G.R. No.
L-23145 November 29, 1968 to paraphrase Frankfurter, arising out of a specific problem, addressed to the
TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D.
TAYAG, ancillary administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.
Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the domiciliary
administrator, the County Trust Company of New York, United States of
America, of the estate of the deceased Idonah Slade Perkins, who died in
New York City on March 27, 1960, to surrender to the ancillary administrator
in the Philippines the stock certificates owned by her in a Philippine
corporation, Benguet Consolidated, Inc., to satisfy the legitimate claims of
local creditors, the lower court, then presided by the Honorable Arsenio
Santos, now retired, issued on May 18, 1964, an order of this tenor: "After
considering the motion of the ancillary administrator, dated February 11,
1964, as well as the opposition filed by the Benguet Consolidated, Inc., the
Court hereby (1) considers as lost for all purposes in connection with the
administration and liquidation of the Philippine estate of Idonah Slade
Perkins the stock certificates covering the 33,002 shares of stock standing in
her name in the books of the Benguet Consolidated, Inc., (2) orders said
certificates cancelled, and (3) directs said corporation to issue new
certificates in lieu thereof, the same to be delivered by said corporation to
either the incumbent ancillary administrator or to the Probate Division of this
Court."1
From such an order, an appeal was taken to this Court not by the domiciliary
administrator, the County Trust Company of New York, but by the Philippine
corporation, the Benguet Consolidated, Inc. The appeal cannot possibly
prosper. The challenged order represents a response and expresses a policy,
attainment of specific ends by the use of specific remedies, with full and
ample support from legal doctrines of weight and significance.
The facts will explain why. As set forth in the brief of appellant Benguet
Consolidated, Inc., Idonah Slade Perkins, who died on March 27, 1960 in
New York City, left among others, two stock certificates covering 33,002
shares of appellant, the certificates being in the possession of the County
Trust Company of New York, which as noted, is the domiciliary administrator
of the estate of the deceased. 2 Then came this portion of the appellant's
brief: "On August 12, 1960, Prospero Sanidad instituted ancillary
administration proceedings in the Court of First Instance of Manila; Lazaro A.
Marquez was appointed ancillary administrator, and on January 22, 1963, he
was substituted by the appellee Renato D. Tayag. A dispute arose between
the domiciary administrator in New York and the ancillary administrator in the
Philippines as to which of them was entitled to the possession of the stock
certificates in question. On January 27, 1964, the Court of First Instance of
Manila ordered the domiciliary administrator, County Trust Company, to
"produce and deposit" them with the ancillary administrator or with the Clerk
of Court. The domiciliary administrator did not comply with the order, and on
February 11, 1964, the ancillary administrator petitioned the court to "issue
an order declaring the certificate or certificates of stocks covering the 33,002
shares issued in the name of Idonah Slade Perkins by Benguet
Consolidated, Inc., be declared [or] considered as lost." 3
It is to be noted further that appellant Benguet Consolidated, Inc. admits that
"it is immaterial" as far as it is concerned as to "who is entitled to the
possession of the stock certificates in question; appellant opposed the
petition of the ancillary administrator because the said stock certificates are
in existence, they are today in the possession of the domiciliary
administrator, the County Trust Company, in New York, U.S.A...." 4
It is its view, therefore, that under the circumstances, the stock certificates
cannot be declared or considered as lost. Moreover, it would allege that there
1
was a failure to observe certain requirements of its by-laws before new stock
certificates could be issued. Hence, its appeal.
As was made clear at the outset of this opinion, the appeal lacks merit. The
challenged order constitutes an emphatic affirmation of judicial authority
sought to be emasculated by the wilful conduct of the domiciliary
administrator in refusing to accord obedience to a court decree. How, then,
can this order be stigmatized as illegal?
As is true of many problems confronting the judiciary, such a response was
called for by the realities of the situation. What cannot be ignored is that
conduct bordering on wilful defiance, if it had not actually reached it, cannot
without undue loss of judicial prestige, be condoned or tolerated. For the law
is not so lacking in flexibility and resourcefulness as to preclude such a
solution, the more so as deeper reflection would make clear its being
buttressed by indisputable principles and supported by the strongest policy
considerations.
It can truly be said then that the result arrived at upheld and vindicated the
honor of the judiciary no less than that of the country. Through this
challenged order, there is thus dispelled the atmosphere of contingent
frustration brought about by the persistence of the domiciliary administrator
to hold on to the stock certificates after it had, as admitted, voluntarily
submitted itself to the jurisdiction of the lower court by entering its
appearance through counsel on June 27, 1963, and filing a petition for relief
from a previous order of March 15, 1963.
Thus did the lower court, in the order now on appeal, impart vitality and
effectiveness to what was decreed. For without it, what it had been decided
would be set at naught and nullified. Unless such a blatant disregard by the
domiciliary administrator, with residence abroad, of what was previously
ordained by a court order could be thus remedied, it would have entailed,
insofar as this matter was concerned, not a partial but a well-nigh complete
paralysis of judicial authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the power of the
appellee ancillary administrator to gain control and possession of all assets
of the decedent within the jurisdiction of the Philippines. Nor could it. Such a
power is inherent in his duty to settle her estate and satisfy the claims of local
creditors.5 As Justice Tuason speaking for this Court made clear, it is a
"general rule universally recognized" that administration, whether principal or
ancillary, certainly "extends to the assets of a decedent found within the state
or country where it was granted," the corollary being "that an administrator
appointed in one state or country has no power over property in another state
or country."6
It is to be noted that the scope of the power of the ancillary administrator
was, in an earlier case, set forth by Justice Malcolm. Thus: "It is often
necessary to have more than one administration of an estate. When a person
dies intestate owning property in the country of his domicile as well as in a
foreign country, administration is had in both countries. That which is granted
in the jurisdiction of decedent's last domicile is termed the principal
administration, while any other administration is termed the ancillary
administration. The reason for the latter is because a grant of administration
does not ex proprio vigore have any effect beyond the limits of the country in
which it is granted. Hence, an administrator appointed in a foreign state has
no authority in the [Philippines]. The ancillary administration is proper,
whenever a person dies, leaving in a country other than that of his last
domicile, property to be administered in the nature of assets of the deceased
liable for his individual debts or to be distributed among his heirs." 7
It would follow then that the authority of the probate court to require that
ancillary administrator's right to "the stock certificates covering the 33,002
shares ... standing in her name in the books of [appellant] Benguet
Consolidated, Inc...." be respected is equally beyond question. For appellant
is a Philippine corporation owing full allegiance and subject to the
unrestricted jurisdiction of local courts. Its shares of stock cannot therefore
be considered in any wise as immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector of Internal
Revenue8 finds application. "In the instant case, the actual situs of the shares
of stock is in the Philippines, the corporation being domiciled [here]." To the
2
force of the above undeniable proposition, not even appellant is insensible. It
does not dispute it. Nor could it successfully do so even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in a rather
conclusive fashion for the legality of the challenged order, how does
appellant, Benguet Consolidated, Inc. propose to carry the extremely heavy
burden of persuasion of precisely demonstrating the contrary? It would
assign as the basic error allegedly committed by the lower court its
"considering as lost the stock certificates covering 33,002 shares of Benguet
belonging to the deceased Idonah Slade Perkins, ..." 9 More specifically,
appellant would stress that the "lower court could not "consider as lost" the
stock certificates in question when, as a matter of fact, his Honor the trial
Judge knew, and does know, and it is admitted by the appellee, that the said
stock certificates are in existence and are today in the possession of the
domiciliary administrator in New York."10
There may be an element of fiction in the above view of the lower court. That
certainly does not suffice to call for the reversal of the appealed order. Since
there is a refusal, persistently adhered to by the domiciliary administrator in
New York, to deliver the shares of stocks of appellant corporation owned by
the decedent to the ancillary administrator in the Philippines, there was
nothing unreasonable or arbitrary in considering them as lost and requiring
the appellant to issue new certificates in lieu thereof. Thereby, the task
incumbent under the law on the ancillary administrator could be discharged
and his responsibility fulfilled.
Any other view would result in the compliance to a valid judicial order being
made to depend on the uncontrolled discretion of the party or entity, in this
case domiciled abroad, which thus far has shown the utmost persistence in
refusing to yield obedience. Certainly, appellant would not be heard to
contend in all seriousness that a judicial decree could be treated as a mere
scrap of paper, the court issuing it being powerless to remedy its flagrant
disregard.
It may be admitted of course that such alleged loss as found by the lower
court did not correspond exactly with the facts. To be more blunt, the quality
of truth may be lacking in such a conclusion arrived at. It is to be
remembered however, again to borrow from Frankfurter, "that fictions which
the law may rely upon in the pursuit of legitimate ends have played an
important part in its development."11
Speaking of the common law in its earlier period, Cardozo could state fictions
"were devices to advance the ends of justice, [even if] clumsy and at times
offensive."12 Some of them have persisted even to the present, that eminent
jurist, noting "the quasi contract, the adopted child, the constructive trust, all
of flourishing vitality, to attest the empire of "as if" today." 13 He likewise noted
"a class of fictions of another order, the fiction which is a working tool of
thought, but which at times hides itself from view till reflection and analysis
have brought it to the light."14
What cannot be disputed, therefore, is the at times indispensable role that
fictions as such played in the law. There should be then on the part of the
appellant a further refinement in the catholicity of its condemnation of such
judicial technique. If ever an occasion did call for the employment of a legal
fiction to put an end to the anomalous situation of a valid judicial order being
disregarded with apparent impunity, this is it. What is thus most obvious is
that this particular alleged error does not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the above
contention by its invoking one of the provisions of its by-laws which would set
forth the procedure to be followed in case of a lost, stolen or destroyed stock
certificate; it would stress that in the event of a contest or the pendency of an
action regarding ownership of such certificate or certificates of stock
allegedly lost, stolen or destroyed, the issuance of a new certificate or
certificates would await the "final decision by [a] court regarding the
ownership [thereof]."15
Such reliance is misplaced. In the first place, there is no such occasion to
apply such by-law. It is admitted that the foreign domiciliary administrator did
not appeal from the order now in question. Moreover, there is likewise the
express admission of appellant that as far as it is concerned, "it is
immaterial ... who is entitled to the possession of the stock certificates ..."
3
Even if such were not the case, it would be a legal absurdity to impart to such
a provision conclusiveness and finality. Assuming that a contrariety exists
between the above by-law and the command of a court decree, the latter is
to be followed.
It is understandable, as Cardozo pointed out, that the Constitution overrides
a statute, to which, however, the judiciary must yield deference, when
appropriately invoked and deemed applicable. It would be most highly
unorthodox, however, if a corporate by-law would be accorded such a high
estate in the jural order that a court must not only take note of it but yield to
its alleged controlling force.
The fear of appellant of a contingent liability with which it could be saddled
unless the appealed order be set aside for its inconsistency with one of its
by-laws does not impress us. Its obedience to a lawful court order certainly
constitutes a valid defense, assuming that such apprehension of a possible
court action against it could possibly materialize. Thus far, nothing in the
circumstances as they have developed gives substance to such a fear.
Gossamer possibilities of a future prejudice to appellant do not suffice to
nullify the lawful exercise of judicial authority.
4. What is more the view adopted by appellant Benguet Consolidated, Inc. is
fraught with implications at war with the basic postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an artificial being
created by operation of law...."16 It owes its life to the state, its birth being
purely dependent on its will. As Berle so aptly stated: "Classically, a
corporation was conceived as an artificial person, owing its existence through
creation by a sovereign power." 17As a matter of fact, the statutory language
employed owes much to Chief Justice Marshall, who in the Dartmouth
College decision defined a corporation precisely as "an artificial being,
invisible, intangible, and existing only in contemplation of law." 18
The well-known authority Fletcher could summarize the matter thus: "A
corporation is not in fact and in reality a person, but the law treats it as
though it were a person by process of fiction, or by regarding it as an artificial
person distinct and separate from its individual stockholders.... It owes its
existence to law. It is an artificial person created by law for certain specific
purposes, the extent of whose existence, powers and liberties is fixed by its
charter."19 Dean Pound's terse summary, a juristic person, resulting from an
association of human beings granted legal personality by the state, puts the
matter neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the basic theme of
which to quote from Friedmann, "is the reality of the group as a social and
legal entity, independent of state recognition and concession." 21 A corporation
as known to Philippine jurisprudence is a creature without any existence until
it has received the imprimatur of the state according to law. It is logically
inconceivable therefore that it will have rights and privileges of a higher
priority than that of its creator. More than that, it cannot legitimately refuse to
yield obedience to acts of its state organs, certainly not excluding the
judiciary, whenever called upon to do so.
As a matter of fact, a corporation once it comes into being, following
American law still of persuasive authority in our jurisdiction, comes more
often within the ken of the judiciary than the other two coordinate branches. It
institutes the appropriate court action to enforce its right. Correlatively, it is
not immune from judicial control in those instances, where a duty under the
law as ascertained in an appropriate legal proceeding is cast upon it.
To assert that it can choose which court order to follow and which to
disregard is to confer upon it not autonomy which may be conceded but
license which cannot be tolerated. It is to argue that it may, when so minded,
overrule the state, the source of its very existence; it is to contend that what
any of its governmental organs may lawfully require could be ignored at will.
So extravagant a claim cannot possibly merit approval.
5. One last point. In Viloria v. Administrator of Veterans Affairs, 22 it was shown
that in a guardianship proceedings then pending in a lower court, the United
States Veterans Administration filed a motion for the refund of a certain sum
of money paid to the minor under guardianship, alleging that the lower court
had previously granted its petition to consider the deceased father as not
4
entitled to guerilla benefits according to a determination arrived at by its main
office in the United States. The motion was denied. In seeking a
reconsideration of such order, the Administrator relied on an American
federal statute making his decisions "final and conclusive on all questions of
law or fact" precluding any other American official to examine the matter
anew, "except a judge or judges of the United States
court."23 Reconsideration was denied, and the Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus:
"We are of the opinion that the appeal should be rejected. The provisions of
the U.S. Code, invoked by the appellant, make the decisions of the U.S.
Veterans' Administrator final and conclusive when made on claims property
submitted to him for resolution; but they are not applicable to the present
case, where the Administrator is not acting as a judge but as a litigant. There
is a great difference between actions against the Administrator (which must
be filed strictly in accordance with the conditions that are imposed by the
Veterans' Act, including the exclusive review by United States courts), and
those actions where the Veterans' Administrator seeks a remedy from our
courts and submits to their jurisdiction by filing actions therein. Our attention
has not been called to any law or treaty that would make the findings of the
Veterans' Administrator, in actions where he is a party, conclusive on our
courts. That, in effect, would deprive our tribunals of judicial discretion and
render them mere subordinate instrumentalities of the Veterans'
Administrator."
deplorable consequences attendant on appellant prevailing attest to the
necessity of negative response from us. That is what appellant will get.
That is all then that this case presents. It is obvious why the appeal cannot
succeed. It is always easy to conjure extreme and even oppressive
possibilities. That is not decisive. It does not settle the issue. What carries
weight and conviction is the result arrived at, the just solution obtained,
grounded in the soundest of legal doctrines and distinguished by its
correspondence with what a sense of realism requires. For through the
appealed order, the imperative requirement of justice according to law is
satisfied and national dignity and honor maintained.
WHEREFORE, the appealed order of the Honorable Arsenio Santos, the
Judge of the Court of First Instance, dated May 18, 1964, is affirmed. With
costs against oppositor-appelant Benguet Consolidated, Inc.
Makalintal, Zaldivar and Capistrano, JJ., concur.
Concepcion, C.J., Reyes, J.B.L., Dizon, Sanchez and Castro, JJ., concur in
the result.

It is bad enough as the Viloria decision made patent for our judiciary to
accept as final and conclusive, determinations made by foreign governmental
agencies. It is infinitely worse if through the absence of any coercive power
by our courts over juridical persons within our jurisdiction, the force and
effectivity of their orders could be made to depend on the whim or caprice of
alien entities. It is difficult to imagine of a situation more offensive to the
dignity of the bench or the honor of the country.

Yet that would be the effect, even if unintended, of the proposition to which
appellant Benguet Consolidated seems to be firmly committed as shown by
its failure to accept the validity of the order complained of; it seeks its
reversal. Certainly we must at all pains see to it that it does not succeed. The

5
 ANG PUE & COMPANY, ET AL., plaintiffs-appellants,
vs.
SECRETARY OF COMMERCE AND INDUSTRY, defendant-appellee.

Felicisimo E. Escaran for plaintiffs-appellants.

Office of the Solicitor General for defendant-appellee.

DIZON, J.:

Action for declaratory relief filed in the Court of First Instance of Iloilo by Ang
Pue & Company, Ang Pue and Tan Siong against the Secretary of Commerce
and Industry to secure judgment "declaring that plaintiffs could extend for five
years the term of the partnership pursuant to the provisions of plaintiffs'
Amendment to the Article of Co-partnership."

The answer filed by the defendant alleged, in substance, that the extension
for another five years of the term of the plaintiffs' partnership would be in
violation of the provisions of Republic Act No. 1180.

It appears that on May 1, 1953, Ang Pue and Tan Siong, both Chinese
citizens, organized the partnership Ang Pue & Company for a term of five
years from May 1, 1953, extendible by their mutual consent. The purpose of
the partnership was "to maintain the business of general merchandising,
buying and selling at wholesale and retail, particularly of lumber, hardware
and other construction materials for commerce, either native or foreign." The
corresponding articles of partnership (Exhibit B) were registered in the Office
of the Securities & Exchange Commission on June 16, 1953.

On June 19, 1954 Republic Act No. 1180 was enacted to regulate the retail
business. It provided, among other things, that, after its enactment, a
partnership not wholly formed by Filipinos could continue to engage in the
retail business until the expiration of its term.

On April 15, 1958 prior to the expiration of the five-year term of the
G.R. No. L-17295 July 30, 1962
partnership Ang Pue & Company, but after the enactment of the Republic Act
1180, the partners already mentioned amended the original articles of part

6
ownership (Exhibit B) so as to extend the term of life of the partnership to Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Regala and
another five years. When the amended articles were presented for Makalintal, JJ., concur.
registration in the Office of the Securities & Exchange Commission on April Bautista Angelo and Reyes, J.B.L., JJ., took no part.
16, 1958, registration was refused upon the ground that the extension was in
violation of the aforesaid Act.

From the decision of the lower court dismissing the action, with costs, the
plaintiffs interposed this appeal.

The question before us is too clear to require an extended discussion. To

organize a corporation or a partnership that could claim a juridical personality
of its own and transact business as such, is not a matter of absolute right but
a privilege which may be enjoyed only under such terms as the State may
deem necessary to impose. That the State, through Congress, and in the
manner provided by law, had the right to enact Republic Act No. 1180 and to
provide therein that only Filipinos and concerns wholly owned by Filipinos
may engage in the retail business can not be seriously disputed. That this
provision was clearly intended to apply to partnership already existing at the
time of the enactment of the law is clearly showing by its provision giving
them the right to continue engaging in their retail business until the expiration
of their term or life.

To argue that because the original articles of partnership provided that the
partners could extend the term of the partnership, the provisions of Republic
Act 1180 cannot be adversely affect appellants herein, is to erroneously
assume that the aforesaid provision constitute a property right of which the
partners can not be deprived without due process or without their consent.
The agreement contain therein must be deemed subject to the law existing at
the time when the partners came to agree regarding the extension. In the
present case, as already stated, when the partners amended the articles of
partnership, the provisions of Republic Act 1180 were already in force, and
there can be not the slightest doubt that the right claimed by appellants to
extend the original term of their partnership to another five years would be in
violation of the clear intent and purpose of the law aforesaid.
[G.R. Nos. 84132-33 : December 10, 1990.]
WHEREFORE, the judgment appealed from is affirmed, with costs.

7
192 SCRA 257
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC.,
Petitioners, vs. PHILIPPINE VETERANS BANK, THE EX-OFFICIO
SHERIFF and GODOFREDO QUILING, in his capacity as Deputy Sheriff
of Calamba, Laguna, Respondents.
DECISION
CRUZ, J.:
This case involves the constitutionality of a presidential decree which, like all
other issuances of President Marcos during his regime, was at that time
regarded as sacrosanct. It is only now, in a freer atmosphere, that his acts
are being tested by the touchstone of the fundamental law that even then
was supposed to limit presidential action.: rd
The particular enactment in question is Pres. Decree No. 1717, which
ordered the rehabilitation of the Agrix Group of Companies to be
administered mainly by the National Development Company. The law
outlined the procedure for filing claims against the Agrix companies and
created a Claims Committee to process these claims. Especially relevant to
this case, and noted at the outset, is Sec. 4(1) thereof providing that "all
mortgages and other liens presently attaching to any of the assets of the
dissolved corporations are hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private
respondent Philippine Veterans Bank a real estate mortgage dated July 7,
1978, over three (3) parcels of land situated in Los Baos, Laguna. During
the existence of the mortgage, AGRIX went bankrupt. It was for the
expressed purpose of salvaging this and the other Agrix companies that the
aforementioned decree was issued by President Marcos.
Pursuant thereto, the private respondent filed a claim with the AGRIX Claims
Committee for the payment of its loan credit. In the meantime, the New Agrix,
Inc. and the National Development Company, petitioners herein, invoking
Sec. 4 (1) of the decree, filed a petition with the Regional Trial Court of
Calamba, Laguna, for the cancellation of the mortgage lien in favor of the
private respondent. For its part, the private respondent took steps to
extrajudicially foreclose the mortgage, prompting the petitioners to file a
second case with the same court to stop the foreclosure. The two cases were
consolidated.
After the submission by the parties of their respective pleadings, the trial
court rendered the impugned decision. Judge Francisco Ma. Guerrero
annulled not only the challenged provision, viz., Sec. 4 (1), but the entire
Pres. Decree No. 1717 on the grounds that: (1) the presidential exercise of
legislative power was a violation of the principle of separation of powers; (2)
the law impaired the obligation of contracts; and (3) the decree violated the
equal protection clause. The motion for reconsideration of this decision
having been denied, the present petition was filed.: rd
The petition was originally assigned to the Third Division of this Court but
because of the constitutional questions involved it was transferred to the
Court en banc. On August 30, 1988, the Court granted the petitioner's prayer
for a temporary restraining order and instructed the respondents to cease
and desist from conducting a public auction sale of the lands in question.
After the Solicitor General and the private respondent had filed their
comments and the petitioners their reply, the Court gave due course to the
petition and ordered the parties to file simultaneous memoranda. Upon
compliance by the parties, the case was deemed submitted.
The petitioners contend that the private respondent is now estopped from
contesting the validity of the decree. In support of this contention, it cites the
recent case of Mendoza v. Agrix Marketing, Inc., 1 where the constitutionality
of Pres. Decree No. 1717 was also raised but not resolved. The Court, after
8
noting that the petitioners had already filed their claims with the AGRIX
Claims Committee created by the decree, had simply dismissed the petition
on the ground of estoppel.
The petitioners stress that in the case at bar the private respondent also
invoked the provisions of Pres. Decree No. 1717 by filing a claim with the
AGRIX Claims Committee. Failing to get results, it sought to foreclose the
real estate mortgage executed by AGRIX in its favor, which had been
extinguished by the decree. It was only when the petitioners challenged the
foreclosure on the basis of Sec. 4 (1) of the decree, that the private
respondent attacked the validity of the provision. At that stage, however,
consistent with Mendoza, the private respondent was already estopped from
questioning the constitutionality of the decree.
The Court does not agree that the principle of estoppel is applicable.
It is not denied that the private respondent did file a claim with the AGRIX
Claims Committee pursuant to this decree. It must be noted, however, that
this was done in 1980, when President Marcos was the absolute ruler of this
country and his decrees were the absolute law. Any judicial challenge to
them would have been futile, not to say foolhardy. The private respondent, no
less than the rest of the nation, was aware of that reality and knew it had no
choice under the circumstances but to conform.: nad
It is true that there were a few venturesome souls who dared to question the
dictator's decisions before the courts of justice then. The record will show,
however, that not a single act or issuance of President Marcos was ever
declared unconstitutional, not even by the highest court, as long as he was in
power. To rule now that the private respondent is estopped for having abided
with the decree instead of boldly assailing it is to close our eyes to a cynical
fact of life during that repressive time.
This case must be distinguished from Mendoza, where the petitioners, after
filing their claims with the AGRIX Claims Committee, received in settlement
thereof shares of stock valued at P40,000.00 without protest or reservation.
The herein private respondent has not been paid a single centavo on its
claim, which was kept pending for more than seven years for alleged lack of
supporting papers. Significantly, the validity of that claim was not questioned
by the petitioner when it sought to restrain the extrajudicial foreclosure of the
mortgage by the private respondent. The petitioner limited itself to the
argument that the private respondent was estopped from questioning the
decree because of its earlier compliance with its provisions.
Independently of these observations, there is the consideration that an
affront to the Constitution cannot be allowed to continue existing simply
because of procedural inhibitions that exalt form over substance.
The Court is especially disturbed by Section 4(1) of the decree, quoted
above, extinguishing all mortgages and other liens attaching to the assets of
AGRIX. It also notes, with equal concern, the restriction in Subsection (ii)
thereof that all "unsecured obligations shall not bear interest" and in
Subsection (iii) that "all accrued interests, penalties or charges as of date
hereof pertaining to the obligations, whether secured or unsecured, shall not
be recognized."
These provisions must be read with the Bill of Rights, where it is clearly
provided in Section 1 that "no person shall be deprived of life, liberty or
property without due course of law nor shall any person be denied the equal
protection of the law" and in Section 10 that "no law impairing the obligation
of contracts shall be passed."
In defending the decree, the petitioners argue that property rights, like all
rights, are subject to regulation under the police power for the promotion of
the common welfare. The contention is that this inherent power of the state
may be exercised at any time for this purpose so long as the taking of the
property right, even if based on contract, is done with due process of law.
This argument is an over-simplification of the problem before us. The police
power is not a panacea for all constitutional maladies. Neither does its mere
invocation conjure an instant and automatic justification for every act of the
government depriving a person of his life, liberty or property.
9
A legislative act based on the police power requires the concurrence of a
lawful subject and a lawful method. In more familiar words, a) the interests of
the public generally, as distinguished from those of a particular class, should
justify the interference of the state; and b) the means employed are
reasonably necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals. 2
Applying these criteria to the case at bar, the Court finds first of all that the
interests of the public are not sufficiently involved to warrant the interference
of the government with the private contracts of AGRIX. The decree speaks
vaguely of the "public, particularly the small investors," who would be
prejudiced if the corporation were not to be assisted. However, the record
does not state how many there are of such investors, and who they are, and
why they are being preferred to the private respondent and other creditors of
AGRIX with vested property rights.:-cralaw
The public interest supposedly involved is not identified or explained. It has
not been shown that by the creation of the New Agrix, Inc. and the extinction
of the property rights of the creditors of AGRIX, the interests of the public as
a whole, as distinguished from those of a particular class, would be promoted
or protected. The indispensable link to the welfare of the greater number has
not been established. On the contrary, it would appear that the decree was
issued only to favor a special group of investors who, for reasons not given,
have been preferred to the legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court still finds that the
means employed to rehabilitate AGRIX fall far short of the requirement that
they shall not be unduly oppressive. The oppressiveness is patent on the
face of the decree. The right to property in all mortgages, liens, interests,
penalties and charges owing to the creditors of AGRIX is arbitrarily
destroyed. No consideration is paid for the extinction of the mortgage rights.
The accrued interests and other charges are simply rejected by the decree.
The right to property is dissolved by legislative fiat without regard to the
private interest violated and, worse, in favor of another private interest.
A mortgage lien is a property right derived from contract and so comes under
the protection of the Bill of Rights. So do interests on loans, as well as
penalties and charges, which are also vested rights once they accrue.
Private property cannot simply be taken by law from one person and given to
another without compensation and any known public purpose. This is plain
arbitrariness and is not permitted under the Constitution.
And not only is there arbitrary taking, there is discrimination as well. In
extinguishing the mortgage and other liens, the decree lumps the secured
creditors with the unsecured creditors and places them on the same level in
the prosecution of their respective claims. In this respect, all of them are
considered unsecured creditors. The only concession given to the secured
creditors is that their loans are allowed to earn interest from the date of the
decree, but that still does not justify the cancellation of the interests earned
before that date. Such interests, whether due to the secured or the
unsecured creditors, are all extinguished by the decree. Even assuming such
cancellation to be valid, we still cannot see why all kinds of creditors,
regardless of security, are treated alike.
Under the equal protection clause, all persons or things similarly situated
must be treated alike, both in the privileges conferred and the obligations
imposed. Conversely, all persons or things differently situated should be
treated differently. In the case at bar, persons differently situated are similarly
treated, in disregard of the principle that there should be equality only among
equals.- nad
One may also well wonder why AGRIX was singled out for government help,
among other corporations where the stockholders or investors were also
swindled. It is not clear why other companies entitled to similar concern were
not similarly treated. And surely, the stockholders of the private respondent,
whose mortgage lien had been cancelled and legitimate claims to accrued
interests rejected, were no less deserving of protection, which they did not
get. The decree operated, to use the words of a celebrated case, 3 "with an
evil eye and an uneven hand."
10
On top of all this, New Agrix, Inc. was created by special decree
notwithstanding the provision of Article XIV, Section 4 of the 1973
Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law, provide
for the formation, organization, or regulation of private corporations, unless
such corporations are owned or controlled by the Government or any
subdivision or instrumentality thereof. 4
The new corporation is neither owned nor controlled by the government. The
National Development Corporation was merely required to extend a loan of
not more than P10,000,000.00 to New Agrix, Inc. Pending payment thereof,
NDC would undertake the management of the corporation, but with the
obligation of making periodic reports to the Agrix board of directors. After
payment of the loan, the said board can then appoint its own management.
The stocks of the new corporation are to be issued to the old investors and
stockholders of AGRIX upon proof of their claims against the abolished
corporation. They shall then be the owners of the new corporation. New
Agrix, Inc. is entirely private and so should have been organized under the
Corporation Law in accordance with the above-cited constitutional provision.
The Court also feels that the decree impairs the obligation of the contract
between AGRIX and the private respondent without justification. While it is
true that the police power is superior to the impairment clause, the principle
will apply only where the contract is so related to the public welfare that it will
be considered congenitally susceptible to change by the legislature in the
interest of the greater number. 5 Most present-day contracts are of that
nature. But as already observed, the contracts of loan and mortgage
executed by AGRIX are purely private transactions and have not been shown
to be affected with public interest. There was therefore no warrant to amend
their provisions and deprive the private respondent of its vested property
rights.
It is worth noting that only recently in the case of the Development Bank of
the Philippines v. NLRC, 6 we sustained the preference in payment of a
mortgage creditor as against the argument that the claims of laborers should
take precedence over all other claims, including those of the government. In
arriving at this ruling, the Court recognized the mortgage lien as a property
right protected by the due process and contract clauses notwithstanding the
argument that the amendment in Section 110 of the Labor Code was a
proper exercise of the police power.: nad
The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of
the police power, not being in conformity with the traditional requirements of
a lawful subject and a lawful method. The extinction of the mortgage and
other liens and of the interest and other charges pertaining to the legitimate
creditors of AGRIX constitutes taking without due process of law, and this is
compounded by the reduction of the secured creditors to the category of
unsecured creditors in violation of the equal protection clause. Moreover, the
new corporation, being neither owned nor controlled by the Government,
should have been created only by general and not special law. And insofar as
the decree also interferes with purely private agreements without any
demonstrated connection with the public interest, there is likewise an
impairment of the obligation of the contract.
With the above pronouncements, we feel there is no more need to rule on
the authority of President Marcos to promulgate Pres. Decree No. 1717
under Amendment No. 6 of the 1973 Constitution. Even if he had such
authority, the decree must fall just the same because of its violation of the Bill
of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is
declared UNCONSTITUTIONAL. The temporary restraining order dated
August 30, 1988, is LIFTED. Costs against the petitioners.- nad
SO ORDERED.
Fernan (C.J.), Narvasa, Gutierrez, Jr., Paras, Gancayco Padilla, Bidin,
Sarmiento, Grio-Aquino, Medialdea and Regalado, JJ., concur.
11
Melencio-Herrera, J., In the result. In Dumlao v. COMELEC, 95 SCRA
392 (1980), a portion of the second paragraph of section 4 of Batas
Pambansa Blg. 52 was declared null and void for being
unconstitutional.

Feliciano, J., is on leave.

12
13

G.R. No. L-19891 July 31, 1964
J.R.S. BUSINESS CORPORATION, J.R. DA SILVA and A.J.
BELTRAN, petitioners,
vs.
IMPERIAL INSURANCE, INC., MACARIO M. OFILADA, Sheriff of Manila
and
HON. AGUSTIN MONTESA, Judge of the Court of First Instance of
Manila, respondents.
Felipe N. Aurea for petitioners.
Taada, Teehankee and Carreon for respondent Imperial Insurance, Inc.
PAREDES, J.:
Petitioner J. R. Da Silva, is the President of the J.R.S. Business Corporation,
an establishment duly franchised by the Congress of the Philippines, to
conduct a messenger and delivery express service. On July 12, 1961, the
respondent Imperial Insurance, Inc., presented with the CFI of Manila a
complaint (Civ. Case No. 47520), for sum of money against the petitioner
corporation. After the defendants therein have submitted their Answer, the
parties entered into a Compromise Agreement, assisted by their respective
counsels, the pertinent portions of which recite:
1) WHEREAS, the DEFENDANTS admit and confess their joint and
solidary indebtedness to the PLAINTIFF in the full sum of PESOS
SIXTY ONE THOUSAND ONE HUNDRED SEVENTY-TWO &
32/100 (P61,172.32), Philippine Currency, itemized as follows:
a) Principal
b) Interest at 12% per annum 5,706.14
c) Liquidated damages at 7% per annum 3,330.58
d) Costs of suit 135.60
e) Attorney's fees 2,000.00
2) WHEREAS, the DEFENDANTS bind themselves, jointly and
severally, and hereby promise to pay their aforementioned obligation
to the PLAINTIFF at its business address at 301-305 Banquero St.,
(Ground Floor), Regina Building, Escolta, Manila, within sixty (60)
days from March 16, 1962 or on or before May 14, 1962;
3) WHEREAS, in the event the DEFENDANTS FAIL to pay in full the
total amount of PESOS SIXTY ONE THOUSAND ONE HUNDRED
SEVENTY TWO & 32/100 (P61,172.32), Philippine Currency, for any
reason whatsoever, on May 14, 1962, the PLAINTIFF shall be
entitled, as a matter of right, to move for the execution of the
decision to be rendered in the above-entitled case by this Honorable
Court based on this COMPROMISE AGREEMENT.
On March 17, 1962, the lower court rendered judgment embodying the
contents of the said compromise agreement, the dispositive portion of which
P50,000.00reads
WHEREFORE, the Court hereby approves the above-quoted
compromise agreement and renders judgment in accordance
14
 therewith, enjoining the parties to comply faithfully and strictly with
the terms and conditions thereof, without special pronouncement as
to costs.
Wherefore, the parties respectfully pray that the foregoing stipulation
of facts be admitted and approved by this Honorable Court, without
prejudice to the parties adducing other evidence to prove their case
not covered by this stipulation of facts. 1wph1.t 2, 1962 (the latter notice being for the whole capital stocks of the defendant,
On May 15, 1962, one day after the date fixed in the compromise agreement,
within which the judgment debt would be paid, but was not, respondent
Imperial Insurance Inc., filed a "Motion for the Insurance of a Writ of
Execution". On May 23, 1962, a Writ of Execution was issued by respondent
Sheriff of Manila and on May 26, 1962, Notices of Sale were sent out for the
auction of the personal properties of the petitioner J.R.S. Business
Corporation. On June 2, 1962, a Notice of Sale of the "whole capital stocks of
the defendants JRS Business Corporation, the business name, right of
operation, the whole assets, furnitures and equipments, the total liabilities,
and Net Worth, books of accounts, etc., etc." of the petitioner corporation
was, handed down. On June 9, the petitioner, thru counsel, presented an
"Urgent Petition for Postponement of Auction Sale and for Release of Levy
on the Business Name and Right to Operate of Defendant JRS Business
Corporation", stating that petitioners were busy negotiating for a loan with
which to pay the judgment debt; that the judgment was for money only and,
therefore, plaintiff (respondent Insurance Company) was not authorized to
take over and appropriate for its own use, the business name of the
defendants; that the right to operate under the franchise, was not
transferable and could not be considered a personal or immovable, property,
subject to levy and sale. On June 10, 1962, a Supplemental Motion for
Release of Execution, was filed by counsel of petitioner JRS Business
Corporation, claiming that the capital stocks thereof, could not be levied upon
and sold under execution. Under date of June 20, 1962, petitioner's counsel
presented a pleading captioned "Very Urgent Motion for Postponement of
Public Auction Sale and for Ruling on Motion for Release of Levy on
the Business Name, Right to Operate and Capital Stocks of JRS Business
Corporation". The auction sale was set for June 21, 1962. In said motion,
petitioners alleged that the loan they had applied for, was to be secured
within the next ten (10) days, and they would be able to discharge the
judgment debt. Respondents opposed the said motion and on June 21, 1962,
the lower court denied the motion for postponement of the auction sale.
In the sale which was conducted in the premises of the JRS Business
Corporation at 1341 Perez St., Paco, Manila, all the properties of said
corporation contained in the Notices of Sale dated May 26, 1962, and June
JRS Business Corporation, the business name, right of operation, the whole
assets, furnitures and equipments, the total liabilities and Net Worth, books
of accounts, etc., etc.), were bought by respondent Imperial Insurance, Inc.,
for P10,000.00, which was the highest bid offered. Immediately after the sale,
respondent Insurance Company took possession of the proper ties and
started running the affairs and operating the business of the JRS Business
Corporation. Hence, the present appeal.
It would seem that the matters which need determination are (1) whether the
respondent Judge acted without or in excess of his jurisdiction or with grave
abuse of discretion in promulgating the Order of June 21, 1962, denying the
motion for postponement of the scheduled sale at public auction, of the
properties of petitioner; and (2) whether the business name or trade name,
franchise (right to operate) and capital stocks of the petitioner are properties
or property rights which could be the subject of levy, execution and sale.
The respondent Court's act of postponing the scheduled sale was within the
discretion of respondent Judge, the exercise of which, one way or the other,
did not constitute grave abuse of discretion and/or excess of jurisdiction.
There was a decision rendered and the corresponding writ of execution was
issued. Respondent Judge had jurisdiction over the matter and erroneous
conclusions of law or fact, if any, committed in the exercise of such
jurisdiction are merely errors of judgment, not correctible by certiorari (Villa
Rey Transit v. Bello, et al., L-18957, April 23, 1963, and cases cited therein.)
The corporation law, on forced sale of franchises, provides
15
 Any franchise granted to a corporation to collect tolls or to occupy,
enjoy, or use public property or any portion of the public domain or
any right of way over public property or the public domain, and any
rights and privileges acquired under such franchise may be levied
upon and sold under execution, together with the property necessary
for the enjoyment, the exercise of the powers, and the receipt of the
proceeds of such franchise or right of way, in the same manner and
with like effect as any other property to satisfy any judgment against
the corporation: Provided, That the sale of the franchise or right of
way and the property necessary for the enjoyment, the exercise of
the powers, and the receipt of the proceeds of said franchise or right
of way is especially decreed and ordered in the judgment: And
provided, further, That the sale shall not become effective until
confirmed by the court after due notice. (Sec. 56, Corporation Law.)
In the case of Gulf Refining Co. v. Cleveland Trust Co., 108 So., 158, it was
held
The first question then for decision is the meaning of the word
"franchise" in the statute.
"A franchise is a special privilege conferred by governmental
authority, and which does not belong to citizens of the
country generally as a matter of common right. ... Its
meaning depends more or less upon the connection in which
the word is employed and the property and corporation to
which it is applied. It may have different significations.
"For practical purposes, franchises, so far as relating to
corporations, are divisible into (1) corporate or general
franchises; and (2) special or secondary franchises. The
former is the franchise to exist as a corporation, while the
latter are certain rights and privileges conferred upon
existing corporations, such as the right to use the streets of a
municipality to lay pipes or tracks, erect poles or string
wires." 2 Fletcher's Cyclopedia Corp. See. 1148; 14 C.J. p.
160; Adams v. Yazon & M. V. R. Co., 24 So. 200, 317, 28 So.
956, 77 Miss. 253, 60 L.R.A. 33 et seq.
The primary franchise of a corporation that is, the right to exist as
such, is vested "in the individuals who compose the corporation and
not in the corporation itself" (14 C.J. pp. 160, 161; Adams v.
Railroad, supra; 2 Fletcher's Cyclopedia Corp. Secs. 1153, 1158; 3
Thompson on Corporations 2d Ed.] Secs. 2863, 2864), and cannot
be conveyed in the absence of a legislative authority so to do (14A
CJ. 543, 577; 1 Fletcher's Cyc. Corp. Sec. 1224; Memphis & L.R.R.
Co. v. Berry 5 S. Ct. 299, 112 U.S. 609, 28 L.E.d. 837; Vicksburg
Waterworks Co. v. Vicksburg, 26 S. Ct. 660, 202 U.S. 453, 50 L.E.d.
1102, 6 Ann. Cas. 253; Arthur v. Commercial & Railroad Bank, 9
Smedes & M. 394, 48 Am. Dec. 719), but the specify or secondary
franchises of a corporation are vested in the corporation and may
ordinarily be conveyed or mortgaged under a general power granted
to a corporation to dispose of its property (Adams v. Railroad, supra;
14A C.J. 542, 557; 3 Thompson on Corp. [2nd Ed.] Sec.
2909), except such special or secondary franchises as are charged
with a public use (2 Fletcher's Cyc. Corp. see. 1225; 14A C.J. 544; 3
Thompson on Corp. [2d Ed.] sec. 2908; Arthur v. Commercial & R.R.
Bank, supra; McAllister v. Plant, 54 Miss. 106).
The right to operate a messenger and express delivery service, by virtue of a
legislative enactment, is admittedly a secondary franchise (R.A. No. 3260,
entitled "An Act granting the JRS Business Corporation a franchise to
conduct a messenger and express service)" and, as such, under our
corporation law, is subject to levy and sale on execution together and
including all the property necessary for the enjoyment thereof. The law,
however, indicates the procedure under which the same (secondary
franchise and the properties necessary for its enjoyment) may be sold under
execution. Said franchise can be sold under execution, when such sale is
especially decreed and ordered in the judgment and it becomes effective
only when the sale is confirmed by the Court after due notice (Sec. 56, Corp.
Law). The compromise agreement and the judgment based thereon, do not
contain any special decree or order making the franchise answerable for the
judgment debt. The same thing may be stated with respect to petitioner's
16
trade name or business name and its capital stock. Incidentally, the trade
name or business name corresponds to the initials of the President of the
petitioner corporation and there can be no serious dispute regarding the fact
that a trade name or business name and capital stock are necessarily
included in the enjoyment of the franchise. Like that of a franchise, the law
mandates, that property necessary for the enjoyment of said franchise, can
only be sold to satisfy a judgment debt if the decision especially so provides.
As We have stated heretofore, no such directive appears in the decision.
Moreover, a trade name or business name cannot be sold separately from
the franchise, and the capital stock of the petitioner corporation or any other
corporation, for the matter, represents the interest and is the property of
stockholders in the corporation, who can only be deprived thereof in the
manner provided by law (Therbee v. Baker, 35 N.E. Eq. [8 Stew.] 501, 505; In
re Wells' Estate, 144 N.W. 174, 177, Wis. 294, cited in 6 Words and Phrases,
109).

It, therefore, results that the inclusion of the franchise, the trade name and/or
business name and the capital stock of the petitioner corporation, in the sale
of the properties of the JRS Business Corporation, has no justification. The
sale of the properties of petitioner corporation is set aside, in so far as it
authorizes the levy and sale of its franchise, trade name and capital stocks.
Without pronouncement as to costs.

Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Regala

and Makalintal, JJ., concur.

17
G.R. No. L-4935 May 28, 1954

J. M. TUASON & CO., INC., represented by it Managing PARTNER,

GREGORIA ARANETA, INC., plaintiff-appellee,
vs.
QUIRINO BOLAOS, defendant-appellant.

Araneta and Araneta for appellee.

Jose A. Buendia for appellant.

REYES, J.:

This is an action originally brought in the Court of First Instance of Rizal,

Quezon City Branch, to recover possesion of registered land situated in
barrio Tatalon, Quezon City.

Plaintiff's complaint was amended three times with respect to the extent and
description of the land sought to be recovered. The original complaint
described the land as a portion of a lot registered in plaintiff's name under
Transfer Certificate of Title No. 37686 of the land record of Rizal Province
and as containing an area of 13 hectares more or less. But the complaint
was amended by reducing the area of 6 hectares, more or less, after the
defendant had indicated the plaintiff's surveyors the portion of land claimed
and occupied by him. The second amendment became necessary and was
allowed following the testimony of plaintiff's surveyors that a portion of the
area was embraced in another certificate of title, which was plaintiff's
Transfer Certificate of Title No. 37677. And still later, in the course of trial,
after defendant's surveyor and witness, Quirino Feria, had testified that the
area occupied and claimed by defendant was about 13 hectares, as shown in
his Exhibit 1, plaintiff again, with the leave of court, amended its complaint to
make its allegations conform to the evidence.

Defendant, in his answer, sets up prescription and title in himself thru "open,
continuous, exclusive and public and notorious possession (of land in

18
dispute) under claim of ownership, adverse to the entire world by defendant
and his predecessor in interest" from "time in-memorial". The answer further
alleges that registration of the land in dispute was obtained by plaintiff or its
predecessors in interest thru "fraud or error and without knowledge (of) or
interest either personal or thru publication to defendant and/or predecessors
in interest." The answer therefore prays that the complaint be dismissed with
costs and plaintiff required to reconvey the land to defendant or pay its value.
After trial, the lower court rendered judgment for plaintiff, declaring defendant
to be without any right to the land in question and ordering him to restore
possession thereof to plaintiff and to pay the latter a monthly rent of P132.62
from January, 1940, until he vacates the land, and also to pay the costs.
Appealing directly to this court because of the value of the property involved,
defendant makes the following assignment or errors:
I. The trial court erred in not dismissing the case on the ground that
the case was not brought by the real property in interest.
II. The trial court erred in admitting the third amended complaint.
III. The trial court erred in denying defendant's motion to strike.
IV. The trial court erred in including in its decision land not involved in
the litigation.
V. The trial court erred in holding that the land in dispute is covered
by transfer certificates of Title Nos. 37686 and 37677.
Vl. The trial court erred in not finding that the defendant is the true
and lawful owner of the land.
VII. The trial court erred in finding that the defendant is liable to pay
the plaintiff the amount of P132.62 monthly from January, 1940, until
he vacates the premises.
VIII. The trial court erred in not ordering the plaintiff to reconvey the
land in litigation to the defendant.
As to the first assigned error, there is nothing to the contention that the
present action is not brought by the real party in interest, that is, by J. M.
Tuason and Co., Inc. What the Rules of Court require is that an action be
brought in the name of, but not necessarily by, the real party in interest.
(Section 2, Rule 2.) In fact the practice is for an attorney-at-law to bring the
action, that is to file the complaint, in the name of the plaintiff. That practice
appears to have been followed in this case, since the complaint is signed by
the law firm of Araneta and Araneta, "counsel for plaintiff" and commences
with the statement "comes now plaintiff, through its undersigned counsel." It
is true that the complaint also states that the plaintiff is "represented herein
by its Managing Partner Gregorio Araneta, Inc.", another corporation, but
there is nothing against one corporation being represented by another
person, natural or juridical, in a suit in court. The contention that Gregorio
Araneta, Inc. can not act as managing partner for plaintiff on the theory that it
is illegal for two corporations to enter into a partnership is without merit, for
the true rule is that "though a corporation has no power to enter into a
partnership, it may nevertheless enter into a joint venture with another where
the nature of that venture is in line with the business authorized by its
charter." (Wyoming-Indiana Oil Gas Co. vs. Weston, 80 A. L. R., 1043, citing
2 Fletcher Cyc. of Corp., 1082.) There is nothing in the record to indicate that
the venture in which plaintiff is represented by Gregorio Araneta, Inc. as "its
managing partner" is not in line with the corporate business of either of them.
Errors II, III, and IV, referring to the admission of the third amended
complaint, may be answered by mere reference to section 4 of Rule 17,
Rules of Court, which sanctions such amendment. It reads:
Sec. 4. Amendment to conform to 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 my time,
even of the trial of these issues. If evidence is objected to at the trial
19
 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 be 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 a continuance to enable the objecting party to meet such
evidence.
Under this provision amendment is not even necessary for the purpose of
rendering judgment on issues proved though not alleged. Thus, commenting
on the provision, Chief Justice Moran says in this Rules of Court:
Under this section, American courts have, under the New Federal
Rules of Civil Procedure, ruled that where the facts shown entitled
plaintiff to relief other than that asked for, no amendment to the
complaint is necessary, especially where defendant has himself
raised the point on which recovery is based, and that the appellate
court treat the pleadings as amended to conform to the evidence,
although the pleadings were not actually amended. (I Moran, Rules
of Court, 1952 ed., 389-390.)
Our conclusion therefore is that specification of error II, III, and IV are without
merit..
Let us now pass on the errors V and VI. Admitting, though his attorney, at the
early stage of the trial, that the land in dispute "is that described or
represented in Exhibit A and in Exhibit B enclosed in red pencil with the name
Quirino Bolaos," defendant later changed his lawyer and also his theory and
tried to prove that the land in dispute was not covered by plaintiff's certificate
of title. The evidence, however, is against defendant, for it clearly establishes
that plaintiff is the registered owner of lot No. 4-B-3-C, situate in barrio
Tatalon, Quezon City, with an area of 5,297,429.3 square meters, more or
less, covered by transfer certificate of title No. 37686 of the land records of
Rizal province, and of lot No. 4-B-4, situated in the same barrio, having an
area of 74,789 square meters, more or less, covered by transfer certificate of
title No. 37677 of the land records of the same province, both lots having
been originally registered on July 8, 1914 under original certificate of title No.
735. The identity of the lots was established by the testimony of Antonio
Manahan and Magno Faustino, witnesses for plaintiff, and the identity of the
portion thereof claimed by defendant was established by the testimony of his
own witness, Quirico Feria. The combined testimony of these three
witnesses clearly shows that the portion claimed by defendant is made up of
a part of lot 4-B-3-C and major on portion of lot 4-B-4, and is well within the
area covered by the two transfer certificates of title already mentioned. This
fact also appears admitted in defendant's answer to the third amended
complaint.
As the land in dispute is covered by plaintiff's Torrens certificate of title and
was registered in 1914, the decree of registration can no longer be impugned
on the ground of fraud, error or lack of notice to defendant, as more than one
year has already elapsed from the issuance and entry of the decree. Neither
court the decree be collaterally attacked by any person claiming title to, or
interest in, the land prior to the registration proceedings. (Sorogon vs.
Makalintal,1 45 Off. Gaz., 3819.) Nor could title to that land in derogation of
that of plaintiff, the registered owner, be acquired by prescription or adverse
possession. (Section 46, Act No. 496.) Adverse, notorious and continuous
possession under claim of ownership for the period fixed by law is ineffective
against a Torrens title. (Valiente vs. Judge of CFI of Tarlac,2 etc., 45 Off. Gaz.,
Supp. 9, p. 43.) And it is likewise settled that the right to secure possession
under a decree of registration does not prescribed. (Francisco vs. Cruz, 43
Off. Gaz., 5105, 5109-5110.) A recent decision of this Court on this point is
that rendered in the case of Jose Alcantara et al., vs. Mariano et al., 92 Phil.,
796. This disposes of the alleged errors V and VI.
As to error VII, it is claimed that `there was no evidence to sustain the finding
that defendant should be sentenced to pay plaintiff P132.62 monthly from
January, 1940, until he vacates the premises.' But it appears from the record
that that reasonable compensation for the use and occupation of the
premises, as stipulated at the hearing was P10 a month for each hectare and
that the area occupied by defendant was 13.2619 hectares. The total rent to
be paid for the area occupied should therefore be P132.62 a month. It is
appears from the testimony of J. A. Araneta and witness Emigdio Tanjuatco
20
that as early as 1939 an action of ejectment had already been filed against
defendant. And it cannot be supposed that defendant has been paying rents,
for he has been asserting all along that the premises in question 'have
always been since time immemorial in open, continuous, exclusive and
public and notorious possession and under claim of ownership adverse to the
entire world by defendant and his predecessors in interest.' This assignment
of error is thus clearly without merit.

Error No. VIII is but a consequence of the other errors alleged and needs for
further consideration.

During the pendency of this case in this Court appellant, thru other counsel,
has filed a motion to dismiss alleging that there is pending before the Court
of First Instance of Rizal another action between the same parties and for the
same cause and seeking to sustain that allegation with a copy of the
complaint filed in said action. But an examination of that complaint reveals
that appellant's allegation is not correct, for the pretended identity of parties
and cause of action in the two suits does not appear. That other case is one
for recovery of ownership, while the present one is for recovery of
possession. And while appellant claims that he is also involved in that order
action because it is a class suit, the complaint does not show that such is
really the case. On the contrary, it appears that the action seeks relief for
each individual plaintiff and not relief for and on behalf of others. The motion
for dismissal is clearly without merit.

Wherefore, the judgment appealed from is affirmed, with costs against the
plaintiff.

Paras, C.J., Pablo, Bengzon, Montemayor, Jugo, Bautista Angelo, Labrador,

and Concepcion, JJ., concur.

21
22

G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and
CHARLES CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V.
LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO,
GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R.
LAGDAMEO, ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL A.
BONCAN, BALDWIN YOUNG and AVELINO V. CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN,
DAVID P. WHITTINGHAM, CHARLES CHAMSAY and LUCIANO
SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V.
LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO,
GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V.
CRUZ and the COURT OF APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.
GUTIERREZ, JR., J.:
These consolidated petitions seek the review of the amended decision of the
Court of Appeals in CA-G.R. SP Nos. 05604 and 05617 which set aside the
earlier decision dated June 5, 1986, of the then Intermediate Appellate Court
and directed that in all subsequent elections for directors of Sanitary Wares
Manufacturing Corporation (Saniwares), American Standard Inc. (ASI)
cannot nominate more than three (3) directors; that the Filipino stockholders
shall not interfere in ASI's choice of its three (3) nominees; that, on the other
hand, the Filipino stockholders can nominate only six (6) candidates and in
the event they cannot agree on the six (6) nominees, they shall vote only
among themselves to determine who the six (6) nominees will be, with
cumulative voting to be allowed but without interference from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was incorporated for the primary
purpose of manufacturing and marketing sanitary wares. One of the
incorporators, Mr. Baldwin Young went abroad to look for foreign partners,
European or American who could help in its expansion plans. On August 15,
1962, ASI, a foreign corporation domiciled in Delaware, United States
entered into an Agreement with Saniwares and some Filipino investors
whereby ASI and the Filipino investors agreed to participate in the ownership
of an enterprise which would engage primarily in the business of
manufacturing in the Philippines and selling here and abroad vitreous china
and sanitary wares. The parties agreed that the business operations in the
Philippines shall be carried on by an incorporated enterprise and that the
name of the corporation shall initially be "Sanitary Wares Manufacturing
Corporation."
The Agreement has the following provisions relevant to the issues in these
cases on the nomination and election of the directors of the corporation:
23
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be
substantially in the form annexed hereto as Exhibit A and,
insofar as permitted under Philippine law, shall specifically
provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a
Board of Directors, which shall consist of nine individuals. As
long as American-Standard shall own at least 30% of the
outstanding stock of the Corporation, three of the nine
directors shall be designated by American-Standard, and the
other six shall be designated by the other stockholders of the
Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to
protect it as a minority group, including the grant of veto powers over a
number of corporate acts and the right to designate certain officers, such as
a member of the Executive Committee whose vote was required for
important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation
was also registered with the Board of Investments for availment of incentives
with the condition that at least 60% of the capital stock of the corporation
shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the
American corporation prospered. Unfortunately, with the business successes,
there came a deterioration of the initially harmonious relations between the
two groups. According to the Filipino group, a basic disagreement was due to
their desire to expand the export operations of the company to which ASI
objected as it apparently had other subsidiaries of joint joint venture groups
in the countries where Philippine exports were contemplated. On March 8,
1983, the annual stockholders' meeting was held. The meeting was presided
by Baldwin Young. The minutes were taken by the Secretary, Avelino Cruz.
After disposing of the preliminary items in the agenda, the stockholders then
proceeded to the election of the members of the board of directors. The ASI
group nominated three persons namely; Wolfgang Aurbach, John Griffin and
David P. Whittingham. The Philippine investors nominated six, namely;
Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George
F. Lee, and Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr.
Luciano E. Salazar, who in turn nominated Mr. Charles Chamsay. The
chairman, Baldwin Young ruled the last two nominations out of order on the
basis of section 5 (a) of the Agreement, the consistent practice of the parties
during the past annual stockholders' meetings to nominate only nine persons
as nominees for the nine-member board of directors, and the legal advice of
Saniwares' legal counsel. The following events then, transpired:
... There were protests against the action of the Chairman
and heated arguments ensued. An appeal was made by the
ASI representative to the body of stockholders present that a
vote be taken on the ruling of the Chairman. The Chairman,
Baldwin Young, declared the appeal out of order and no vote
on the ruling was taken. The Chairman then instructed the
Corporate Secretary to cast all the votes present and
represented by proxy equally for the 6 nominees of the
Philippine Investors and the 3 nominees of ASI, thus
effectively excluding the 2 additional persons nominated,
namely, Luciano E. Salazar and Charles Chamsay. The ASI
representative, Mr. Jaqua protested the decision of the
Chairman and announced that all votes accruing to ASI
shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No.
05617) were being cumulatively voted for the three ASI
nominees and Charles Chamsay, and instructed the
Secretary to so vote. Luciano E. Salazar and other proxy
holders announced that all the votes owned by and or
represented by them 467,197 shares (p. 27, Rollo, AC-G.R.
24
SP No. 05617) were being voted cumulatively in favor of
Luciano E. Salazar. The Chairman, Baldwin Young,
nevertheless instructed the Secretary to cast all votes
equally in favor of the three ASI nominees, namely, Wolfgang
Aurbach, John Griffin and David Whittingham and the six
originally nominated by Rogelio Vinluan, namely, Ernesto
Lagdameo, Sr., Raul Boncan, Ernesto Lagdameo, Jr.,
Enrique Lagdameo, George F. Lee, and Baldwin Young. The
Secretary then certified for the election of the following
Wolfgang Aurbach, John Griffin, David Whittingham Ernesto
Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo,
George F. Lee, Raul A. Boncan, Baldwin Young. The
representative of ASI then moved to recess the meeting
which was duly seconded. There was also a motion to
adjourn (p. 28, Rollo, AC-G.R. SP No. 05617). This motion to
adjourn was accepted by the Chairman, Baldwin Young, who
announced that the motion was carried and declared the
meeting adjourned. Protests against the adjournment were
registered and having been ignored, Mr. Jaqua the ASI
representative, stated that the meeting was not adjourned
but only recessed and that the meeting would be
reconvened in the next room. The Chairman then threatened
to have the stockholders who did not agree to the decision of
the Chairman on the casting of votes bodily thrown out. The
ASI Group, Luciano E. Salazar and other stockholders,
allegedly representing 53 or 54% of the shares of
Saniwares, decided to continue the meeting at the elevator
lobby of the American Standard Building. The continued
meeting was presided by Luciano E. Salazar, while Andres
Gatmaitan acted as Secretary. On the basis of the
cumulative votes cast earlier in the meeting, the ASI Group
nominated its four nominees; Wolfgang Aurbach, John
Griffin, David Whittingham and Charles Chamsay. Luciano E.
Salazar voted for himself, thus the said five directors were
certified as elected directors by the Acting Secretary, Andres
Gatmaitan, with the explanation that there was a tie among
the other six (6) nominees for the four (4) remaining
positions of directors and that the body decided not to break
the tie. (pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties
with the Securities and Exchange Commission (SEC). The first petition filed
was for preliminary injunction by Saniwares, Emesto V. Lagdameo, Baldwin
Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and
George F. Lee against Luciano Salazar and Charles Chamsay. The case was
denominated as SEC Case No. 2417. The second petition was for quo
warranto and application for receivership by Wolfgang Aurbach, John Griffin,
David Whittingham, Luciano E. Salazar and Charles Chamsay against the
group of Young and Lagdameo (petitioners in SEC Case No. 2417) and
Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both sets of
parties except for Avelino Cruz claimed to be the legitimate directors of the
corporation.
The two petitions were consolidated and tried jointly by a hearing officer who
rendered a decision upholding the election of the Lagdameo Group and
dismissing the quo warranto petition of Salazar and Chamsay. The ASI
Group and Salazar appealed the decision to the SEC en banc which affirmed
the hearing officer's decision.
The SEC decision led to the filing of two separate appeals with the
Intermediate Appellate Court by Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604)
and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The
petitions were consolidated and the appellate court in its decision ordered the
remand of the case to the Securities and Exchange Commission with the
directive that a new stockholders' meeting of Saniwares be ordered
convoked as soon as possible, under the supervision of the Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo Group)
the appellate court (Court of Appeals) rendered the questioned amended
decision. Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham
and Charles Chamsay in G.R. No. 75875 assign the following errors:
25
 I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE
ALLEGED ELECTION OF PRIVATE RESPONDENTS AS
MEMBERS OF THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE WAS NO ELECTION
AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE
STOCKHOLDERS FROM EXERCISING THEIR FULL
VOTING RIGHTS REPRESENTED BY THE NUMBER OF
SHARES IN SANIWARES, THUS DEPRIVING
PETITIONERS AND THE CORPORATION THEY
REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT
DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS
AND READS PROVISIONS INTO THE AGREEMENT OF
THE PARTIES WHICH WERE NOT THERE, WHICH
ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended
decision on the following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard
of binding contractual agreements entered into by
stockholders and the replacement of the conditions of such
agreements with terms never contemplated by the
stockholders but merely dictated by the CA .
11.2. The Amended decision would likewise sanction the
deprivation of the property rights of stockholders without due
process of law in order that a favored group of stockholders
may be illegally benefitted and guaranteed a continuing
monopoly of the control of a corporation. (pp. 14-15, Rollo-
75975-76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT
COURT, WHILE RECOGNIZING THAT THE
STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO
TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC
INTENT OF THE AGREEMENT AND THE LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY
RULE THAT PRIVATE PETITIONERS HEREIN WERE THE
DULY ELECTED DIRECTORS DURING THE 8 MARCH
1983 ANNUAL STOCKHOLDERS MEETING OF
SANTWARES. (P. 24, Rollo-75951)
The issues raised in the petitions are interrelated, hence, they are discussed
jointly.
The main issue hinges on who were the duly elected directors of Saniwares
for the year 1983 during its annual stockholders' meeting held on March 8,
1983. To answer this question the following factors should be determined: (1)
the nature of the business established by the parties whether it was a joint
venture or a corporation and (2) whether or not the ASI Group may vote their
additional 10% equity during elections of Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby
established among themselves a joint venture or some other relation
depends upon their actual intention which is determined in accordance with
the rules governing the interpretation and construction of contracts. (Terminal
Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal
Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the
actual intention of the parties should be viewed strictly on the "Agreement"
26
dated August 15,1962 wherein it is clearly stated that the parties' intention
was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which
states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute
any of the parties hereto partners or joint venturers in
respect of any transaction hereunder. (At P. 66, Rollo-GR
No. 75875)
They object to the admission of other evidence which tends to show that the
parties' agreement was to establish a joint venture presented by the
Lagdameo and Young Group on the ground that it contravenes the parol
evidence rule under section 7, Rule 130 of the Revised Rules of Court.
According to them, the Lagdameo and Young Group never pleaded in their
pleading that the "Agreement" failed to express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an
agreement have been reduced to writing, it is to be
considered as containing all such terms, and therefore, there
can be, between the parties and their successors in interest,
no evidence of the terms of the agreement other than the
contents of the writing, except in the following cases:
(a) Where a mistake or imperfection of the writing, or its
failure to express the true intent and agreement of the
parties or the validity of the agreement is put in issue by the
pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in
their Reply and Answer to Counterclaim in SEC Case No. 2417 that the
Agreement failed to express the true intent of the parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it
appear that the parties thereto disclaim being partners or
joint venturers such disclaimer is directed at third parties and
is not inconsistent with, and does not preclude, the existence
of two distinct groups of stockholders in Saniwares one of
which (the Philippine Investors) shall constitute the majority,
and the other ASI shall constitute the minority stockholder. In
any event, the evident intention of the Philippine Investors
and ASI in entering into the Agreement is to enter into ajoint
venture enterprise, and if some words in the Agreement
appear to be contrary to the evident intention of the parties,
the latter shall prevail over the former (Art. 1370, New Civil
Code). The various stipulations of a contract shall be
interpreted together attributing to the doubtful ones that
sense which may result from all of them taken jointly (Art.
1374, New Civil Code). Moreover, in order to judge the
intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered. (Art.
1371, New Civil Code). (Part I, Original Records, SEC Case
No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove
that the parties joined their efforts in furtherance of an
enterprise for their joint profit, the question whether they
intended by their agreement to create a joint adventure, or to
assume some other relation is a question of fact for the jury.
(Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa
27
 v. Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George, 27
Wyo, 423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the
Agreement as well as the testimonial evidence presented by the Lagdameo
and Young Group shows that the parties agreed to establish a joint venture
and not a corporation. The history of the organization of Saniwares and the
unusual arrangements which govern its policy making body are all consistent
with a joint venture and not with an ordinary corporation. As stated by the
SEC:
According to the unrebutted testimony of Mr. Baldwin Young,
he negotiated the Agreement with ASI in behalf of the
Philippine nationals. He testified that ASI agreed to accept
the role of minority vis-a-vis the Philippine National group of
investors, on the condition that the Agreement should
contain provisions to protect ASI as the minority.
An examination of the Agreement shows that certain
provisions were included to protect the interests of ASI as
the minority. For example, the vote of 7 out of 9 directors is
required in certain enumerated corporate acts [Sec. 3 (b) (ii)
(a) of the Agreement]. ASI is contractually entitled to
designate a member of the Executive Committee and the
vote of this member is required for certain transactions [Sec.
3 (b) (i)].
The Agreement also requires a 75% super-majority vote for
the amendment of the articles and by-laws of Saniwares
[Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to
designate the president and plant manager [Sec. 5 (6)]. The
Agreement further provides that the sales policy of
Saniwares shall be that which is normally followed by ASI
[Sec. 13 (a)] and that Saniwares should not export
"Standard" products otherwise than through ASI's Export
Marketing Services [Sec. 13 (6)]. Under the Agreement, ASI
agreed to provide technology and know-how to Saniwares
and the latter paid royalties for the same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions of the Agreement
requiring a 7 out of 9 votes of the board of directors for
certain actions, in effect gave ASI (which designates 3
directors under the Agreement) an effective veto power.
Furthermore, the grant to ASI of the right to designate certain
officers of the corporation; the super-majority voting
requirements for amendments of the articles and by-laws;
and most significantly to the issues of tms case, the
provision that ASI shall designate 3 out of the 9 directors and
the other stockholders shall designate the other 6, clearly
indicate that there are two distinct groups in Saniwares,
namely ASI, which owns 40% of the capital stock and the
Philippine National stockholders who own the balance of
60%, and that 2) ASI is given certain protections as the
minority stockholder.
Premises considered, we believe that under the Agreement
there are two groups of stockholders who established a
corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other
stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not
"nominated" or "elected" in the selection of the nine directors on a six to three
ratio. Each group is assured of a fixed number of directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint
venture. Baldwin Young also testified that Section 16(c) of the Agreement
that "Nothing herein contained shall be construed to constitute any of the
parties hereto partners or joint venturers in respect of any transaction
28
hereunder" was merely to obviate the possibility of the enterprise being
treated as partnership for tax purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and
manufacturing capacities of a local firm are constrained to seek the
technology and marketing assistance of huge multinational corporations of
the developed world. Arrangements are formalized where a foreign group
becomes a minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance. However, there
is always a danger from such arrangements. The foreign group may, from the
start, intend to establish its own sole or monopolistic operations and merely
uses the joint venture arrangement to gain a foothold or test the Philippine
waters, so to speak. Or the covetousness may come later. As the Philippine
firm enlarges its operations and becomes profitable, the foreign group
undermines the local majority ownership and actively tries to completely or
predominantly take over the entire company. This undermining of joint
ventures is not consistent with fair dealing to say the least. To the extent that
such subversive actions can be lawfully prevented, the courts should extend
protection especially in industries where constitutional and legal
requirements reserve controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the
right of stockholders to enter into agreements regarding the
exercise of their voting rights.
Sec. 100. Agreements by stockholders.-
xxx xxx xxx
2. An agreement between two or more stockholders, if in
writing and signed by the parties thereto, may provide that in
exercising any voting rights, the shares held by them shall
be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by
them.
Appellants contend that the above provision is included in
the Corporation Code's chapter on close corporations and
Saniwares cannot be a close corporation because it has 95
stockholders. Firstly, although Saniwares had 95
stockholders at the time of the disputed stockholders
meeting, these 95 stockholders are not separate from each
other but are divisible into groups representing a single
Identifiable interest. For example, ASI, its nominees and
lawyers count for 13 of the 95 stockholders. The
YoungYutivo family count for another 13 stockholders, the
Chamsay family for 8 stockholders, the Santos family for 9
stockholders, the Dy family for 7 stockholders, etc. If the
members of one family and/or business or interest group are
considered as one (which, it is respectfully submitted, they
should be for purposes of determining how closely held
Saniwares is there were as of 8 March 1983, practically only
17 stockholders of Saniwares. (Please refer to discussion in
pp. 5 to 6 of appellees' Rejoinder Memorandum dated 11
December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a
close corporation because it has more than 20 stockholders,
the undeniable fact is that it is a close-held corporation.
Surely, appellants cannot honestly claim that Saniwares is a
public issue or a widely held corporation.
In the United States, many courts have taken a realistic
approach to joint venture corporations and have not rigidly
applied principles of corporation law designed primarily for
public issue corporations. These courts have indicated that
express arrangements between corporate joint ventures
should be construed with less emphasis on the ordinary
rules of law usually applied to corporate entities and with
more consideration given to the nature of the agreement
29
between the joint venturers (Please see Wabash Ry v.
American Refrigerator Transit Co., 7 F 2d 335; Chicago, M &
St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490';
Seaboard Airline Ry v. Atlantic Coast Line Ry; 240 N.C.
495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d
903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90,
295 N.W. 571; Beardsley v. Beardsley, 138 U.S. 262; "The
Legal Status of Joint Venture Corporations", 11 Vand Law
Rev. p. 680,1958). These American cases dealt with legal
questions as to the extent to which the requirements arising
from the corporate form of joint venture corporations should
control, and the courts ruled that substantial justice lay with
those litigants who relied on the joint venture agreement
rather than the litigants who relied on the orthodox principles
of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the
joint venture deviate from the traditional pattern of
corporation management. A noted authority has pointed out
that just as in close corporations, shareholders' agreements
in joint venture corporations often contain provisions which
do one or more of the following: (1) require greater than
majority vote for shareholder and director action; (2) give
certain shareholders or groups of shareholders power to
select a specified number of directors; (3) give to the
shareholders control over the selection and retention of
employees; and (4) set up a procedure for the settlement of
disputes by arbitration (See I O' Neal, Close Corporations,
1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC
Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code
does not necessarily imply that agreements regarding the
exercise of voting rights are allowed only in close
corporations. As Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in
particular. Does this provision necessarily imply that these
agreements can be valid only in close corporations as
defined by the Code? Suppose that a corporation has twenty
five stockholders, and therefore cannot qualify as a close
corporation under section 96, can some of them enter into
an agreement to vote as a unit in the election of directors? It
is submitted that there is no reason for denying stockholders
of corporations other than close ones the right to enter into
not voting or pooling agreements to protect their interests, as
long as they do not intend to commit any wrong, or fraud on
the other stockholders not parties to the agreement. Of
course, voting or pooling agreements are perhaps more
useful and more often resorted to in close corporations. But
they may also be found necessary even in widely held
corporations. Moreover, since the Code limits the legal
meaning of close corporations to those which comply with
the requisites laid down by section 96, it is entirely possible
that a corporation which is in fact a close corporation will not
come within the definition. In such case, its stockholders
should not be precluded from entering into contracts like
voting agreements if these are otherwise valid. (Campos &
Lopez-Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement
relating to the designation or nomination of directors restricts
the right of the Agreement's signatories to vote for directors,
such contractual provision, as correctly held by the SEC, is
valid and binding upon the signatories thereto, which include
appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their
additional equity during elections of Saniwares' board of directors, the Court
of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's
participation in the management of the corporation is spelled
30
out in the Agreement. Section 5(a) hereof says that three of
the nine directors shall be designated by ASI and the
remaining six by the other stockholders, i.e., the Filipino
stockholders. This allocation of board seats is obviously in
consonance with the minority position of ASI.
Having entered into a well-defined contractual relationship, it
is imperative that the parties should honor and adhere to
their respective rights and obligations thereunder. Appellants
seem to contend that any allocation of board seats, even in
joint venture corporations, are null and void to the extent that
such may interfere with the stockholder's rights to cumulative
voting as provided in Section 24 of the Corporation Code.
This Court should not be prepared to hold that any
agreement which curtails in any way cumulative voting
should be struck down, even if such agreement has been
freely entered into by experienced businessmen and do not
prejudice those who are not parties thereto. It may well be
that it would be more cogent to hold, as the Securities and
Exchange Commission has held in the decision appealed
from, that cumulative voting rights may be voluntarily waived
by stockholders who enter into special relationships with
each other to pursue and implement specific purposes, as in
joint venture relationships between foreign and local
stockholders, so long as such agreements do not adversely
affect third parties.
In any event, it is believed that we are not here called upon
to make a general rule on this question. Rather, all that
needs to be done is to give life and effect to the particular
contractual rights and obligations which the parties have
assumed for themselves.
On the one hand, the clearly established minority position of
ASI and the contractual allocation of board seats Cannot be
disregarded. On the other hand, the rights of the
stockholders to cumulative voting should also be protected.
In our decision sought to be reconsidered, we opted to
uphold the second over the first. Upon further reflection, we
feel that the proper and just solution to give due
consideration to both factors suggests itself quite clearly.
This Court should recognize and uphold the division of the
stockholders into two groups, and at the same time uphold
the right of the stockholders within each group to cumulative
voting in the process of determining who the group's
nominees would be. In practical terms, as suggested by
appellant Luciano E. Salazar himself, this means that if the
Filipino stockholders cannot agree who their six nominees
will be, a vote would have to be taken among the Filipino
stockholders only. During this voting, each Filipino
stockholder can cumulate his votes. ASI, however, should
not be allowed to interfere in the voting within the Filipino
group. Otherwise, ASI would be able to designate more than
the three directors it is allowed to designate under the
Agreement, and may even be able to get a majority of the
board seats, a result which is clearly contrary to the
contractual intent of the parties.
Such a ruling will give effect to both the allocation of the
board seats and the stockholder's right to cumulative voting.
Moreover, this ruling will also give due consideration to the
issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as
amended) and the nationalization requirements of the
Constitution and the laws if ASI is allowed to nominate more
than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI
Group has the right to vote their additional equity pursuant to Section 24 of
the Corporation Code which gives the stockholders of a corporation the right
to cumulate their votes in electing directors. Petitioner Salazar adds that this
right if granted to the ASI Group would not necessarily mean a violation of
the Anti-Dummy Act (Commonwealth Act 108, as amended). He cites section
2-a thereof which provides:
31
 And provided finally that the election of aliens as members of
the board of directors or governing body of corporations or
associations engaging in partially nationalized activities shall
be allowed in proportion to their allowable participation or
share in the capital of such entities. (amendments introduced
by Presidential Decree 715, section 1, promulgated May 28,
1975)
The ASI Group's argument is correct within the context of Section 24 of the
Corporation Code. The point of query, however, is whether or not that
provision is applicable to a joint venture with clearly defined agreements:
The legal concept of ajoint venture is of common law origin.
It has no precise legal definition but it has been generally
understood to mean an organization formed for some
temporary purpose. (Gates v. Megargel, 266 Fed. 811
[1920]) It is in fact hardly distinguishable from the
partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a
mutual right of control. Blackner v. Mc Dermott, 176 F. 2d.
498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043 [1939];
Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P.
2d. 242 [1955]). The main distinction cited by most opinions
in common law jurisdictions is that the partnership
contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution
of a single transaction, and is thus of a temporary nature.
(Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931];
Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates
v. Megargel 266 Fed. 811 [1920]). This observation is not
entirely accurate in this jurisdiction, since under the Civil
Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific
undertaking. (Art. 1783, Civil Code). It would seem therefore
that under Philippine law, a joint venture is a form of
partnership and should thus be governed by the law of
partnerships. The Supreme Court has however recognized a
distinction between these two business forms, and has held
that although a corporation cannot enter into a partnership
contract, it may however engage in a joint venture with
others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954])
(Campos and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of
contracts generally apply to a contract of joint venture. (O' Hara v. Harman 14
App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the
resolution of the question of whether or not the ASI Group may vote their
additional equity lies in the agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of
the parties as regards the allocation of director seats under Section 5 (a) of
the "Agreement," and the right of each group of stockholders to cumulative
voting in the process of determining who the group's nominees would be
under Section 3 (a) (1) of the "Agreement." As pointed out by SEC, Section 5
(a) of the Agreement relates to the manner of nominating the members of the
board of directors while Section 3 (a) (1) relates to the manner of voting for
these nominees.
This is the proper interpretation of the Agreement of the parties as regards
the election of members of the board of directors.
To allow the ASI Group to vote their additional equity to help elect even a
Filipino director who would be beholden to them would obliterate their
minority status as agreed upon by the parties. As aptly stated by the
appellate court:
... ASI, however, should not be allowed to interfere in the
voting within the Filipino group. Otherwise, ASI would be
able to designate more than the three directors it is allowed
to designate under the Agreement, and may even be able to
32
 get a majority of the board seats, a result which is clearly
contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the
board seats and the stockholder's right to cumulative voting.
Moreover, this ruling will also give due consideration to the
issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as
amended) and the nationalization requirements of the
Constitution and the laws if ASI is allowed to nominate more
than three directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties
is the consideration as regards the possible domination by the foreign
investors of the enterprise in violation of the nationalization requirements
enshrined in the Constitution and circumvention of the Anti-Dummy Act. In
this regard, petitioner Salazar's position is that the Anti-Dummy Act allows
the ASI group to elect board directors in proportion to their share in the
capital of the entity. It is to be noted, however, that the same law also limits
the election of aliens as members of the board of directors in proportion to
their allowance participation of said entity. In the instant case, the foreign
Group ASI was limited to designate three directors. This is the allowable
participation of the ASI Group. Hence, in future dealings, this limitation of six
to three board seats should always be maintained as long as the joint
venture agreement exists considering that in limiting 3 board seats in the 9-
man board of directors there are provisions already agreed upon and
embodied in the parties' Agreement to protect the interests arising from the
minority status of the foreign investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC
which were impliedly affirmed by the appellate court declaring Messrs.
Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V. Lagdameo,
Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique
Lagdameo, and George F. Lee as the duly elected directors of Saniwares at
the March 8,1983 annual stockholders' meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No.
75951) object to a cumulative voting during the election of the board of
directors of the enterprise as ruled by the appellate court and submits that
the six (6) directors allotted the Filipino stockholders should be selected by
consensus pursuant to section 5 (a) of the Agreement which uses the word
"designate" meaning "nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the
enterprise if the Filipino stockholders are allowed to select their nominees
separately and not as a common slot determined by the majority of their
group.
Section 5 (a) of the Agreement which uses the word designates in the
allocation of board directors should not be interpreted in isolation. This
should be construed in relation to section 3 (a) (1) of the Agreement. As we
stated earlier, section 3(a) (1) relates to the manner of voting for these
nominees which is cumulative voting while section 5(a) relates to the manner
of nominating the members of the board of directors. The petitioners in G.R.
No. 75951 agreed to this procedure, hence, they cannot now impugn its
legality.
The insinuation that the ASI Group may be able to control the enterprise
under the cumulative voting procedure cannot, however, be ignored. The
validity of the cumulative voting procedure is dependent on the directors thus
elected being genuine members of the Filipino group, not voters whose
interest is to increase the ASI share in the management of Saniwares. The
joint venture character of the enterprise must always be taken into account,
so long as the company exists under its original agreement. Cumulative
voting may not be used as a device to enable ASI to achieve stealthily or
indirectly what they cannot accomplish openly. There are substantial
safeguards in the Agreement which are intended to preserve the majority
status of the Filipino investors as well as to maintain the minority status of the
foreign investors group as earlier discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are
DISMISSED and the petition in G.R. No. 75951 is partly GRANTED. The
33
amended decision of the Court of Appeals is MODIFIED in that Messrs.
Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo,
Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique
Lagdameo, and George F. Lee are declared as the duly elected directors of
Saniwares at the March 8,1983 annual stockholders' meeting. In all other
respects, the questioned decision is AFFIRMED. Costs against the
petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.

SO ORDERED.

Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.

Feliciano, J., took no part.

34
 understandable, and interpretative American jurisprudence is found in
abundance, yet the issue submitted is not lightly to be resolved. The
question, flatly presented, is, whether Act. No. 2761 of the Philippine
Legislature is valid or, more directly stated, whether the Government of
the Philippine Islands, through its Legislature, can deny the registry of
vessels in its coastwise trade to corporations having alien stockholders.

FACTS.

Smith, Bell & Co., (Ltd.), is a corporation organized and existing under the
laws of the Philippine Islands. A majority of its stockholders are British
subjects. It is the owner of a motor vessel known as the Bato built for it in the
Philippine Islands in 1916, of more than fifteen tons gross The Bato was
brought to Cebu in the present year for the purpose of transporting plaintiff's
merchandise between ports in the Islands. Application was made at Cebu,
the home port of the vessel, to the Collector of Customs for a certificate of
Philippine registry. The Collector refused to issue the certificate, giving as his
G.R. No. 15574 September 17, 1919 reason that all the stockholders of Smith, Bell & Co., Ltd., were not citizens
either of the United States or of the Philippine Islands. The instant action is
SMITH, BELL & COMPANY (LTD.), petitioner, the result.
vs.
JOAQUIN NATIVIDAD, Collector of Customs of the port of LAW.
Cebu, respondent.
The Act of Congress of April 29, 1908, repealing the Shipping Act of April 30,
Ross and Lawrence for petitioner. 1906 but reenacting a portion of section 3 of this Law, and still in force,
Attorney-General Paredes for respondent. provides in its section 1:

MALCOLM, J.:
A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.), against Joaquin
Natividad, Collector of Customs of the port of Cebu, Philippine Islands, to
compel him to issue a certificate of Philippine registry to the petitioner for its
motor vessel Bato. The Attorney-General, acting as counsel for respondent,
demurs to the petition on the general ground that it does not state facts
sufficient to constitute a cause of action. While the facts are thus admitted,
and while, moreover, the pertinent provisions of law are clear and
That until Congress shall have authorized the registry as vessels of
the United States of vessels owned in the Philippine Islands, the
Government of the Philippine Islands is hereby authorized to adopt,
from time to time, and enforce regulations governing the
transportation of merchandise and passengers between ports or
places in the Philippine Archipelago. (35 Stat. at L., 70; Section
3912, U. S. Comp Stat. [1916]; 7 Pub. Laws, 364.)

35
The Act of Congress of August 29, 1916, commonly known as the Jones
Law, still in force, provides in section 3, (first paragraph, first sentence), 6, 7,
8, 10, and 31, as follows.
SEC. 3. That no law shall be enacted in said Islands which shall
deprive any person of life, liberty, or property without due process of
law, or deny to any person therein the equal protection of the laws. . .
.
SEC. 6. That the laws now in force in the Philippines shall continue in
force and effect, except as altered, amended, or modified herein,
until altered, amended, or repealed by the legislative authority herein
provided or by Act of Congress of the United States.
SEC. 7. That the legislative authority herein provided shall have
power, when not inconsistent with this Act, by due enactment to
amend, alter modify, or repeal any law, civil or criminal, continued in
force by this Act as it may from time to time see fit
This power shall specifically extend with the limitation herein
provided as to the tariff to all laws relating to revenue provided as to
the tariff to all laws relating to revenue and taxation in effect in the
Philippines.
SEC. 8. That general legislative power, except as otherwise herein
provided, is hereby granted to the Philippine Legislature, authorized
by this Act.
SEC. 10. That while this Act provides that the Philippine government
shall have the authority to enact a tariff law the trade relations
between the islands and the United States shall continue to be
governed exclusively by laws of the Congress of the United
States: Provided, That tariff acts or acts amendatory to the tariff of
the Philippine Islands shall not become law until they shall receive
the approval of the President of the United States, nor shall any act
of the Philippine Legislature affecting immigration or the currency or
coinage laws of the Philippines become a law until it has been
approved by the President of the United States: Provided
further, That the President shall approve or disapprove any act
mentioned in the foregoing proviso within six months from and after
its enactment and submission for his approval, and if not
disapproved within such time it shall become a law the same as if it
had been specifically approved.
SEC. 31. That all laws or parts of laws applicable to the Philippines
not in conflict with any of the provisions of this Act are hereby
continued in force and effect." (39 Stat at L., 546.)
On February 23, 1918, the Philippine Legislature enacted Act No. 2761. The
first section of this law amended section 1172 of the Administrative Code to
read as follows:
SEC. 1172. Certificate of Philippine register. Upon registration of a
vessel of domestic ownership, and of more than fifteen tons gross, a
certificate of Philippine register shall be issued for it. If the vessel is
of domestic ownership and of fifteen tons gross or less, the taking of
the certificate of Philippine register shall be optional with the owner.
"Domestic ownership," as used in this section, means ownership
vested in some one or more of the following classes of persons: (a)
Citizens or native inhabitants of the Philippine Islands; (b) citizens of
the United States residing in the Philippine Islands; (c) any
corporation or company composed wholly of citizens of the
Philippine Islands or of the United States or of both, created under
the laws of the United States, or of any State thereof, or of thereof, or
the managing agent or master of the vessel resides in the Philippine
Islands
Any vessel of more than fifteen gross tons which on February eighth,
nineteen hundred and eighteen, had a certificate of Philippine
register under existing law, shall likewise be deemed a vessel of
domestic ownership so long as there shall not be any change in the
36
 ownership thereof nor any transfer of stock of the companies or
corporations owning such vessel to person not included under the
last preceding paragraph.
Sections 2 and 3 of Act No. 2761 amended sections 1176 and 1202 of the
Administrative Code to read as follows:
SEC. 1176. Investigation into character of vessel. No application
for a certificate of Philippine register shall be approved until the
collector of customs is satisfied from an inspection of the vessel that
it is engaged or destined to be engaged in legitimate trade and that it
is of domestic ownership as such ownership is defined in section
eleven hundred and seventy-two of this Code.
The collector of customs may at any time inspect a vessel or
examine its owner, master, crew, or passengers in order to ascertain
whether the vessel is engaged in legitimate trade and is entitled to
have or retain the certificate of Philippine register.
SEC. 1202. Limiting number of foreign officers and engineers on
board vessels. No Philippine vessel operating in the coastwise
trade or on the high seas shall be permitted to have on board more
than one master or one mate and one engineer who are not citizens
of the United States or of the Philippine Islands, even if they hold
licenses under section one thousand one hundred and ninety-nine
hereof. No other person who is not a citizen of the United States or
of the Philippine Islands shall be an officer or a member of the crew
of such vessel. Any such vessel which fails to comply with the terms
of this section shall be required to pay an additional tonnage tax of
fifty centavos per net ton per month during the continuance of said
failure.
ISSUES.
Predicated on these facts and provisions of law, the issues as above stated
recur, namely, whether Act No 2761 of the Philippine Legislature is valid in
whole or in part whether the Government of the Philippine Islands, through
its Legislature, can deny the registry of vessel in its coastwise trade to
corporations having alien stockholders .
OPINION.
1. Considered from a positive standpoint, there can exist no measure of
doubt as to the power of the Philippine Legislature to enact Act No. 2761.
The Act of Congress of April 29, 1908, with its specific delegation of authority
to the Government of the Philippine Islands to regulate the transportation of
merchandise and passengers between ports or places therein, the liberal
construction given to the provisions of the Philippine Bill, the Act of Congress
of July 1, 1902, by the courts, and the grant by the Act of Congress of August
29, 1916, of general legislative power to the Philippine Legislature, are
certainly superabundant authority for such a law. While the Act of the local
legislature may in a way be inconsistent with the Act of Congress regulating
the coasting trade of the Continental United States, yet the general rule that
only such laws of the United States have force in the Philippines as are
expressly extended thereto, and the abnegation of power by Congress in
favor of the Philippine Islands would leave no starting point for convincing
argument. As a matter of fact, counsel for petitioner does not assail
legislative action from this direction (See U. S. vs. Bull [1910], 15 Phil., 7;
Sinnot vs. Davenport [1859] 22 How., 227.)
2. It is from the negative, prohibitory standpoint that counsel argues against
the constitutionality of Act No. 2761. The first paragraph of the Philippine Bill
of Rights of the Philippine Bill, repeated again in the first paragraph of the
Philippine Bill of Rights as set forth in the Jones Law, provides "That no law
shall be enacted in said Islands which shall deprive any person of life, liberty,
or property without due process of law, or deny to any person therein the
equal protection of the laws." Counsel says that Act No. 2761 denies to
Smith, Bell & Co., Ltd., the equal protection of the laws because it, in effect,
prohibits the corporation from owning vessels, and because classification of
corporations based on the citizenship of one or more of their stockholders is
capricious, and that Act No. 2761 deprives the corporation of its properly
without due process of law because by the passage of the law company was
37
automatically deprived of every beneficial attribute of ownership in
the Bato and left with the naked title to a boat it could not use .
The guaranties extended by the Congress of the United States to the
Philippine Islands have been used in the same sense as like provisions
found in the United States Constitution. While the "due process of law and
equal protection of the laws" clause of the Philippine Bill of Rights is couched
in slightly different words than the corresponding clause of the Fourteenth
Amendment to the United States Constitution, the first should be interpreted
and given the same force and effect as the latter. (Kepner vs. U.S. [1904],
195 U. S., 100; Sierra vs. Mortiga [1907], 204 U. S.,.470; U. S. vs. Bull
[1910], 15 Phil., 7.) The meaning of the Fourteenth Amendment has been
announced in classic decisions of the United States Supreme Court. Even at
the expense of restating what is so well known, these basic principles must
again be set down in order to serve as the basis of this decision.
The guaranties of the Fourteenth Amendment and so of the first paragraph of
the Philippine Bill of Rights, are universal in their application to all person
within the territorial jurisdiction, without regard to any differences of race,
color, or nationality. The word "person" includes aliens. (Yick Wo vs. Hopkins
[1886], 118 U. S., 356; Truax vs. Raich [1915], 239 U. S., 33.) Private
corporations, likewise, are "persons" within the scope of the guaranties in so
far as their property is concerned. (Santa Clara County vs. Southern Pac. R.
R. Co. [1886], 118.U. S., 394; Pembina Mining Co. vs. Pennsylvania
[1888],.125 U. S., 181 Covington & L. Turnpike Road Co. vs. Sandford
[1896], 164 U. S., 578.) Classification with the end in view of providing
diversity of treatment may be made among corporations, but must be based
upon some reasonable ground and not be a mere arbitrary selection (Gulf,
Colorado & Santa Fe Railway Co. vs. Ellis [1897],.165 U. S., 150.) Examples
of laws held unconstitutional because of unlawful discrimination against
aliens could be cited. Generally, these decisions relate to statutes which had
attempted arbitrarily to forbid aliens to engage in ordinary kinds of business
to earn their living. (State vs. Montgomery [1900], 94 Maine, 192, peddling
but see. Commonwealth vs. Hana [1907], 195 Mass., 262; Templar vs. Board
of Examiners of Barbers [1902], 131 Mich., 254, barbers; Yick
Wo vs. Hopkins [1886], 118 U. S.,.356, discrimination against Chinese;
Truax vs. Raich [1915], 239 U. S., 33; In re Parrott [1880], 1 Fed , 481;
Fraser vs. McConway & Torley Co. [1897], 82 Fed , 257; Juniata Limestone
Co. vs. Fagley [1898], 187 Penn., 193, all relating to the employment of
aliens by private corporations.)
A literal application of general principles to the facts before us would, of
course, cause the inevitable deduction that Act No. 2761 is unconstitutional
by reason of its denial to a corporation, some of whole members are
foreigners, of the equal protection of the laws. Like all beneficient
propositions, deeper research discloses provisos. Examples of a denial of
rights to aliens notwithstanding the provisions of the Fourteenth Amendment
could be cited. (Tragesser vs. Gray [1890], 73 Md., 250, licenses to sell
spirituous liquors denied to persons not citizens of the United States;
Commonwealth vs. Hana [1907], 195 Mass , 262, excluding aliens from the
right to peddle; Patsone vs. Commonwealth of Pennsylvania [1914], 232 U.
S. , 138, prohibiting the killing of any wild bird or animal by any unnaturalized
foreign-born resident; Ex parte Gilleti [1915], 70 Fla., 442, discriminating in
favor of citizens with reference to the taking for private use of the common
property in fish and oysters found in the public waters of the State;
Heim vs. McCall [1915], 239 U. S.,.175, and Crane vs. New York [1915], 239
U. S., 195, limiting employment on public works by, or for, the State or a
municipality to citizens of the United States.)
One of the exceptions to the general rule, most persistent and far reaching in
influence is, that neither the Fourteenth Amendment to the United States
Constitution, broad and comprehensive as it is, nor any other amendment,
"was designed to interfere with the power of the State, sometimes termed its
`police power,' to prescribe regulations to promote the health, peace, morals,
education, and good order of the people, and legislate so as to increase the
industries of the State, develop its resources and add to its wealth and
prosperity. From the very necessities of society, legislation of a special
character, having these objects in view, must often be had in certain
districts." (Barbier vs. Connolly [1884], 113 U.S., 27; New Orleans Gas
Co. vs. Lousiana Light Co. [1885], 115 U.S., 650.) This is the same police
power which the United States Supreme Court say "extends to so dealing
with the conditions which exist in the state as to bring out of them the
greatest welfare in of its people." (Bacon vs. Walker [1907], 204 U.S., 311.)
For quite similar reasons, none of the provision of the Philippine Organic Law
38
could could have had the effect of denying to the Government of the
Philippine Islands, acting through its Legislature, the right to exercise that
most essential, insistent, and illimitable of powers, the sovereign police
power, in the promotion of the general welfare and the public interest. (U.
S. vs. Toribio [1910], 15 Phil., 85; Churchill and Tait vs. Rafferty [1915], 32
Phil., 580; Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660.)
Another notable exception permits of the regulation or distribution of the
public domain or the common property or resources of the people of the
State, so that use may be limited to its citizens. (Ex parte Gilleti [1915], 70
Fla., 442; McCready vs. Virginia [1876], 94 U. S., 391;
Patsone vs. Commonwealth of Pennsylvania [1914], 232U. S., 138.) Still
another exception permits of the limitation of employment in the construction
of public works by, or for, the State or a municipality to citizens of the United
States or of the State. (Atkin vs. Kansas [1903],191 U. S., 207;
Heim vs. McCall [1915], 239 U.S., 175; Crane vs. New York [1915], 239 U.
S., 195.) Even as to classification, it is admitted that a State may classify with
reference to the evil to be prevented; the question is a practical one,
dependent upon experience. (Patsone vs. Commonwealth of Pennsylvania
[1914], 232 U. S., 138.)
To justify that portion of Act no. 2761 which permits corporations or
companies to obtain a certificate of Philippine registry only on condition that
they be composed wholly of citizens of the Philippine Islands or of the United
States or both, as not infringing Philippine Organic Law, it must be done
under some one of the exceptions here mentioned This must be done,
moreover, having particularly in mind what is so often of controlling effect in
this jurisdiction our local experience and our peculiar local conditions.
To recall a few facts in geography, within the confines of Philippine
jurisdictional limits are found more than three thousand islands. Literally, and
absolutely, steamship lines are, for an Insular territory thus situated, the
arteries of commerce. If one be severed, the life-blood of the nation is lost. If
on the other hand these arteries are protected, then the security of the
country and the promotion of the general welfare is sustained. Time and
again, with such conditions confronting it, has the executive branch of the
Government of the Philippine Islands, always later with the sanction of the
judicial branch, taken a firm stand with reference to the presence of
undesirable foreigners. The Government has thus assumed to act for the all-
sufficient and primitive reason of the benefit and protection of its own citizens
and of the self-preservation and integrity of its dominion. (In re Patterson
[1902], 1 Phil., 93; Forbes vs. Chuoco, Tiaco and Crossfield [1910], 16 Phil.,
534;.228 U.S., 549; In re McCulloch Dick [1918], 38 Phil., 41.) Boats owned
by foreigners, particularly by such solid and reputable firms as the instant
claimant, might indeed traverse the waters of the Philippines for ages without
doing any particular harm. Again, some evilminded foreigner might very
easily take advantage of such lavish hospitality to chart Philippine waters, to
obtain valuable information for unfriendly foreign powers, to stir up
insurrection, or to prejudice Filipino or American commerce. Moreover, under
the Spanish portion of Philippine law, the waters within the domestic
jurisdiction are deemed part of the national domain, open to public use.
(Book II, Tit. IV, Ch. I, Civil Code; Spanish Law of Waters of August 3, 1866,
arts 1, 2, 3.) Common carriers which in the Philippines as in the United
States and other countries are, as Lord Hale said, "affected with a public
interest," can only be permitted to use these public waters as a privilege and
under such conditions as to the representatives of the people may seem
wise. (See De Villata vs. Stanley [1915], 32 Phil., 541.)
In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S., 138), a
case herein before mentioned, Justice Holmes delivering the opinion of the
United States Supreme Court said:
This statute makes it unlawful for any unnaturalized foreign-born
resident to kill any wild bird or animal except in defense of person or
property, and `to that end' makes it unlawful for such foreign-born
person to own or be possessed of a shotgun or rifle; with a penalty of
$25 and a forfeiture of the gun or guns. The plaintiff in error was
found guilty and was sentenced to pay the abovementioned fine. The
judgment was affirmed on successive appeals. (231 Pa., 46; 79 Atl.,
928.) He brings the case to this court on the ground that the statute
is contrary to the 14th Amendment and also is in contravention of the
treaty between the United States and Italy, to which latter country the
plaintiff in error belongs .
39
 Under the 14th Amendment the objection is twofold; unjustifiably
depriving the alien of property, and discrimination against such aliens
as a class. But the former really depends upon the latter, since it
hardly can be disputed that if the lawful object, the protection of wild
life (Geer vs. Connecticut, 161 U.S., 519; 40 L. ed., 793; 16 Sup. Ct.
Rep., 600), warrants the discrimination, the, means adopted for
making it effective also might be adopted. . . .
The discrimination undoubtedly presents a more difficult question.
But we start with reference to the evil to be prevented, and that if the
class discriminated against is or reasonably might be considered to
define those from whom the evil mainly is to be feared, it properly
may be picked out. A lack of abstract symmetry does not matter. The
question is a practical one, dependent upon experience. . . .
The question therefore narrows itself to whether this court can say
that the legislature of Pennsylvania was not warranted in assuming
as its premise for the law that resident unnaturalized aliens were the
peculiar source of the evil that it desired to prevent.
(Barrett vs. Indiana,. 229 U.S., 26, 29; 57 L. ed., 1050, 1052; 33 Sup.
Ct. Rep., 692.)
Obviously the question, so stated, is one of local experience, on
which this court ought to be very slow to declare that the state
legislature was wrong in its facts (Adams vs. Milwaukee, 228 U.S.,
572, 583; 57 L. ed., 971,.977; 33 Sup. Ct. Rep., 610.) If we might
trust popular speech in some states it was right; but it is enough that
this court has no such knowledge of local conditions as to be able to
say that it was manifestly wrong. . . .
Judgment affirmed.
We are inclined to the view that while Smith, Bell & Co. Ltd., a corporation
having alien stockholders, is entitled to the protection afforded by the due-
process of law and equal protection of the laws clause of the Philippine Bill of
Rights, nevertheless, Act No. 2761 of the Philippine Legislature, in denying to
corporations such as Smith, Bell &. Co. Ltd., the right to register vessels in
the Philippines coastwise trade, does not belong to that vicious species of
class legislation which must always be condemned, but does fall within
authorized exceptions, notably, within the purview of the police power, and so
does not offend against the constitutional provision.
This opinion might well be brought to a close at this point. It occurs to us,
however, that the legislative history of the United States and the Philippine
Islands, and, probably, the legislative history of other countries, if we were to
take the time to search it out, might disclose similar attempts at restriction on
the right to enter the coastwise trade, and might thus furnish valuable aid by
which to ascertain and, if possible, effectuate legislative intention.
3. The power to regulate commerce, expressly delegated to the
Congress by the Constitution, includes the power to nationalize ships
built and owned in the United States by registries and enrollments,
and the recording of the muniments of title of American vessels. The
Congress "may encourage or it may entirely prohibit such commerce,
and it may regulate in any way it may see fit between these two
extremes." (U.S. vs. Craig [1886], 28 Fed., 795; Gibbons vs. Ogden
[1824], 9 Wheat., 1; The Passenger Cases [1849], 7 How., 283.)
Acting within the purview of such power, the first Congress of the United
States had not been long convened before it enacted on September 1, 1789,
"An Act for Registering and Clearing Vessels, Regulating the Coasting Trade,
and for other purposes." Section 1 of this law provided that for any ship or
vessel to obtain the benefits of American registry, it must belong wholly to a
citizen or citizens of the United States "and no other." (1 Stat. at L., 55.) That
Act was shortly after repealed, but the same idea was carried into the Acts of
Congress of December 31, 1792 and February 18, 1793. (1 Stat. at L., 287,
305.).Section 4 of the Act of 1792 provided that in order to obtain the registry
of any vessel, an oath shall be taken and subscribed by the owner, or by one
of the owners thereof, before the officer authorized to make such registry,
declaring, "that there is no subject or citizen of any foreign prince or state,
directly or indirectly, by way of trust, confidence, or otherwise, interested in
such vessel, or in the profits or issues thereof." Section 32 of the Act of 1793
even went so far as to say "that if any licensed ship or vessel shall be
40
transferred to any person who is not at the time of such transfer a citizen of
and resident within the United States, ... every such vessel with her tackle,
apparel, and furniture, and the cargo found on board her, shall be forefeited."
In case of alienation to a foreigner, Chief Justice Marshall said that all the
privileges of an American bottom were ipso facto forfeited. (U.S. vs. Willings
and Francis [1807], 4 Cranch, 48.) Even as late as 1873, the Attorney-
General of the United States was of the opinion that under the provisions of
the Act of December 31, 1792, no vessel in which a foreigner is directly or
indirectly interested can lawfully be registered as a vessel of the United.
States. (14 Op. Atty.-Gen. [U.S.], 340.)
These laws continued in force without contest, although possibly the Act of
March 3, 1825, may have affected them, until amended by the Act of May 28,
1896 (29 Stat. at L., 188) which extended the privileges of registry from
vessels wholly owned by a citizen or citizens of the United States to
corporations created under the laws of any of the states thereof. The law, as
amended, made possible the deduction that a vessel belonging to a domestic
corporation was entitled to registry or enrollment even though some stock of
the company be owned by aliens. The right of ownership of stock in a
corporation was thereafter distinct from the right to hold the property by the
corporation (Humphreys vs. McKissock [1890], 140 U.S., 304;
Queen vs. Arnaud [1846], 9 Q. B., 806; 29 Op. Atty.-Gen. [U.S.],188.)
On American occupation of the Philippines, the new government found a
substantive law in operation in the Islands with a civil law history which it
wisely continued in force Article fifteen of the Spanish Code of Commerce
permitted any foreigner to engage in Philippine trade if he had legal capacity
to do so under the laws of his nation. When the Philippine Commission came
to enact the Customs Administrative Act (No. 355) in 1902, it returned to the
old American policy of limiting the protection and flag of the United States to
vessels owned by citizens of the United States or by native inhabitants of the
Philippine Islands (Sec. 117.) Two years later, the same body reverted to the
existing Congressional law by permitting certification to be issued to a citizen
of the United States or to a corporation or company created under the laws of
the United States or of any state thereof or of the Philippine Islands (Act No.
1235, sec. 3.) The two administration codes repeated the same provisions
with the necessary amplification of inclusion of citizens or native inhabitants
of the Philippine Islands (Adm. Code of 1916, sec. 1345; Adm. Code of 1917,
sec. 1172). And now Act No. 2761 has returned to the restrictive idea of the
original Customs Administrative Act which in turn was merely a reflection of
the statutory language of the first American Congress.
Provisions such as those in Act No. 2761, which deny to foreigners the right
to a certificate of Philippine registry, are thus found not to be as radical as a
first reading would make them appear.
Without any subterfuge, the apparent purpose of the Philippine Legislature is
seen to be to enact an anti-alien shipping act. The ultimate purpose of the
Legislature is to encourage Philippine ship-building. This, without doubt, has,
likewise, been the intention of the United States Congress in passing
navigation or tariff laws on different occasions. The object of such a law, the
United States Supreme Court once said, was to encourage American trade,
navigation, and ship-building by giving American ship-owners exclusive
privileges. (Old Dominion Steamship Co. vs. Virginia [1905], 198 U.S., 299;
Kent's Commentaries, Vol. 3, p. 139.)
In the concurring opinion of Justice Johnson in Gibbons vs. Ogden ([1824], 9
Wheat., 1) is found the following:
Licensing acts, in fact, in legislation, are universally restraining acts;
as, for example, acts licensing gaming houses, retailers of spirituous
liquors, etc. The act, in this instance, is distinctly of that character,
and forms part of an extensive system, the object of which is to
encourage American shipping, and place them on an equal footing
with the shipping of other nations. Almost every commercial nation
reserves to its own subjects a monopoly of its coasting trade; and a
countervailing privilege in favor of American shipping is
contemplated, in the whole legislation of the United States on this
subject. It is not to give the vessel an American character, that the
license is granted; that effect has been correctly attributed to the act
of her enrollment. But it is to confer on her American privileges, as
contradistinguished from foreign; and to preserve the. Government
from fraud by foreigners, in surreptitiously intruding themselves into
41
 the American commercial marine, as well as frauds upon the purposes of obtaining a certificate of Philippine registry in the coastwise trade
revenue in the trade coastwise, that this whole system is projected. to citizens of the Philippine Islands, and to citizens of the United States, does
not violate the provisions of paragraph 1 of section 3 of the Act of Congress
The United States Congress in assuming its grave responsibility of legislating of August 29, 1916 No treaty right relied upon Act No. 2761 of the Philippine
wisely for a new country did so imbued with a spirit of Americanism. Legislature is held valid and constitutional .
Domestic navigation and trade, it decreed, could only be carried on by
citizens of the United States. If the representatives of the American people The petition for a writ of mandamus is denied, with costs against the
acted in this patriotic manner to advance the national policy, and if their petitioner. So ordered.
action was accepted without protest in the courts, who can say that they did
not enact such beneficial laws under the all-pervading police power, with the Arellano, C.J., Torres, Johnson, Araullo, Street, Avancea and Moir,
prime motive of safeguarding the country and of promoting its prosperity? JJ., concur.
Quite similarly, the Philippine Legislature made up entirely of Filipinos,
representing the mandate of the Filipino people and the guardian of their
rights, acting under practically autonomous powers, and imbued with a
strong sense of Philippinism, has desired for these Islands safety from
foreign interlopers, the use of the common property exclusively by its citizens
and the citizens of the United States, and protection for the common good of
the people. Who can say, therefore, especially can a court, that with all the
facts and circumstances affecting the Filipino people before it, the Philippine
Legislature has erred in the enactment of Act No. 2761?

Surely, the members of the judiciary are not expected to live apart from
active life, in monastic seclusion amidst dusty tomes and ancient records,
but, as keen spectators of passing events and alive to the dictates of the
general the national welfare, can incline the scales of their decisions in
favor of that solution which will most effectively promote the public policy. All
the presumption is in favor of the constitutionally of the law and without good
and strong reasons, courts should not attempt to nullify the action of the
Legislature. "In construing a statute enacted by the Philippine Commission
(Legislature), we deem it our duty not to give it a construction which would be
repugnant to an Act of Congress, if the language of the statute is fairly
susceptible of another construction not in conflict with the higher law." (In
re Guaria [1913], 24. Phil., 36; U.S. vs. Ten Yu [1912], 24 Phil., 1.) That is
the true construction which will best carry legislative intention into effect.
G.R. No. L-19550 June 19, 1967
With full consciousness of the importance of the question, we nevertheless
are clearly of the opinion that the limitation of domestic ownership for

42
HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and
KARL BECK, petitioners,
vs.
HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE;
JOSE LUKBAN, in his capacity as Acting Director, National Bureau of
Investigation; SPECIAL PROSECUTORS PEDRO D. CENZON, EFREN I.
PLANA and MANUEL VILLAREAL, JR. and ASST. FISCAL MANASES G.
REYES; JUDGE AMADO ROAN, Municipal Court of Manila; JUDGE
ROMAN CANSINO, Municipal Court of Manila; JUDGE HERMOGENES
CALUAG, Court of First Instance of Rizal-Quezon City Branch, and
JUDGE DAMIAN JIMENEZ, Municipal Court of Quezon City, respondents.
Paredes, Poblador, Cruz and Nazareno and Meer, Meer and Meer and Juan
T. David for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General
Pacifico P. de Castro, Assistant Solicitor General Frine C. Zaballero, Solicitor
Camilo D. Quiason and Solicitor C. Padua for respondents.
CONCEPCION, C.J.:
Upon application of the officers of the government named on the margin 1
hereinafter referred to as Respondents-Prosecutors several judges 2
hereinafter referred to as Respondents-Judges issued, on different
dates,3 a total of 42 search warrants against petitioners herein 4 and/or the
corporations of which they were officers,5 directed to the any peace officer, to
search the persons above-named and/or the premises of their offices,
warehouses and/or residences, and to seize and take possession of the
following personal property to wit:
Books of accounts, financial records, vouchers, correspondence,
receipts, ledgers, journals, portfolios, credit journals, typewriters, and
other documents and/or papers showing all business transactions
including disbursements receipts, balance sheets and profit and loss
statements and Bobbins (cigarette wrappers).
as "the subject of the offense; stolen or embezzled and proceeds or fruits of
the offense," or "used or intended to be used as the means of committing the
offense," which is described in the applications adverted to above as
"violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue
(Code) and the Revised Penal Code."
Alleging that the aforementioned search warrants are null and void, as
contravening the Constitution and the Rules of Court because, inter alia:
(1) they do not describe with particularity the documents, books and things to
be seized; (2) cash money, not mentioned in the warrants, were actually
seized; (3) the warrants were issued to fish evidence against the
aforementioned petitioners in deportation cases filed against them; (4) the
searches and seizures were made in an illegal manner; and (5) the
documents, papers and cash money seized were not delivered to the courts
that issued the warrants, to be disposed of in accordance with law on
March 20, 1962, said petitioners filed with the Supreme Court this original
action for certiorari, prohibition, mandamus and injunction, and prayed that,
pending final disposition of the present case, a writ of preliminary injunction
be issued restraining Respondents-Prosecutors, their agents and /or
representatives from using the effects seized as aforementioned or any
copies thereof, in the deportation cases already adverted to, and that, in due
course, thereafter, decision be rendered quashing the contested search
warrants and declaring the same null and void, and commanding the
respondents, their agents or representatives to return to petitioners herein, in
accordance with Section 3, Rule 67, of the Rules of Court, the documents,
papers, things and cash moneys seized or confiscated under the search
warrants in question.
In their answer, respondents-prosecutors alleged, 6 (1) that the contested
search warrants are valid and have been issued in accordance with law; (2)
that the defects of said warrants, if any, were cured by petitioners' consent;
and (3) that, in any event, the effects seized are admissible in evidence
against herein petitioners, regardless of the alleged illegality of the
aforementioned searches and seizures.
On March 22, 1962, this Court issued the writ of preliminary injunction prayed
for in the petition. However, by resolution dated June 29, 1962, the writ was
43
partially lifted or dissolved, insofar as the papers, documents and things
seized from the offices of the corporations above mentioned are concerned;
but, the injunction was maintained as regards the papers, documents and
things found and seized in the residences of petitioners herein. 7
Thus, the documents, papers, and things seized under the alleged authority
of the warrants in question may be split into two (2) major groups, namely:
(a) those found and seized in the offices of the aforementioned corporations,
and (b) those found and seized in the residences of petitioners herein.
As regards the first group, we hold that petitioners herein have no cause of
action to assail the legality of the contested warrants and of the seizures
made in pursuance thereof, for the simple reason that said corporations have
their respective personalities, separate and distinct from the personality of
herein petitioners, regardless of the amount of shares of stock or of the
interest of each of them in said corporations, and whatever the offices they
hold therein may be.8 Indeed, it is well settled that the legality of a seizure
can be contested only by the party whose rights have been impaired
thereby,9 and that the objection to an unlawful search and seizure is purely
personal and cannot be availed of by third parties. 10 Consequently,
petitioners herein may not validly object to the use in evidence against them
of the documents, papers and things seized from the offices and premises of
the corporations adverted to above, since the right to object to the admission
of said papers in evidence belongs exclusively to the corporations, to whom
the seized effects belong, and may not be invoked by the corporate officers
in proceedings against them in their individual capacity. 11 Indeed, it has been
held:
. . . that the Government's action in gaining possession of papers
belonging to the corporation did not relate to nor did it affect
the personal defendants. If these papers were unlawfully seized and
thereby the constitutional rights of or any one were invaded, they
were the rights of the corporation and not the rights of the other
defendants. Next, it is clear that a question of the lawfulness of a
seizure can be raised only by one whose rights have been invaded.
Certainly, such a seizure, if unlawful, could not affect the
constitutional rights of defendants whose property had not been
seized or the privacy of whose homes had not been disturbed; nor
could they claim for themselves the benefits of the Fourth
Amendment, when its violation, if any, was with reference to the
rights of another. Remus vs. United States (C.C.A.)291 F. 501, 511. It
follows, therefore, that the question of the admissibility of the
evidence based on an alleged unlawful search and seizure
does not extend to the personal defendants but
embraces only the corporation whose property was taken. . . . (A
Guckenheimer & Bros. Co. vs. United States, [1925] 3 F. 2d. 786,
789, Emphasis supplied.)
With respect to the documents, papers and things seized in the residences of
petitioners herein, the aforementioned resolution of June 29, 1962, lifted the
writ of preliminary injunction previously issued by this Court, 12 thereby, in
effect, restraining herein Respondents-Prosecutors from using them in
evidence against petitioners herein.
In connection with said documents, papers and things, two (2) important
questions need be settled, namely: (1) whether the search warrants in
question, and the searches and seizures made under the authority thereof,
are valid or not, and (2) if the answer to the preceding question is in the
negative, whether said documents, papers and things may be used in
evidence against petitioners herein.1wph1.t
Petitioners maintain that the aforementioned search warrants are in the
nature of general warrants and that accordingly, the seizures effected upon
the authority there of are null and void. In this connection, the
Constitution 13 provides:
The right of the people to be secure in their persons, houses, papers,
and effects against unreasonable searches and seizures shall not be
violated, and no warrants shall issue but upon probable cause, to be
determined by the judge after examination under oath or affirmation
of the complainant and the witnesses he may produce, and
particularly describing the place to be searched, and the persons or
things to be seized.
44
Two points must be stressed in connection with this constitutional mandate,
namely: (1) that no warrant shall issue but upon probable cause, to be
determined by the judge in the manner set forth in said provision; and (2) that
the warrant shall particularly describe the things to be seized.
None of these requirements has been complied with in the contested
warrants. Indeed, the same were issued upon applications stating that the
natural and juridical person therein named had committed a "violation of
Central Ban Laws, Tariff and Customs Laws, Internal Revenue (Code) and
Revised Penal Code." In other words, no specific offense had been alleged in
said applications. The averments thereof with respect to the offense
committed were abstract. As a consequence, it was impossible for the judges
who issued the warrants to have found the existence of probable cause, for
the same presupposes the introduction of competent proof that the party
against whom it is sought has performed particular acts, or
committed specific omissions, violating a given provision of our criminal laws.
As a matter of fact, the applications involved in this case do not allege any
specific acts performed by herein petitioners. It would be the legal heresy, of
the highest order, to convict anybody of a "violation of Central Bank Laws,
Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal
Code," as alleged in the aforementioned applications without reference
to any determinate provision of said laws or
To uphold the validity of the warrants in question would be to wipe out
completely one of the most fundamental rights guaranteed in our
Constitution, for it would place the sanctity of the domicile and the privacy of
communication and correspondence at the mercy of the whims caprice or
passion of peace officers. This is precisely the evil sought to be remedied by
the constitutional provision above quoted to outlaw the so-called general
warrants. It is not difficult to imagine what would happen, in times of keen
political strife, when the party in power feels that the minority is likely to wrest
it, even though by legal means.
Such is the seriousness of the irregularities committed in connection with the
disputed search warrants, that this Court deemed it fit to amend Section 3 of
Rule 122 of the former Rules of Court 14 by providing in its counterpart, under
the Revised Rules of Court 15 that "a search warrant shall not issue but upon
probable cause in connection with one specific offense." Not satisfied with
this qualification, the Court added thereto a paragraph, directing that "no
search warrant shall issue for more than one specific offense."
The grave violation of the Constitution made in the application for the
contested search warrants was compounded by the description therein made
of the effects to be searched for and seized, to wit:
Books of accounts, financial records, vouchers, journals,
correspondence, receipts, ledgers, portfolios, credit journals,
typewriters, and other documents and/or papers showing all
business transactions including disbursement receipts, balance
sheets and related profit and loss statements.
Thus, the warrants authorized the search for and seizure of records
pertaining to all business transactions of petitioners herein, regardless of
whether the transactions were legal or illegal. The warrants sanctioned the
seizure of all records of the petitioners and the aforementioned corporations,
whatever their nature, thus openly contravening the explicit command of our
Bill of Rights that the things to be seized be particularly described as
well as tending to defeat its major objective: the elimination
of general warrants.
Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-
Prosecutors maintain that, even if the searches and seizures under
consideration were unconstitutional, the documents, papers and things thus
seized are admissible in evidence against petitioners herein. Upon mature
deliberation, however, we are unanimously of the opinion that the position
taken in the Moncado case must be abandoned. Said position was in line
with the American common law rule, that the criminal should not be allowed
to go free merely "because the constable has blundered," 16 upon the theory
that the constitutional prohibition against unreasonable searches and
seizures is protected by means other than the exclusion of evidence
unlawfully obtained, 17 such as the common-law action for damages against
the searching officer, against the party who procured the issuance of the
search warrant and against those assisting in the execution of an illegal
45
search, their criminal punishment, resistance, without liability to an unlawful
seizure, and such other legal remedies as may be provided by other laws.
However, most common law jurisdictions have already given up this
approach and eventually adopted the exclusionary rule, realizing that this
is the only practical means of enforcing the constitutional injunction against
unreasonable searches and seizures. In the language of Judge Learned
Hand:
As we understand it, the reason for the exclusion of evidence
competent as such, which has been unlawfully acquired, is that
exclusion is the only practical way of enforcing the constitutional
privilege. In earlier times the action of trespass against the offending
official may have been protection enough; but that is true no longer.
Only in case the prosecution which itself controls the seizing officials,
knows that it cannot profit by their wrong will that wrong be
repressed.18
In fact, over thirty (30) years before, the Federal Supreme Court had already
declared:
If letters and private documents can thus be seized and held and
used in evidence against a citizen accused of an offense, the
protection of the 4th Amendment, declaring his rights to be secure
against such searches and seizures, is of no value, and, so far as
those thus placed are concerned, might as well be stricken from the
Constitution. The efforts of the courts and their officials to bring the
guilty to punishment, praiseworthy as they are, are not to be aided
by the sacrifice of those great principles established by years of
endeavor and suffering which have resulted in their embodiment in
the fundamental law of the land.19
This view was, not only reiterated, but, also, broadened in subsequent
decisions on the same Federal Court. 20After reviewing previous decisions
thereon, said Court held, in Mapp vs. Ohio (supra.):
. . . Today we once again examine the Wolf's constitutional
documentation of the right of privacy free from unreasonable state
intrusion, and after its dozen years on our books, are led by it to
close the only courtroom door remaining open to evidence secured
by official lawlessness in flagrant abuse of that basic right, reserved
to all persons as a specific guarantee against that very same
unlawful conduct. We hold that all evidence obtained by searches
and seizures in violation of the Constitution is, by that same authority,
inadmissible in a State.
Since the Fourth Amendment's right of privacy has been declared
enforceable against the States through the Due Process Clause of
the Fourteenth, it is enforceable against them by the same sanction
of exclusion as it used against the Federal Government. Were it
otherwise, then just as without the Weeks rule the assurance against
unreasonable federal searches and seizures would be "a form of
words," valueless and underserving of mention in a perpetual charter
of inestimable human liberties, so too, without that rule the freedom
from state invasions of privacy would be so ephemeral and so neatly
severed from its conceptual nexus with the freedom from all brutish
means of coercing evidence as not to permit this Court's high regard
as a freedom "implicit in the concept of ordered liberty." At the time
that the Court held in Wolf that the amendment was applicable to the
States through the Due Process Clause, the cases of this Court as
we have seen, had steadfastly held that as to federal officers the
Fourth Amendment included the exclusion of the evidence seized in
violation of its provisions. Even Wolf "stoutly adhered" to that
proposition. The right to when conceded operatively enforceable
against the States, was not susceptible of destruction by avulsion of
the sanction upon which its protection and enjoyment had always
been deemed dependent under the Boyd, Weeks and Silverthorne
Cases. Therefore, in extending the substantive protections of due
process to all constitutionally unreasonable searches state or
federal it was logically and constitutionally necessarily that the
exclusion doctrine an essential part of the right to privacy be
also insisted upon as an essential ingredient of the right newly
recognized by the Wolf Case. In short, the admission of the new
46
 constitutional Right by Wolf could not tolerate denial of its most
important constitutional privilege, namely, the exclusion of the
evidence which an accused had been forced to give by reason of the
unlawful seizure. To hold otherwise is to grant the right but in reality
to withhold its privilege and enjoyment. Only last year the Court itself
recognized that the purpose of the exclusionary rule to "is to deter
to compel respect for the constitutional guaranty in the only
effectively available way by removing the incentive to disregard
it" . . . .
The ignoble shortcut to conviction left open to the State tends to
destroy the entire system of constitutional restraints on which the
liberties of the people rest. Having once recognized that the right to
privacy embodied in the Fourth Amendment is enforceable against
the States, and that the right to be secure against rude invasions of
privacy by state officers is, therefore constitutional in origin, we can
no longer permit that right to remain an empty promise. Because it is
enforceable in the same manner and to like effect as other basic
rights secured by its Due Process Clause, we can no longer permit it
to be revocable at the whim of any police officer who, in the name of
law enforcement itself, chooses to suspend its enjoyment. Our
decision, founded on reason and truth, gives to the individual no
more than that which the Constitution guarantees him to the police
officer no less than that to which honest law enforcement is entitled,
and, to the courts, that judicial integrity so necessary in the true
administration of justice. (emphasis ours.)
Indeed, the non-exclusionary rule is contrary, not only to the letter, but also,
to the spirit of the constitutional injunction against unreasonable searches
and seizures. To be sure, if the applicant for a search warrant has competent
evidence to establish probable cause of the commission of a given crime by
the party against whom the warrant is intended, then there is no reason why
the applicant should not comply with the requirements of the fundamental
law. Upon the other hand, if he has no such competent evidence, then it
is not possible for the Judge to find that there is probable cause, and, hence,
no justification for the issuance of the warrant. The only possible explanation
(not justification) for its issuance is the necessity of fishing evidence of the
commission of a crime. But, then, this fishing expedition is indicative of the
absence of evidence to establish a probable cause.
Moreover, the theory that the criminal prosecution of those who secure an
illegal search warrant and/or make unreasonable searches or seizures would
suffice to protect the constitutional guarantee under consideration, overlooks
the fact that violations thereof are, in general, committed By agents of the
party in power, for, certainly, those belonging to the minority could not
possibly abuse a power they do not have. Regardless of the handicap under
which the minority usually but, understandably finds itself in
prosecuting agents of the majority, one must not lose sight of the fact that the
psychological and moral effect of the possibility 21 of securing their conviction,
is watered down by the pardoning power of the party for whose benefit the
illegality had been committed.
In their Motion for Reconsideration and Amendment of the Resolution of this
Court dated June 29, 1962, petitioners allege that Rooms Nos. 81 and 91 of
Carmen Apartments, House No. 2008, Dewey Boulevard, House No. 1436,
Colorado Street, and Room No. 304 of the Army-Navy Club, should be
included among the premises considered in said Resolution as residences of
herein petitioners, Harry S. Stonehill, Robert P. Brook, John J. Brooks and
Karl Beck, respectively, and that, furthermore, the records, papers and other
effects seized in the offices of the corporations above referred to include
personal belongings of said petitioners and other effects under their
exclusive possession and control, for the exclusion of which they have a
standing under the latest rulings of the federal courts of federal courts of the
United States. 22
We note, however, that petitioners' theory, regarding their alleged possession
of and control over the aforementioned records, papers and effects, and the
alleged "personal" nature thereof, has Been Advanced, notin their petition or
amended petition herein, but in the Motion for Reconsideration and
Amendment of the Resolution of June 29, 1962. In other words, said theory
would appear to be readjustment of that followed in said petitions, to suit the
approach intimated in the Resolution sought to be reconsidered and
amended. Then, too, some of the affidavits or copies of alleged affidavits
attached to said motion for reconsideration, or submitted in support thereof,
47
contain either inconsistent allegations, or allegations inconsistent with the
theory now advanced by petitioners herein.

Upon the other hand, we are not satisfied that the allegations of said petitions
said motion for reconsideration, and the contents of the aforementioned
affidavits and other papers submitted in support of said motion, have
sufficiently established the facts or conditions contemplated in the cases
relied upon by the petitioners; to warrant application of the views therein
expressed, should we agree thereto. At any rate, we do not deem it
necessary to express our opinion thereon, it being best to leave the matter
open for determination in appropriate cases in the future.

We hold, therefore, that the doctrine adopted in the Moncado case must be,
as it is hereby, abandoned; that the warrants for the search of three (3)
residences of herein petitioners, as specified in the Resolution of June 29,
1962, are null and void; that the searches and seizures therein made are
illegal; that the writ of preliminary injunction heretofore issued, in connection
with the documents, papers and other effects thus seized in said residences
of herein petitioners is hereby made permanent; that the writs prayed for are
granted, insofar as the documents, papers and other effects so seized in the
aforementioned residences are concerned; that the aforementioned motion
for Reconsideration and Amendment should be, as it is hereby, denied; and
that the petition herein is dismissed and the writs prayed for denied, as
regards the documents, papers and other effects seized in the twenty-nine
(29) places, offices and other premises enumerated in the same Resolution,
without special pronouncement as to costs.

It is so ordered.

Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ.,
concur.

48
[G.R. No. L-32409. February 27, 1971.]

BACHE & CO. (PHIL.), INC. and FREDERICK E.

SEGGERMAN, Petitioners, v. HON. JUDGE VIVENCIO M. RUIZ, MISAEL
P. VERA, in his capacity as Commissioner of Internal Revenue,
ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO VELASQUEZ,
MIMIR DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN DOE, JOHN
DOE, and JOHN DOE, Respondents.

49
San Juan, Africa, Gonzales & San Agustin, for Petitioners. Revenue, wrote a letter addressed to respondent Judge Vivencio M. Ruiz
requesting the issuance of a search warrant against petitioners for violation
Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin of Section 46(a) of the National Internal Revenue Code, in relation to all other
V . Bautista, Solicitor Pedro A. Ramirez and Special Attorney Jaime M. pertinent provisions thereof, particularly Sections 53, 72, 73, 208 and 209,
Maza for Respondents. and authorizing Revenue Examiner Rodolfo de Leon, one of herein
respondents, to make and file the application for search warrant which was
attached to the letter.

In the afternoon of the following day, February 25, 1970, respondent De Leon
DECISION and his witness, respondent Arturo Logronio, went to the Court of First
Instance of Rizal. They brought with them the following papers: respondent
Veras aforesaid letter-request; an application for search warrant already
filled up but still unsigned by respondent De Leon; an affidavit of respondent
Logronio subscribed before respondent De Leon; a deposition in printed form
of respondent Logronio already accomplished and signed by him but not yet
VILLAMOR, J.: subscribed; and a search warrant already accomplished but still unsigned by
respondent Judge.

This is an original action of certiorari, prohibition and mandamus, with prayer
for a writ of preliminary mandatory and prohibitory injunction. In their petition
Bache & Co. (Phil.), Inc., a corporation duly organized and existing under the
laws of the Philippines, and its President, Frederick E. Seggerman, pray this
Court to declare null and void Search Warrant No. 2-M-70 issued by
respondent Judge on February 25, 1970; to order respondents to desist from
enforcing the same and/or keeping the documents, papers and effects seized
by virtue thereof, as well as from enforcing the tax assessments on petitioner
corporation alleged by petitioners to have been made on the basis of the said
documents, papers and effects, and to order the return of the latter to
petitioners. We gave due course to the petition but did not issue the writ of
preliminary injunction prayed for therein.
The pertinent facts of this case, as gathered from record, are as
follows:chanrob1es virtual 1aw library
On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal
At that time respondent Judge was hearing a certain case; so, by means of a
note, he instructed his Deputy Clerk of Court to take the depositions of
respondents De Leon and Logronio. After the session had adjourned,
respondent Judge was informed that the depositions had already been taken.
The stenographer, upon request of respondent Judge, read to him her
stenographic notes; and thereafter, respondent Judge asked respondent
Logronio to take the oath and warned him that if his deposition was found to
be false and without legal basis, he could be charged for perjury. Respondent
Judge signed respondent de Leons application for search warrant and
respondent Logronios deposition, Search Warrant No. 2-M-70 was then sign
by respondent Judge and accordingly issued.
Three days later, or on February 28, 1970, which was a Saturday, the BIR
agents served the search warrant petitioners at the offices of petitioner
corporation on Ayala Avenue, Makati, Rizal. Petitioners lawyers protested
the search on the ground that no formal complaint or transcript of testimony
was attached to the warrant. The agents nevertheless proceeded with their
search which yielded six boxes of documents.

50
On March 3, 1970, petitioners filed a petition with the Court of First Instance
of Rizal praying that the search warrant be quashed, dissolved or recalled,
that preliminary prohibitory and mandatory writs of injunction be issued, that
the search warrant be declared null and void, and that the respondents be
ordered to pay petitioners, jointly and severally, damages and attorneys fees.
On March 18, 1970, the respondents, thru the Solicitor General, filed an
answer to the petition. After hearing, the court, presided over by respondent
Judge, issued on July 29, 1970, an order dismissing the petition for
dissolution of the search warrant. In the meantime, or on April 16, 1970, the
Bureau of Internal Revenue made tax assessments on petitioner corporation
in the total sum of P2,594,729.97, partly, if not entirely, based on the
documents thus seized. Petitioners came to this Court.
The petition should be granted for the following reasons:chanrob1es virtual
1aw library
1. Respondent Judge failed to personally examine the complainant and his
witness.
The pertinent provisions of the Constitution of the Philippines and of the
Revised Rules of Court are:jgc:chanrobles.com.ph
"(3) The right of the people to be secure in their persons, houses, papers and
effects against unreasonable searches and seizures shall not be violated,
and no warrants shall issue but upon probable cause, to be determined by
the judge after examination under oath or affirmation of the complainant and
the witnesses he may produce, and particularly describing the place to be
searched, and the persons or things to be seized." (Art. III, Sec. 1,
Constitution.)
"SEC. 3. Requisites for issuing search warrant. A search warrant shall not
issue but upon probable cause in connection with one specific offense to be
determined by the judge or justice of the peace after examination under oath
or affirmation of the complainant and the witnesses he may produce, and
particularly describing the place to be searched and the persons or things to
be seized.
"No search warrant shall issue for more than one specific offense.
"SEC. 4. Examination of the applicant. The judge or justice of the peace
must, before issuing the warrant, personally examine on oath or affirmation
the complainant and any witnesses he may produce and take their
depositions in writing, and attach them to the record, in addition to any
affidavits presented to him." (Rule 126, Revised Rules of Court.)
The examination of the complainant and the witnesses he may produce,
required by Art. III, Sec. 1, par. 3, of the Constitution, and by Secs. 3 and 4,
Rule 126 of the Revised Rules of Court, should be conducted by the judge
himself and not by others. The phrase "which shall be determined by the
judge after examination under oath or affirmation of the complainant and the
witnesses he may produce," appearing in the said constitutional provision,
was introduced by Delegate Francisco as an amendment to the draft
submitted by the Sub-Committee of Seven. The following discussion in the
Constitutional Convention (Laurel, Proceedings of the Philippine
Constitutional Convention, Vol. III, pp. 755-757) is
enlightening:jgc:chanrobles.com.ph
"SR. ORENSE. Vamos a dejar compaero los piropos y vamos al grano.
En los casos de una necesidad de actuar inmediatamente para que no se
frusten los fines de la justicia mediante el registro inmediato y la incautacion
del cuerpo del delito, no cree Su Seoria que causaria cierta demora el
procedimiento apuntado en su enmienda en tal forma que podria frustrar los
fines de la justicia o si Su Seoria encuentra un remedio para esto casos con
el fin de compaginar los fines de la justicia con los derechos del individuo en
su persona, bienes etcetera, etcetera.
"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su
Seoria pregunta por la siguiente razon: el que solicita un mandamiento de
registro tiene que hacerlo por escrito y ese escrito no aparecer en la Mesa
del Juez sin que alguien vaya el juez a presentar ese escrito o peticion de
sucuestro. Esa persona que presenta el registro puede ser el mismo
denunciante o alguna persona que solicita dicho mandamiento de registro.
Ahora toda la enmienda en esos casos consiste en que haya peticion de
51
registro y el juez no se atendra solamente a sea peticion sino que el juez
examiner a ese denunciante y si tiene testigos tambin examiner a los
testigos.
"SR. ORENSE. No cree Su Seoria que el tomar le declaracion de ese
denunciante por escrito siempre requeriria algun tiempo?.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado
minimizamos en todo lo posible las vejaciones injustas con la expedicion
arbitraria de los mandamientos de registro. Creo que entre dos males
debemos escoger. el menor.
x x x respondent Judge, Mr. Eleodoro V. Gonzales, Special Deputy Clerk of Court,
"MR. LAUREL. . . . The reason why we are in favor of this amendment is
because we are incorporating in our constitution something of a fundamental
character. Now, before a judge could issue a search warrant, he must be
under the obligation to examine personally under oath the complainant and if
he has any witness, the witnesses that he may produce . . ."cralaw virtua1aw
library
In the case at bar, no personal examination at all was conducted by
respondent Judge of the complainant (respondent De Leon) and his witness
(respondent Logronio). While it is true that the complainants application for
search warrant and the witness printed-form deposition were subscribed and
sworn to before respondent Judge, the latter did not ask either of the two any
question the answer to which could possibly be the basis for determining
whether or not there was probable cause against herein petitioners. Indeed,
the participants seem to have attached so little significance to the matter that
notes of the proceedings before respondent Judge were not even taken. At
this juncture it may be well to recall the salient facts. The transcript of
stenographic notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken
at the hearing of this case in the court below shows that per instruction of
took the depositions of the complainant and his witness, and that
stenographic notes thereof were taken by Mrs. Gaspar. At that time
respondent Judge was at the sala hearing a case. After respondent Judge
was through with the hearing, Deputy Clerk Gonzales, stenographer Gaspar,
complainant De Leon and witness Logronio went to respondent Judges
chamber and informed the Judge that they had finished the depositions.
Respondent Judge then requested the stenographer to read to him her
stenographic notes. Special Deputy Clerk Gonzales testified as
follows:jgc:chanrobles.com.ph

The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is "A And after finishing reading the stenographic notes, the Honorable Judge
more emphatic and candid, for it requires the judge, before issuing a search requested or instructed them, requested Mr. Logronio to raise his hand and
warrant, to "personally examine on oath or affirmation the complainant and warned him if his deposition will be found to be false and without legal basis,
any witnesses he may produce . . ."cralaw virtua1aw library he can be charged criminally for perjury. The Honorable Court told Mr.
Logronio whether he affirms the facts contained in his deposition and the
Personal examination by the judge of the complainant and his witnesses is affidavit executed before Mr. Rodolfo de Leon.
necessary to enable him to determine the existence or non-existence of a
probable cause, pursuant to Art. III, Sec. 1, par. 3, of the Constitution, and "Q And thereafter?
Sec. 3, Rule 126 of the Revised Rules of Court, both of which prohibit the
issuance of warrants except "upon probable cause." The determination of "A And thereafter, he signed the deposition of Mr. Logronio.
whether or not a probable cause exists calls for the exercise of judgment
after a judicial appraisal of facts and should not be allowed to be delegated in "Q Who is this he?
the absence of any rule to the contrary.
"A The Honorable Judge.

52
 provisions of the Tax Code referred to above. Thus we find the
"Q The deposition or the affidavit? following:chanrob1es virtual 1aw library

"A The affidavit, Your Honor."cralaw virtua1aw library Sec. 46(a) requires the filing of income tax returns by corporations.

Thereafter, respondent Judge signed the search warrant. Sec. 53 requires the withholding of income taxes at source.

The participation of respondent Judge in the proceedings which led to the
issuance of Search Warrant No. 2-M-70 was thus limited to listening to the
stenographers readings of her notes, to a few words of warning against the
commission of perjury, and to administering the oath to the complainant and
his witness. This cannot be consider a personal examination. If there was an
examination at all of the complainant and his witness, it was the one
conducted by the Deputy Clerk of Court. But, as stated, the Constitution and
the rules require a personal examination by the judge. It was precisely on
account of the intention of the delegates to the Constitutional Convention to
make it a duty of the issuing judge to personally examine the complainant
and his witnesses that the question of how much time would be consumed by
the judge in examining them came up before the Convention, as can be seen
from the record of the proceedings quoted above. The reading of the
stenographic notes to respondent Judge did not constitute sufficient
compliance with the constitutional mandate and the rule; for by that manner
respondent Judge did not have the opportunity to observe the demeanor of
the complainant and his witness, and to propound initial and follow-up
questions which the judicial mind, on account of its training, was in the best
position to conceive. These were important in arriving at a sound inference
on the all-important question of whether or not there was probable cause.
2. The search warrant was issued for more than one specific offense.
Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the
National Internal Revenue Code in relation to all other pertinent provisions
thereof particularly Secs. 53, 72, 73, 208 and 209." The question is: Was the
said search warrant issued "in connection with one specific offense," as
required by Sec. 3, Rule 126?
Sec. 72 imposes surcharges for failure to render income tax returns and for
rendering false and fraudulent returns.
Sec. 73 provides the penalty for failure to pay the income tax, to make a
return or to supply the information required under the Tax Code.
Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds,
or manufactures any article subject to a specific tax, without having paid the
privilege tax therefore, or who aids or abets in the conduct of illicit distilling,
rectifying, compounding, or illicit manufacture of any article subject to specific
tax . . .," and provides that in the case of a corporation, partnership, or
association, the official and/or employee who caused the violation shall be
responsible.
Sec. 209 penalizes the failure to make a return of receipts, sales, business,
or gross value of output removed, or to pay the tax due thereon.
The search warrant in question was issued for at least four distinct offenses
under the Tax Code. The first is the violation of Sec. 46(a), Sec. 72 and Sec.
73 (the filing of income tax returns), which are interrelated. The second is the
violation of Sec. 53 (withholding of income taxes at source). The third is the
violation of Sec. 208 (unlawful pursuit of business or occupation); and the
fourth is the violation of Sec. 209 (failure to make a return of receipts, sales,
business or gross value of output actually removed or to pay the tax due
thereon). Even in their classification the six above-mentioned provisions are
embraced in two different titles: Secs. 46(a), 53, 72 and 73 are under Title II
(Income Tax); while Secs. 208 and 209 are under Title V (Privilege Tax on
Business and Occupation).

To arrive at the correct answer it is essential to examine closely the Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19,

53
1967 (20 SCRA 383), is not applicable, because there the search warrants
were issued for "violation of Central Bank Laws, Internal Revenue (Code)
and Revised Penal Code;" whereas, here Search Warrant No 2-M-70 was
issued for violation of only one code, i.e., the National Internal Revenue
Code. The distinction more apparent than real, because it was precisely on
account of the Stonehill incident, which occurred sometime before the
present Rules of Court took effect on January 1, 1964, that this Court
amended the former rule by inserting therein the phrase "in connection with
one specific offense," and adding the sentence "No search warrant shall
issue for more than one specific offense," in what is now Sec. 3, Rule 126.
Thus we said in Stonehill:jgc:chanrobles.com.ph
"Such is the seriousness of the irregularities committed in connection with the
disputed search warrants, that this Court deemed it fit to amend Section 3 of
Rule 122 of the former Rules of Court that a search warrant shall not issue
but upon probable cause in connection with one specific offense. Not
satisfied with this qualification, the Court added thereto a paragraph,
directing that no search warrant shall issue for more than one specific
offense."
3. The search warrant does not particularly describe the things to be seized.
The documents, papers and effects sought to be seized are described in
Search Warrant No. 2-M-70 in this manner:jgc:chanrobles.com.ph
"Unregistered and private books of accounts (ledgers, journals, columnars,
receipts and disbursements books, customers ledgers); receipts for
payments received; certificates of stocks and securities; contracts,
promissory notes and deeds of sale; telex and coded messages; business
communications, accounting and business records; checks and check stubs;
records of bank deposits and withdrawals; and records of foreign
remittances, covering the years 1966 to 1970."cralaw virtua1aw library
The description does not meet the requirement in Art III, Sec. 1, of the
Constitution, and of Sec. 3, Rule 126 of the Revised Rules of Court, that the
warrant should particularly describe the things to be seized.
In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion,
said:jgc:chanrobles.com.ph
"The grave violation of the Constitution made in the application for the
contested search warrants was compounded by the description therein made
of the effects to be searched for and seized, to wit:chanrob1es virtual 1aw
library
Books of accounts, financial records, vouchers, journals, correspondence,
receipts, ledgers, portfolios, credit journals, typewriters, and other documents
and/or paper showing all business transactions including disbursement
receipts, balance sheets and related profit and loss statements.
"Thus, the warrants authorized the search for and seizure of records
pertaining to all business transactions of petitioners herein, regardless of
whether the transactions were legal or illegal. The warrants sanctioned the
seizure of all records of the petitioners and the aforementioned corporations,
whatever their nature, thus openly contravening the explicit command of our
Bill of Rights that the things to be seized be particularly described as
well as tending to defeat its major objective: the elimination of general
warrants."cralaw virtua1aw library
While the term "all business transactions" does not appear in Search Warrant
No. 2-M-70, the said warrant nevertheless tends to defeat the major objective
of the Bill of Rights, i.e., the elimination of general warrants, for the language
used therein is so all-embracing as to include all conceivable records of
petitioner corporation, which, if seized, could possibly render its business
inoperative.
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had
occasion to explain the purpose of the requirement that the warrant should
particularly describe the place to be searched and the things to be seized, to
wit:jgc:chanrobles.com.ph
". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97)
specifically require that a search warrant should particularly describe the
place to be searched and the things to be seized. The evident purpose and
54
intent of this requirement is to limit the things to be seized to those, and only
those, particularly described in the search warrant to leave the officers of
the law with no discretion regarding what articles they shall seize, to the end
that unreasonable searches and seizures may not be made, that abuses 109 Phil., 140.) In the case at bar time is of the essence in view of the tax
may not be committed. That this is the correct interpretation of this
constitutional provision is borne out by American authorities."cralaw
virtua1aw library
The purpose as thus explained could, surely and effectively, be defeated
under the search warrant issued in this case.
A search warrant may be said to particularly describe the things to be seized
when the description therein is as specific as the circumstances will ordinarily
allow (People v. Rubio; 57 Phil. 384); or when the description expresses a
conclusion of fact not of law by which the warrant officer may be guided
in making the search and seizure (idem., dissent of Abad Santos, J.,); or
when the things described are limited to those which bear direct relation to
the offense for which the warrant is being issued (Sec. 2, Rule 126, Revised
Rules of Court). The herein search warrant does not conform to any of the
foregoing tests. If the articles desired to be seized have any direct relation to
an offense committed, the applicant must necessarily have some evidence,
other than those articles, to prove the said offense; and the articles subject of
search and seizure should come in handy merely to strengthen such
evidence. In this event, the description contained in the herein disputed
warrant should have mentioned, at least, the dates, amounts, persons, and
other pertinent data regarding the receipts of payments, certificates of stocks
and securities, contracts, promissory notes, deeds of sale, messages and
communications, checks, bank deposits and withdrawals, records of foreign
remittances, among others, enumerated in the warrant.
Respondents contend that certiorari does not lie because petitioners failed to
file a motion for reconsideration of respondent Judges order of July 29,
1970. The contention is without merit. In the first place, when the questions
raised before this Court are the same as those which were squarely raised in
and passed upon by the court below, the filing of a motion for reconsideration
in said court before certiorari can be instituted in this Court is no longer a
prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second
place, the rule requiring the filing of a motion for reconsideration before an
application for a writ of certiorari can be entertained was never intended to be
applied without considering the circumstances. (Matutina v. Buslon, Et Al.,
assessments sought to be enforced by respondent officers of the Bureau of
Internal Revenue against petitioner corporation, On account of which
immediate and more direct action becomes necessary. (Matute v. Court of
Appeals, Et Al., 26 SCRA 768.) Lastly, the rule does not apply where, as in
this case, the deprivation of petitioners fundamental right to due process
taints the proceeding against them in the court below not only with irregularity
but also with nullity. (Matute v. Court of Appeals, Et Al., supra.)
It is next contended by respondents that a corporation is not entitled to
protection against unreasonable search and seizures. Again, we find no merit
in the contention.
"Although, for the reasons above stated, we are of the opinion that an officer
of a corporation which is charged with a violation of a statute of the state of
its creation, or of an act of Congress passed in the exercise of its
constitutional powers, cannot refuse to produce the books and papers of
such corporation, we do not wish to be understood as holding that a
corporation is not entitled to immunity, under the 4th Amendment, against
unreasonable searches and seizures. A corporation is, after all, but an
association of individuals under an assumed name and with a distinct legal
entity. In organizing itself as a collective body it waives no constitutional
immunities appropriate to such body. Its property cannot be taken without
compensation. It can only be proceeded against by due process of law, and
is protected, under the 14th Amendment, against unlawful discrimination . . ."
(Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought
that a different rule applied to a corporation, the ground that it was not
privileged from producing its books and papers. But the rights of a
corporation against unlawful search and seizure are to be protected even if
the same result might have been achieved in a lawful way." (Silverthorne
Lumber Company, Et. Al. v. United States of America, 251 U.S. 385, 64 L. ed.
319.)
55

In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized
the right of a corporation to object against unreasonable searches and
seizures, thus:jgc:chanrobles.com.ph
"As regards the first group, we hold that petitioners herein have no cause of
action to assail the legality of the contested warrants and of the seizures
made in pursuance thereof, for the simple reason that said corporations have
their respective personalities, separate and distinct from the personality of
herein petitioners, regardless of the amount of shares of stock or the interest
of each of them in said corporations, whatever, the offices they hold therein
may be. Indeed, it is well settled that the legality of a seizure can be
contested only by the party whose rights have been impaired thereby, and
that the objection to an unlawful search and seizure is purely personal and
cannot be availed of by third parties. Consequently, petitioners herein may
not validly object to the use in evidence against them of the documents,
papers and things seized from the offices and premises of the corporations
adverted to above, since the right to object to the admission of said papers in
evidence belongs exclusively to the corporations, to whom the seized effects
belong, and may not be invoked by the corporate officers in proceedings
against them in their individual capacity . . ."cralaw virtua1aw library
PREMISES CONSIDERED, the petition is granted. Accordingly, Search
Warrant No. 2-M-70 issued by respondent Judge is declared null and void;
respondents are permanently enjoined from enforcing the said search
warrant; the documents, papers and effects seized thereunder are ordered to
be returned to petitioners; and respondent officials the Bureau of Internal
Revenue and their representatives are permanently enjoined from enforcing
the assessments mentioned in Annex "G" of the present petition, as well as
other assessments based on the documents, papers and effects seized
under the search warrant herein nullified, and from using the same against
petitioners in any criminal or other proceeding. No pronouncement as to
costs.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee and
Makasiar, JJ., concur.
Reyes, J.B.L., J., concurs with Mr. Justice Barredo.
Castro, J., concurs in the result.

In the Stonehill case only the officers of the various corporations in whose
offices documents, papers and effects were searched and seized were the
petitioners. In the case at bar, the corporation to whom the seized documents
belong, and whose rights have thereby been impaired, is itself a petitioner.
On that score, petitioner corporation here stands on a different footing from
the corporations in Stonehill.

The tax assessments referred to earlier in this opinion were, if not entirely
as claimed by petitioners at least partly as in effect admitted by
respondents based on the documents seized by virtue of Search Warrant
No. 2-M-70. Furthermore, the fact that the assessments were made some
one and one-half months after the search and seizure on February 25, 1970,
is a strong indication that the documents thus seized served as basis for the
assessments. Those assessments should therefore not be enforced.

56
57
G.R. No. 75885 May 27, 1987

BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner,

vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN
JOVITO SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA,
COMMISSIONER RAMON DIAZ, COMMISSIONER RAUL R. DAZA,
COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE B. SIACUNCO,
et al., respondents.

Apostol, Bernas, Gumaru, Ona and Associates for petitioner.

Vicente G. Sison for intervenor A.T. Abesamis.

NARVASA, J.:

Challenged in this special civil action of certiorari and prohibition by a private

corporation known as the Bataan Shipyard and Engineering Co., Inc. are: (1)
Executive Orders Numbered 1 and 2, promulgated by President Corazon C.
Aquino on February 28, 1986 and March 12, 1986, respectively, and (2) the
sequestration, takeover, and other orders issued, and acts done, in

58
accordance with said executive orders by the Presidential Commission on
Good Government and/or its Commissioners and agents, affecting said
corporation.
1. The Sequestration, Takeover, and Other Orders Complained of
a. The Basic Sequestration Order
The sequestration order which, in the view of the petitioner corporation,
initiated all its misery was issued on April 14, 1986 by Commissioner Mary
Concepcion Bautista. It was addressed to three of the agents of the
Commission, hereafter simply referred to as PCGG. It reads as follows:
RE: SEQUESTRATION ORDER
By virtue of the powers vested in the Presidential
Commission on Good Government, by authority of the
President of the Philippines, you are hereby directed to
sequester the following companies.
1. Bataan Shipyard and Engineering Co.,
Inc. (Engineering Island Shipyard and
Mariveles Shipyard)
2. Baseco Quarry
3. Philippine Jai-Alai Corporation
4. Fidelity Management Co., Inc.
5. Romson Realty, Inc.
6. Trident Management Co.
7. New Trident Management
8. Bay Transport
9. And all affiliate companies of Alfredo
"Bejo" Romualdez
You are hereby ordered:
1. To implement this sequestration order with a minimum
disruption of these companies' business activities.
2. To ensure the continuity of these companies as going
concerns, the care and maintenance of these assets until
such time that the Office of the President through the
Commission on Good Government should decide otherwise.
3. To report to the Commission on Good Government
periodically.
Further, you are authorized to request for Military/Security
Support from the Military/Police authorities, and such other
acts essential to the achievement of this sequestration
order. 1
b. Order for Production of Documents
On the strength of the above sequestration order, Mr. Jose M. Balde, acting
for the PCGG, addressed a letter dated April 18, 1986 to the President and
other officers of petitioner firm, reiterating an earlier request for the
production of certain documents, to wit:
1. Stock Transfer Book
2. Legal documents, such as:
2.1. Articles of Incorporation
59
 2.2. By-Laws 9. Complete list of depository banks for all funds with the
authorized signatories for withdrawals thereof.
2.3. Minutes of the Annual Stockholders
2
Meeting from 1973 to 1986 10. Schedule of company investments and placements.

2.4. Minutes of the Regular and Special The letter closed with the warning that if the documents were not submitted
Meetings of the Board of Directors from within five days, the officers would be cited for "contempt in pursuance with
1973 to 1986 Presidential Executive Order Nos. 1 and 2."

2.5. Minutes of the Executive Committee c. Orders Re Engineer Island

Meetings from 1973 to 1986
(1) Termination of Contract for Security
2.6. Existing contracts with Services
suppliers/contractors/others.
A third order assailed by petitioner corporation, hereafter referred to simply
3. Yearly list of stockholders with their corresponding as BASECO, is that issued on April 21, 1986 by a Capt. Flordelino B. Zabala,
share/stockholdings from 1973 to 1986 duly certified by the a member of the task force assigned to carry out the basic sequestration
Corporate Secretary. order. He sent a letter to BASECO's Vice-President for Finance, 3 terminating
the contract for security services within the Engineer Island compound
4. Audited Financial Statements such as Balance Sheet, between BASECO and "Anchor and FAIRWAYS" and "other civilian security
Profit & Loss and others from 1973 to December 31, 1985. agencies," CAPCOM military personnel having already been assigned to the
area,
5. Monthly Financial Statements for the current year up to
March 31, 1986. (2) Change of Mode of Payment of Entry
Charges
6. Consolidated Cash Position Reports from January to April
15, 1986. On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed
to "Truck Owners and Contractors," particularly a "Mr. Buddy Ondivilla
7. Inventory listings of assets up dated up to March 31, National Marine Corporation," advising of the amendment in part of their
1986. contracts with BASECO in the sense that the stipulated charges for use of
the BASECO road network were made payable "upon entry and not anymore
subject to monthly billing as was originally agreed upon." 4
8. Updated schedule of Accounts Receivable and Accounts
Payable.
d. Aborted Contract for Improvement of Wharf at Engineer
Island

60
On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract subject to specified guidelines and safeguards including audit and
in behalf of BASECO with Deltamarine Integrated Port Services, Inc., in verification. 8
virtue of which the latter undertook to introduce improvements costing
approximately P210,000.00 on the BASECO wharf at Engineer Island, g. The TAKEOVER Order
allegedly then in poor condition, avowedly to "optimize its utilization and in
return maximize the revenue which would flow into the government coffers," By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the
in consideration of Deltamarine's being granted "priority in using the provisional takeover by the PCGG of BASECO, "the Philippine Dockyard
improved portion of the wharf ahead of anybody" and exemption "from the Corporation and all their affiliated companies." 9 Diaz invoked the provisions
payment of any charges for the use of wharf including the area where it may of Section 3 (c) of Executive Order No. 1, empowering the Commission
install its bagging equipments" "until the improvement remains in a condition
suitable for port operations." 5 It seems however that this contract was never
* * To provisionally takeover in the public interest or to
consummated. Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO
prevent its disposal or dissipation, business enterprises and
Management Team," advised Deltamarine by letter dated July 30, 1986 that
properties taken over by the government of the Marcos
"the new management is not in a position to honor the said contract" and
Administration or by entities or persons close to former
thus "whatever improvements * * (may be introduced) shall be deemed
President Marcos, until the transactions leading to such
unauthorized * * and shall be at * * (Deltamarine's) own risk." 6
acquisition by the latter can be disposed of by the
appropriate authorities.
e. Order for Operation of Sesiman Rock Quarry, Mariveles,
Bataan
A management team was designated to implement the order, headed by
Capt. Siacunco, and was given the following powers:
By Order dated June 20, 1986, Commissioner Mary Bautista first directed a
PCGG agent, Mayor Melba O. Buenaventura, "to plan and implement
1. Conducts all aspects of operation of the subject
progress towards maximizing the continuous operation of the BASECO
companies;
Sesiman Rock Quarry * * by conventional methods;" but afterwards,
Commissioner Bautista, in representation of the PCGG, authorized another
party, A.T. Abesamis, to operate the quarry, located at Mariveles, Bataan, an 2. Installs key officers, hires and terminates personnel as
agreement to this effect having been executed by them on September 17, necessary;
1986. 7
3. Enters into contracts related to management and
f. Order to Dispose of Scrap, etc. operation of the companies;

By another Order of Commissioner Bautista, this time dated June 26, 1986, 4. Ensures that the assets of the companies are not
Mayor Buenaventura was also "authorized to clean and beautify the dissipated and used effectively and efficiently; revenues are
Company's compound," and in this connection, to dispose of or sell "metal duly accounted for; and disburses funds only as may be
scraps" and other materials, equipment and machineries no longer usable, necessary;

61
 5. Does actions including among others, seeking of military
support as may be necessary, that will ensure compliance to
this order;
6. Holds itself fully accountable to the Presidential
Commission on Good Government on all aspects related to
this take-over order.
h. Termination of Services of BASECO
Officers
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S.
Mendoza, Moises M. Valdez, Gilberto Pasimanero, and Benito R. Cuesta I,
advising of the termination of their services by the PCGG. 10
2. Petitioner's Plea and Postulates
It is the foregoing specific orders and acts of the PCGG and its members and
agents which, to repeat, petitioner BASECO would have this Court nullify.
More particularly, BASECO prays that this Court-
1) declare unconstitutional and void Executive Orders Numbered 1 and 2;
2) annul the sequestration order dated April- 14, 1986, and all other orders
subsequently issued and acts done on the basis thereof, inclusive of the
takeover order of July 14, 1986 and the termination of the services of the
BASECO executives. 11
a. Re Executive Orders No. 1 and 2, and the Sequestration
and Takeover Orders
While BASECO concedes that "sequestration without resorting to judicial
action, might be made within the context of Executive Orders Nos. 1 and 2
before March 25, 1986 when the Freedom Constitution was promulgated,
under the principle that the law promulgated by the ruler under a
revolutionary regime is the law of the land, it ceased to be acceptable when
the same ruler opted to promulgate the Freedom Constitution on March 25,
1986 wherein under Section I of the same, Article IV (Bill of Rights) of the
1973 Constitution was adopted providing, among others, that "No person
shall be deprived of life, liberty and property without due process of law."
(Const., Art. I V, Sec. 1)." 12
It declares that its objection to the constitutionality of the Executive Orders
"as well as the Sequestration Order * * and Takeover Order * * issued
purportedly under the authority of said Executive Orders, rests on four
fundamental considerations: First, no notice and hearing was accorded * * (it)
before its properties and business were taken over; Second, the PCGG is not
a court, but a purely investigative agency and therefore not competent to act
as prosecutor and judge in the same cause; Third, there is nothing in the
issuances which envisions any proceeding, process or remedy by which
petitioner may expeditiously challenge the validity of the takeover after the
same has been effected; and Fourthly, being directed against specified
persons, and in disregard of the constitutional presumption of innocence and
general rules and procedures, they constitute a Bill of Attainder." 13
b. Re Order to Produce Documents
It argues that the order to produce corporate records from 1973 to 1986,
which it has apparently already complied with, was issued without court
authority and infringed its constitutional right against self-incrimination, and
unreasonable search and seizure. 14
c. Re PCGG's Exercise of Right of Ownership and
Management
BASECO further contends that the PCGG had unduly interfered with its right
of dominion and management of its business affairs by
1) terminating its contract for security services with Fairways & Anchor,
without the consent and against the will of the contracting parties; and
amending the mode of payment of entry fees stipulated in its Lease Contract
62
with National Stevedoring & Lighterage Corporation, these acts being in
violation of the non-impairment clause of the constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous
contract" with Deltamarine Integrated Port Services, Inc., giving the latter free
use of BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and
operate its rock quarry at Sesiman, Mariveles; 17
4) authorizing the same mayor to sell or dispose of its metal scrap,
equipment, machinery and other materials; 18
5) authorizing the takeover of BASECO, Philippine Dockyard Corporation,
and all their affiliated companies;
6) terminating the services of BASECO executives: President Hilario M. Ruiz;
EVP Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto
Pasimanero; Legal Dept. Mgr. Benito R. Cuesta I; 19
20
7) planning to elect its own Board of Directors;
8) allowing willingly or unwillingly its personnel to take, steal, carry away from
petitioner's premises at Mariveles * * rolls of cable wires, worth P600,000.00
on May 11, 1986; 21
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars
supposed to have been buried therein. 22
3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover
Orders
Many misconceptions and much doubt about the matter of sequestration,
takeover and freeze orders have been engendered by misapprehension, or
incomplete comprehension if not indeed downright ignorance of the law
governing these remedies. It is needful that these misconceptions and
doubts be dispelled so that uninformed and useless debates about them may
be avoided, and arguments tainted b sophistry or intellectual dishonesty be
quickly exposed and discarded. Towards this end, this opinion will essay an
exposition of the law on the matter. In the process many of the objections
raised by BASECO will be dealt with.
4. The Governing Law
a. Proclamation No. 3
The impugned executive orders are avowedly meant to carry out the explicit
command of the Provisional Constitution, ordained by Proclamation No.
3, 23 that the President-in the exercise of legislative power which she was
authorized to continue to wield "(until a legislature is elected and convened
under a new Constitution" "shall give priority to measures to achieve the
mandate of the people," among others to (r)ecover ill-gotten properties
amassed by the leaders and supporters of the previous regime and protect
the interest of the people through orders of sequestration or freezing of
assets or accounts." 24
b. Executive Order No. 1
Executive Order No. 1 stresses the "urgent need to recover all ill-gotten
wealth," and postulates that "vast resources of the government have been
amassed by former President Ferdinand E. Marcos, his immediate family,
relatives, and close associates both here and abroad." 25 Upon these
premises, the Presidential Commission on Good Government was
created, 26 "charged with the task of assisting the President in regard to
(certain specified) matters," among which was precisely-
* * The recovery of all in-gotten wealth accumulated by
former President Ferdinand E. Marcos, his immediate family,
relatives, subordinates and close associates, whether
located in the Philippines or abroad, including the takeover
or sequestration of all business enterprises and entities
63
 owned or controlled by them, during his administration,
directly or through nominees, by taking undue advantage of
their public office and/or using their powers, authority,
influence, connections or relationship. 27
In relation to the takeover or sequestration that it was authorized to
undertake in the fulfillment of its mission, the PCGG was granted "power and
authority" to do the following particular acts, to wit:
1. To sequester or place or cause to be placed under its
control or possession any building or office wherein any ill-
gotten wealth or properties may be found, and any records
pertaining thereto, in order to prevent their destruction,
concealment or disappearance which would frustrate or
hamper the investigation or otherwise prevent the
Commission from accomplishing its task.
2. To provisionally take over in the public interest or to
prevent the disposal or dissipation, business enterprises and
properties taken over by the government of the Marcos
Administration or by entities or persons close to former
President Marcos, until the transactions leading to such
acquisition by the latter can be disposed of by the
appropriate authorities.
3. To enjoin or restrain any actual or threatened commission
of acts by any person or entity that may render moot and
academic, or frustrate or otherwise make ineffectual the
efforts of the Commission to carry out its task under this
order. 28
So that it might ascertain the facts germane to its objectives, it was granted
power to conduct investigations; require submission of evidence by
subpoenae ad testificandum and duces tecum; administer oaths; punish for
contempt. 29 It was given power also to promulgate such rules and
regulations as may be necessary to carry out the purposes of * * (its
creation). 30
c. Executive Order No. 2
Executive Order No. 2 gives additional and more specific data and directions
respecting "the recovery of ill-gotten properties amassed by the leaders and
supporters of the previous regime." It declares that:
1) * * the Government of the Philippines is in possession of
evidence showing that there are assets and properties
purportedly pertaining to former Ferdinand E. Marcos, and/or
his wife Mrs. Imelda Romualdez Marcos, their close
relatives, subordinates, business associates, dummies,
agents or nominees which had been or were acquired by
them directly or indirectly, through or as a result of the
improper or illegal use of funds or properties owned by the
government of the Philippines or any of its branches,
instrumentalities, enterprises, banks or financial institutions,
or by taking undue advantage of their office, authority,
influence, connections or relationship, resulting in their
unjust enrichment and causing grave damage and prejudice
to the Filipino people and the Republic of the Philippines:"
and
2) * * said assets and properties are in the form of bank
accounts, deposits, trust accounts, shares of stocks,
buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal
properties in the Philippines and in various countries of the
world." 31
Upon these premises, the President-
1) froze "all assets and properties in the Philippines in which
former President Marcos and/or his wife, Mrs. Imelda
64
Romualdez Marcos, their close relatives, subordinates,
business associates, dummies, agents, or nominees have
any interest or participation;
2) prohibited former President Ferdinand Marcos and/or his
wife * *, their close relatives, subordinates, business
associates, duties, agents, or nominees from transferring,
conveying, encumbering, concealing or dissipating said
assets or properties in the Philippines and abroad, pending
the outcome of appropriate proceedings in the Philippines to
determine whether any such assets or properties were
acquired by them through or as a result of improper or illegal
use of or the conversion of funds belonging to the
Government of the Philippines or any of its branches,
instrumentalities, enterprises, banks or financial institutions,
or by taking undue advantage of their official position,
authority, relationship, connection or influence to unjustly
enrich themselves at the expense and to the grave damage
and prejudice of the Filipino people and the Republic of the
Philippines;
3) prohibited "any person from transferring, conveying,
encumbering or otherwise depleting or concealing such
assets and properties or from assisting or taking part in their
transfer, encumbrance, concealment or dissipation under
pain of such penalties as are prescribed by law;" and
4) required "all persons in the Philippines holding such
assets or properties, whether located in the Philippines or
abroad, in their names as nominees, agents or trustees, to
make full disclosure of the same to the Commission on Good
Government within thirty (30) days from publication of * (the)
Executive Order, * *. 32
d. Executive Order No. 14
A third executive order is relevant: Executive Order No. 14, 33 by which the
PCGG is empowered, "with the assistance of the Office of the Solicitor
General and other government agencies, * * to file and prosecute all cases
investigated by it * * as may be warranted by its findings." 34 All such cases,
whether civil or criminal, are to be filed "with the Sandiganbayanwhich shall
have exclusive and original jurisdiction thereof." 35 Executive Order No. 14
also pertinently provides that civil suits for restitution, reparation of damages,
or indemnification for consequential damages, forfeiture proceedings
provided for under Republic Act No. 1379, or any other civil actions under the
Civil Code or other existing laws, in connection with * * (said Executive
Orders Numbered 1 and 2) may be filed separately from and proceed
independently of any criminal proceedings and may be proved by a
preponderance of evidence;" and that, moreover, the "technical rules of
procedure and evidence shall not be strictly applied to* * (said)civil cases." 36
5. Contemplated Situations
The situations envisaged and sought to be governed are self-evident, these
being:
1) that "(i)ll-gotten properties (were) amassed by the leaders
and supporters of the previous regime"; 37
a) more particularly, that ill-gotten wealth (was) accumulated
by former President Ferdinand E. Marcos, his immediate
family, relatives, subordinates and close associates, * *
located in the Philippines or abroad, * * (and) business
enterprises and entities (came to be) owned or controlled by
them, during * * (the Marcos) administration, directly or
through nominees, by taking undue advantage of their public
office and/or using their powers, authority, influence,
Connections or relationship; 38
b) otherwise stated, that "there are assets and properties
purportedly pertaining to former President Ferdinand E.
Marcos, and/or his wife Mrs. Imelda Romualdez Marcos,
65
 their close relatives, subordinates, business associates,
dummies, agents or nominees which had been or were
acquired by them directly or indirectly, through or as a result
of the improper or illegal use of funds or properties owned by
the Government of the Philippines or any of its branches,
instrumentalities, enterprises, banks or financial institutions,
or by taking undue advantage of their office, authority,
influence, connections or relationship, resulting in their
unjust enrichment and causing grave damage and prejudice
to the Filipino people and the Republic of the Philippines"; 39
c) that "said assets and properties are in the form of bank
accounts. deposits, trust. accounts, shares of stocks,
buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal
properties in the Philippines and in various countries of the
world;" 40 and
2) that certain "business enterprises and properties (were)
taken over by the government of the Marcos Administration
or by entities or persons close to former President Marcos. 41
6. Government's Right and Duty to Recover All Ill-gotten Wealth
There can be no debate about the validity and eminent propriety of the
Government's plan "to recover all ill-gotten wealth."
Neither can there be any debate about the proposition that assuming the
above described factual premises of the Executive Orders and Proclamation
No. 3 to be true, to be demonstrable by competent evidence, the recovery
from Marcos, his family and his dominions of the assets and properties
involved, is not only a right but a duty on the part of Government.
But however plain and valid that right and duty may be, still a balance must
be sought with the equally compelling necessity that a proper respect be
accorded and adequate protection assured, the fundamental rights of private
property and free enterprise which are deemed pillars of a free society such
as ours, and to which all members of that society may without exception lay
claim.
* * Democracy, as a way of life enshrined in the Constitution,
embraces as its necessary components freedom of
conscience, freedom of expression, and freedom in the
pursuit of happiness. Along with these freedoms are
included economic freedom and freedom of enterprise within
reasonable bounds and under proper control. * * Evincing
much concern for the protection of property, the Constitution
distinctly recognizes the preferred position which real estate
has occupied in law for ages. Property is bound up with
every aspect of social life in a democracy as democracy is
conceived in the Constitution. The Constitution realizes the
indispensable role which property, owned in reasonable
quantities and used legitimately, plays in the stimulation to
economic effort and the formation and growth of a solid
social middle class that is said to be the bulwark of
democracy and the backbone of every progressive and
happy country. 42
a. Need of Evidentiary Substantiation in Proper Suit
Consequently, the factual premises of the Executive Orders cannot simply be
assumed. They will have to be duly established by adequate proof in each
case, in a proper judicial proceeding, so that the recovery of the ill-gotten
wealth may be validly and properly adjudged and consummated; although
there are some who maintain that the fact-that an immense fortune, and "vast
resources of the government have been amassed by former President
Ferdinand E. Marcos, his immediate family, relatives, and close associates
both here and abroad," and they have resorted to all sorts of clever schemes
and manipulations to disguise and hide their illicit acquisitions-is within the
realm of judicial notice, being of so extensive notoriety as to dispense with
proof thereof, Be this as it may, the requirement of evidentiary substantiation
has been expressly acknowledged, and the procedure to be followed
explicitly laid down, in Executive Order No. 14.
66
 b. Need of Provisional Measures to Collect and Conserve
Assets Pending Suits
Nor may it be gainsaid that pending the institution of the suits for the
recovery of such "ill-gotten wealth" as the evidence at hand may reveal, there
is an obvious and imperative need for preliminary, provisional measures to
prevent the concealment, disappearance, destruction, dissipation, or loss of
the assets and properties subject of the suits, or to restrain or foil acts that
may render moot and academic, or effectively hamper, delay, or negate
efforts to recover the same.
7. Provisional Remedies Prescribed by Law
To answer this need, the law has prescribed three (3) provisional remedies.
These are: (1) sequestration; (2) freeze orders; and (3) provisional takeover.
Sequestration and freezing are remedies applicable generally to unearthed
instances of "ill-gotten wealth." The remedy of "provisional takeover" is
peculiar to cases where "business enterprises and properties (were) taken
over by the government of the Marcos Administration or by entities or
persons close to former President Marcos." 43
a. Sequestration
By the clear terms of the law, the power of the PCGG to sequester
property claimed to be "ill-gotten" means to place or cause to be placed
under its possession or control said property, or any building or office wherein
any such property and any records pertaining thereto may be found,
including "business enterprises and entities,"-for the purpose of preventing
the destruction, concealment or dissipation of, and otherwise conserving and
preserving, the same-until it can be determined, through appropriate judicial
proceedings, whether the property was in truth will- gotten," i.e., acquired
through or as a result of improper or illegal use of or the conversion of funds
belonging to the Government or any of its branches, instrumentalities,
enterprises, banks or financial institutions, or by taking undue advantage of
official position, authority relationship, connection or influence, resulting in
unjust enrichment of the ostensible owner and grave damage and prejudice
to the State. 44 And this, too, is the sense in which the term is commonly
understood in other jurisdictions. 45
b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of property
alleged to constitute "ill-gotten wealth" "from transferring, conveying,
encumbering or otherwise depleting or concealing such property, or from
assisting or taking part in its transfer, encumbrance, concealment, or
dissipation." 46 In other words, it commands the possessor to hold the
property and conserve it subject to the orders and disposition of the authority
decreeing such freezing. In this sense, it is akin to a garnishment by which
the possessor or ostensible owner of property is enjoined not to deliver,
transfer, or otherwise dispose of any effects or credits in his possession or
control, and thus becomes in a sense an involuntary depositary thereof. 47
c. Provisional Takeover
In providing for the remedy of "provisional takeover," the law acknowledges
the apparent distinction between "ill gotten" "business enterprises and
entities" (going concerns, businesses in actual operation), generally, as to
which the remedy of sequestration applies, it being necessarily inferred that
the remedy entails no interference, or the least possible interference with the
actual management and operations thereof; and "business enterprises which
were taken over by the government government of the Marcos
Administration or by entities or persons close to him," in particular, as to
which a "provisional takeover" is authorized, "in the public interest or to
prevent disposal or dissipation of the enterprises." 48 Such a "provisional
takeover" imports something more than sequestration or freezing, more than
the placing of the business under physical possession and control, albeit
without or with the least possible interference with the management and
carrying on of the business itself. In a "provisional takeover," what is taken
into custody is not only the physical assets of the business enterprise or
entity, but the business operation as well. It is in fine the assumption of
control not only over things, but over operations or on- going activities. But,
67
to repeat, such a "provisional takeover" is allowed only as regards "business
enterprises * * taken over by the government of the Marcos Administration or
by entities or persons close to former President Marcos."
d. No Divestment of Title Over Property Seized
It may perhaps be well at this point to stress once again the provisional,
contingent character of the remedies just described. Indeed the law plainly
qualifies the remedy of take-over by the adjective, "provisional." These
remedies may be resorted to only for a particular exigency: to prevent in the
public interest the disappearance or dissipation of property or business, and
conserve it pending adjudgment in appropriate proceedings of the primary
issue of whether or not the acquisition of title or other right thereto by the
apparent owner was attended by some vitiating anomaly. None of the
remedies is meant to deprive the owner or possessor of his title or any right
to the property sequestered, frozen or taken over and vest it in the
sequestering agency, the Government or other person. This can be done
only for the causes and by the processes laid down by law.
That this is the sense in which the power to sequester, freeze or provisionally
take over is to be understood and exercised, the language of the executive
orders in question leaves no doubt. Executive Order No. 1 declares that the
sequestration of property the acquisition of which is suspect shall last "until
the transactions leading to such acquisition * * can be disposed of by the
appropriate authorities." 49 Executive Order No. 2 declares that the assets or
properties therein mentioned shall remain frozen "pending the outcome of
appropriate proceedings in the Philippines to determine whether any such
assets or properties were acquired" by illegal means. Executive Order No. 14
makes clear that judicial proceedings are essential for the resolution of the
basic issue of whether or not particular assets are "ill-gotten," and resultant
recovery thereof by the Government is warranted.
e. State of Seizure Not To Be Indefinitely Maintained; The
Constitutional Command
There is thus no cause for the apprehension voiced by BASECO 50 that
sequestration, freezing or provisional takeover is designed to be an end in
itself, that it is the device through which persons may be deprived of their
property branded as "ill-gotten," that it is intended to bring about a
permanent, rather than a passing, transitional state of affairs. That this is not
so is quite explicitly declared by the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears about
the duration of these provisional remedies. Section 26 of its Transitory
Provisions, 51 lays down the relevant rule in plain terms, apart from extending
ratification or confirmation (although not really necessary) to the institution by
presidential fiat of the remedy of sequestration and freeze orders:
SEC. 26. The authority to issue sequestration or freeze
orders under Proclamation No. 3 dated March 25, 1986 in
relation to the recovery of ill-gotten wealth shag remain
operative for not more than eighteen months after the
ratification of this Constitution. However, in the national
interest, as certified by the President, the Congress may
extend said period.
A sequestration or freeze order shall be issued only upon
showing of a prima facie case. The order and the list of the
sequestered or frozen properties shall forthwith be registered
with the proper court. For orders issued before the
ratification of this Constitution, the corresponding judicial
action or proceeding shall be filed within six months from its
ratification. For those issued after such ratification, the
judicial action or proceeding shall be commenced within six
months from the issuance thereof.
The sequestration or freeze order is deemed automatically
lifted if no judicial action or proceeding is commenced as
herein provided. 52
f. Kinship to Attachment Receivership
68
As thus described, sequestration, freezing and provisional takeover are akin
to the provisional remedy of preliminary attachment, or receivership. 53 By
attachment, a sheriff seizes property of a defendant in a civil suit so that it
may stand as security for the satisfaction of any judgment that may be
obtained, and not disposed of, or dissipated, or lost intentionally or otherwise,
pending the action. 54 By receivership, property, real or personal, which is
subject of litigation, is placed in the possession and control of a receiver
appointed by the Court, who shall conserve it pending final determination of
the title or right of possession over it. 55 All these remedies sequestration,
freezing, provisional, takeover, attachment and receivership are
provisional, temporary, designed for-particular exigencies, attended by no
character of permanency or finality, and always subject to the control of the
issuing court or agency.
g. Remedies, Non-Judicial
Parenthetically, that writs of sequestration or freeze or takeover orders are
not issued by a court is of no moment. The Solicitor General draws attention
to the writ of distraint and levy which since 1936 the Commissioner of
Internal Revenue has been by law authorized to issue against property of a
delinquent taxpayer. 56 BASECO itself declares that it has not manifested "a
rigid insistence on sequestration as a purely judicial remedy * * (as it feels)
that the law should not be ossified to a point that makes it insensitive to
change." What it insists on, what it pronounces to be its "unyielding position,
is that any change in procedure, or the institution of a new one, should
conform to due process and the other prescriptions of the Bill of Rights of the
Constitution." 57 It is, to be sure, a proposition on which there can be no
disagreement.
h. Orders May Issue Ex Parte
Like the remedy of preliminary attachment and receivership, as well as
delivery of personal property in replevinsuits, sequestration and provisional
takeover writs may issue ex parte. 58 And as in preliminary attachment,
receivership, and delivery of personality, no objection of any significance may
be raised to the ex parte issuance of an order of sequestration, freezing or
takeover, given its fundamental character of temporariness or conditionality;
and taking account specially of the constitutionally expressed "mandate of
the people to recover ill-gotten properties amassed by the leaders and
supporters of the previous regime and protect the interest of the
people;" 59 as well as the obvious need to avoid alerting suspected
possessors of "ill-gotten wealth" and thereby cause that disappearance or
loss of property precisely sought to be prevented, and the fact, just as self-
evident, that "any transfer, disposition, concealment or disappearance of said
assets and properties would frustrate, obstruct or hamper the efforts of the
Government" at the just recovery thereof. 60
8. Requisites for Validity
What is indispensable is that, again as in the case of attachment and
receivership, there exist a prima facie factual foundation, at least, for the
sequestration, freeze or takeover order, and adequate and fair opportunity to
contest it and endeavor to cause its negation or nullification. 61
Both are assured under the executive orders in question and the rules and
regulations promulgated by the PCGG.
a. Prima Facie Evidence as Basis for Orders
Executive Order No. 14 enjoins that there be "due regard to the requirements
of fairness and due process." 62Executive Order No. 2 declares that with
respect to claims on allegedly "ill-gotten" assets and properties, "it is the
position of the new democratic government that President Marcos * * (and
other parties affected) be afforded fair opportunity to contest these claims
before appropriate Philippine authorities." 63 Section 7 of the Commission's
Rules and Regulations provides that sequestration or freeze (and takeover)
orders issue upon the authority of at least two commissioners, based on
the affirmation or complaint of an interested party, or motu proprio when the
Commission has reasonable grounds to believe that the issuance thereof is
warranted. 64 A similar requirement is now found in Section 26, Art. XVIII of
the 1987 Constitution, which requires that a "sequestration or freeze order
shall be issued only upon showing of a prima facie case." 65
69
 b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the
procedure by which a party may seek to set aside a writ of sequestration or
freeze order, viz:
SECTION 5. Who may contend.-The person against whom a
writ of sequestration or freeze or hold order is directed may
request the lifting thereof in writing, either personally or
through counsel within five (5) days from receipt of the writ
or order, or in the case of a hold order, from date of
knowledge thereof.
SECTION 6. Procedure for review of writ or order.-After due
hearing or motu proprio for good cause shown, the
Commission may lift the writ or order unconditionally or
subject to such conditions as it may deem necessary, taking
into consideration the evidence and the circumstance of the
case. The resolution of the commission may be appealed by
the party concerned to the Office of the President of the
Philippines within fifteen (15) days from receipt thereof.
Parenthetically, even if the requirement for a prima facie showing of "ill-
gotten wealth" were not expressly imposed by some rule or regulation as a
condition to warrant the sequestration or freezing of property contemplated in
the executive orders in question, it would nevertheless be exigible in this
jurisdiction in which the Rule of Law prevails and official acts which are
devoid of rational basis in fact or law, or are whimsical and capricious, are
condemned and struck down. 66
9. Constitutional Sanction of Remedies
If any doubt should still persist in the face of the foregoing considerations as
to the validity and propriety of sequestration, freeze and takeover orders, it
should be dispelled by the fact that these particular remedies and the
authority of the PCGG to issue them have received constitutional
approbation and sanction. As already mentioned, the Provisional or
"Freedom" Constitution recognizes the power and duty of the President to
enact "measures to achieve the mandate of the people to * * * (recover ill-
gotten properties amassed by the leaders and supporters of the previous
regime and protect the interest of the people through orders of sequestration
or freezing of assets or accounts." And as also already adverted to, Section
26, Article XVIII of the 1987 Constitution 67 treats of, and ratifies the "authority
to issue sequestration or freeze orders under Proclamation No. 3 dated
March 25, 1986."
The institution of these provisional remedies is also premised upon the
State's inherent police power, regarded, as t lie power of promoting the public
welfare by restraining and regulating the use of liberty and property," 68 and
as "the most essential, insistent and illimitable of powers * * in the promotion
of general welfare and the public interest," 69and said to be co-extensive with
self-protection and * * not inaptly termed (also) the'law of overruling
necessity." " 70
10. PCGG not a "Judge"; General Functions
It should also by now be reasonably evident from what has thus far been said
that the PCGG is not, and was never intended to act as, a judge. Its general
function is to conduct investigations in order to collect evidenceestablishing
instances of "ill-gotten wealth;" issue sequestration, and such orders as may
be warranted by the evidence thus collected and as may be necessary to
preserve and conserve the assets of which it takes custody and control and
prevent their disappearance, loss or dissipation; and eventually file and
prosecute in the proper court of competent jurisdiction all cases investigated
by it as may be warranted by its findings. It does not try and decide, or hear
and determine, or adjudicate with any character of finality or compulsion,
cases involving the essential issue of whether or not property should be
forfeited and transferred to the State because "ill-gotten" within the meaning
of the Constitution and the executive orders. This function is reserved to the
designated court, in this case, the Sandiganbayan. 71 There can therefore be
no serious regard accorded to the accusation, leveled by BASECO, 72 that
the PCGG plays the perfidious role of prosecutor and judge at the same time.
70
11. Facts Preclude Grant of Relief to Petitioner BASECO's Stock and Transfer Book. 75 Their names and the number of
shares respectively held by them are as follows:
Upon these premises and reasoned conclusions, and upon the facts
disclosed by the record, hereafter to be discussed, the petition cannot
succeed. The writs of certiorari and prohibition prayed for will not be issued.
1. Jose A. Rojas 1,248 shares
The facts show that the corporation known as BASECO was owned or
controlled by President Marcos "during his administration, through nominees,
by taking undue advantage of his public office and/or using his powers,
authority, or influence, " and that it was by and through the same means, that 2. Severino G. de 1,248 shares
BASECO had taken over the business and/or assets of the National Shipyard la Cruz
and Engineering Co., Inc., and other government-owned or controlled
entities.

12. Organization and Stock Distribution of BASECO 3. Emilio T. Yap 2,508 shares

BASECO describes itself in its petition as "a shiprepair and shipbuilding

company * * incorporated as a domestic private corporation * * (on Aug. 30,
1972) by a consortium of Filipino shipowners and shipping executives. Its 4. Jose Fernandez 1,248 shares
main office is at Engineer Island, Port Area, Manila, where its Engineer Island
Shipyard is housed, and its main shipyard is located at Mariveles
Bataan." 73 Its Articles of Incorporation disclose that its authorized capital
stock is P60,000,000.00 divided into 60,000 shares, of which 12,000 shares 5. Jose Francisco 128 shares
with a value of P12,000,000.00 have been subscribed, and on said
subscription, the aggregate sum of P3,035,000.00 has been paid by the
incorporators. 74 The same articles Identify the incorporators, numbering
fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3) Eduardo T. 6. Manuel S. 96 shares
Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7) Mendoza
Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose
Francisco, (11) Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S.
Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.
7. Anthony P. Lee 1,248 shares
By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to
be stockholders, namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3)
Zacarias Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo
Torres. As of this year, 1986, there were twenty (20) stockholders listed in

71
8. Hilario M. Ruiz 32 shares Drydock shares

9. Constante L. 8 shares 16. Manuel Jacela 1 share

Farias

17. Jonathan G. Lu 1 share

10. Fidelity 65,882
Management, Inc. shares

18. Jose J. 1 share

Tanchanco
11. Trident 7,412 shares
Management

19. Dioscoro Papa 128 shares

12. United Phil. 1,240 shares

Lines
20. Edward T. 4 shares
Marcelo

13. Renato M. 8 shares

Tanseco
TOTAL 218,819
shares.

14. Fidel Ventura 8 shares

13 Acquisition of NASSCO by BASECO

15. Metro Bay 136,370

72
Barely six months after its incorporation, BASECO acquired from National
Shipyard & Steel Corporation, or NASSCO, a government-owned or
controlled corporation, the latter's shipyard at Mariveles, Bataan, known as
the Bataan National Shipyard (BNS), and except for NASSCO's Engineer
Island Shops and certain equipment of the BNS, consigned for future
negotiation all its structures, buildings, shops, quarters, houses, plants,
equipment and facilities, in stock or in transit. This it did in virtue of a
"Contract of Purchase and Sale with Chattel Mortgage" executed on
February 13, 1973. The price was P52,000,000.00. As partial payment
thereof, BASECO delivered to NASSCO a cash bond of P11,400,000.00,
convertible into cash within twenty-four (24) hours from completion of the
inventory undertaken pursuant to the contract. The balance of
P41,600,000.00, with interest at seven percent (7%) per annum,
compounded semi-annually, was stipulated to be paid in equal semi-annual
installments over a term of nine (9) years, payment to commence after a
grace period of two (2) years from date of turnover of the shipyard to
BASECO. 76
14. Subsequent Reduction of Price; Intervention of Marcos
Unaccountably, the price of P52,000,000.00 was reduced by more than one-
half, to P24,311,550.00, about eight (8) months later. A document to this
effect was executed on October 9, 1973, entitled "Memorandum Agreement,"
and was signed for NASSCO by Arturo Pacificador, as Presiding Officer of
the Board of Directors, and David R. Ines, as General Manager. 77 This
agreement bore, at the top right corner of the first page, the word
"APPROVED" in the handwriting of President Marcos, followed by his usual
full signature. The document recited that a down payment of P5,862,310.00
had been made by BASECO, and the balance of P19,449,240.00 was
payable in equal semi-annual installments over nine (9) years after a grace
period of two (2) years, with interest at 7% per annum.
15. Acquisition of 300 Hectares from Export Processing Zone Authority
On October 1, 1974, BASECO acquired three hundred (300) hectares of land
in Mariveles from the Export Processing Zone Authority for the price of
P10,047,940.00 of which, as set out in the document of sale, P2,000.000.00
was paid upon its execution, and the balance stipulated to be payable in
installments. 78
16. Acquisition of Other Assets of NASSCO; Intervention of Marcos
Some nine months afterwards, or on July 15, 1975, to be precise, BASECO,
again with the intervention of President Marcos, acquired ownership of the
rest of the assets of NASSCO which had not been included in the first two (2)
purchase documents. This was accomplished by a deed entitled "Contract of
Purchase and Sale," 79which, like the Memorandum of Agreement dated
October 9, 1973 supra also bore at the upper right-hand corner of its first
page, the handwritten notation of President Marcos reading, "APPROVED,
July 29, 1973," and underneath it, his usual full signature. Transferred to
BASECO were NASSCO's "ownership and all its titles, rights and interests
over all equipment and facilities including structures, buildings, shops,
quarters, houses, plants and expendable or semi-expendable assets, located
at the Engineer Island, known as the Engineer Island Shops, including all the
equipment of the Bataan National Shipyards (BNS) which were excluded
from the sale of NBS to BASECO but retained by BASECO and all other
selected equipment and machineries of NASSCO at J. Panganiban Smelting
Plant." In the same deed, NASSCO committed itself to cooperate with
BASECO for the acquisition from the National Government or other
appropriate Government entity of Engineer Island. Consideration for the sale
was set at P5,000,000.00; a down payment of P1,000,000.00 appears to
have been made, and the balance was stipulated to be paid at 7% interest
per annum in equal semi annual installments over a term of nine (9) years, to
commence after a grace period of two (2) years. Mr. Arturo Pacificador again
signed for NASSCO, together with the general manager, Mr. David R. Ines.
17. Loans Obtained
It further appears that on May 27, 1975 BASECO obtained a loan from the
NDC, taken from "the last available Japanese war damage fund of
$19,000,000.00," to pay for "Japanese made heavy equipment (brand
new)." 80On September 3, 1975, it got another loan also from the NDC in the
73
amount of P30,000,000.00 (id.). And on January 28, 1976, it got still another
loan, this time from the GSIS, in the sum of P12,400,000.00. 81 The claim has
been made that not a single centavo has been paid on these loans. 82
18. Reports to President Marcos
In September, 1977, two (2) reports were submitted to President Marcos
regarding BASECO. The first was contained in a letter dated September 5,
1977 of Hilario M. Ruiz, BASECO president. 83 The second was embodied in
a confidential memorandum dated September 16, 1977 of Capt. A.T.
Romualdez. 84 They further disclose the fine hand of Marcos in the affairs of
BASECO, and that of a Romualdez, a relative by affinity.
a. BASECO President's Report
In his letter of September 5, 1977, BASECO President Ruiz reported to
Marcos that there had been "no orders or demands for ship construction" for
some time and expressed the fear that if that state of affairs persisted,
BASECO would not be able to pay its debts to the Government, which at the
time stood at the not inconsiderable amount of P165,854,000.00. 85 He
suggested that, to "save the situation," there be a "spin-off (of their)
shipbuilding activities which shall be handled exclusively by an entirely new
corporation to be created;" and towards this end, he informed Marcos that
BASECO was
* * inviting NDC and LUSTEVECO to participate by
converting the NDC shipbuilding loan to BASECO amounting
to P341.165M and assuming and converting a portion of
BASECO's shipbuilding loans from REPACOM amounting to
P52.2M or a total of P83.365M as NDC's equity contribution
in the new corporation. LUSTEVECO will participate by
absorbing and converting a portion of the REPACOM loan of
Bay Shipyard and Drydock, Inc., amounting to P32.538M. 86
b. Romualdez' Report
Capt. A.T. Romualdez' report to the President was submitted eleven (11)
days later. It opened with the following caption:
MEMORANDUM:
FOR : The President
SUBJECT: An Evaluation and Re-assessment of a
Performance of a Mission
FROM: Capt. A.T. Romualdez.
Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting
its loan obligations due chiefly to the fact that "orders to build ships as
expected * * did not materialize."
He advised that five stockholders had "waived and/or assigned their holdings
inblank," these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo
Torres, (4) Magiliw Torres, and (5) Anthony P. Lee. Pointing out that "Mr.
Magiliw Torres * * is already dead and Mr. Jose A. Rojas had a major heart
attack," he made the following quite revealing, and it may be added, quite
cynical and indurate recommendation, to wit:
* * (that) their replacements (be effected) so we can register
their names in the stock book prior to the implementation
of your instructions to pass a board resolution to legalize the
transfers under SEC regulations;
2. By getting their replacements, the families cannot
question us later on; and
87
3. We will owe no further favors from them.
He also transmitted to Marcos, together with the report, the following
documents: 88
74
1. Stock certificates indorsed and assigned in blank with
assignments and waivers; 89
2. The articles of incorporation, the amended articles, and
the by-laws of BASECO;
3. Deed of Sales, wherein NASSCO sold to BASECO four
(4) parcels of land in "Engineer Island", Port Area, Manila;
4. Transfer Certificate of Title No. 124822 in the name of
BASECO, covering "Engineer Island";
5. Contract dated October 9, 1973, between NASSCO and
BASECO re-structure and equipment at Mariveles, Bataan;
6. Contract dated July 16, 1975, between NASSCO and
BASECO re-structure and equipment at Engineer Island,
Port Area Manila;
7. Contract dated October 1, 1974, between EPZA and
BASECO re 300 hectares of land at Mariveles, Bataan;
8. List of BASECO's fixed assets;
9. Loan Agreement dated September 3, 1975, BASECO's
loan from NDC of P30,000,000.00;
10. BASECO-REPACOM Agreement dated May 27, 1975;
11. GSIS loan to BASECO dated January 28, 1976 of
P12,400,000.00 for the housing facilities for BASECO's rank-
and-file employees. 90
Capt. Romualdez also recommended that BASECO's loans be restructured
"until such period when BASECO will have enough orders for ships in order
for the company to meet loan obligations," and that
An LOI may be issued to government agencies using floating
equipment, that a linkage scheme be applied to a certain
percent of BASECO's net profit as part of BASECO's
amortization payments to make it justifiable for you, Sir. 91
It is noteworthy that Capt. A.T. Romualdez does not appear to be a
stockholder or officer of BASECO, yet he has presented a report on
BASECO to President Marcos, and his report demonstrates intimate
familiarity with the firm's affairs and problems.
19. Marcos' Response to Reports
President Marcos lost no time in acting on his subordinates'
recommendations, particularly as regards the "spin-off" and the "linkage
scheme" relative to "BASECO's amortization payments."
a. Instructions re "Spin-Off"
Under date of September 28, 1977, he addressed a Memorandum to
Secretary Geronimo Velasco of the Philippine National Oil Company and
Chairman Constante Farias of the National Development Company,
directing them "to participate in the formation of a new corporation resulting
from the spin-off of the shipbuilding component of BASECO along the
following guidelines:
a. Equity participation of government shall be through
LUSTEVECO and NDC in the amount of P115,903,000
consisting of the following obligations of BASECO which are
hereby authorized to be converted to equity of the said new
corporation, to wit:
75
 1. NDC P83,865,000 (P31.165M loan &
P52.2M Reparation)
2. LUSTEVECO P32,538,000 (Reparation)
b. Equity participation of government shall be in the form of
non- voting shares.
For immediate compliance. 92
Mr. Marcos' guidelines were promptly complied with by his subordinates.
Twenty-two (22) days after receiving their president's memorandum, Messrs.
Hilario M. Ruiz, Constante L. Farias and Geronimo Z. Velasco, in
representation of their respective corporations, executed a PRE-
INCORPORATION AGREEMENT dated October 20, 1977. 93 In it, they
undertook to form a shipbuilding corporation to be known as "PHIL-ASIA
SHIPBUILDING CORPORATION," to bring to realization their president's
instructions. It would seem that the new corporation ultimately formed was
actually named "Philippine Dockyard Corporation (PDC)." 94
b. Letter of Instructions No. 670
Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of
instructions. On February 14, 1978, he issued Letter of Instructions No. 670
addressed to the Reparations Commission REPACOM the Philippine
National Oil Company (PNOC), the Luzon Stevedoring Company
(LUSTEVECO), and the National Development Company (NDC). What is
commanded therein is summarized by the Solicitor General, with pithy and
not inaccurate observations as to the effects thereof (in italics), as follows:
* * 1) the shipbuilding equipment procured by BASECO
through reparations be transferred to NDC subject to
reimbursement by NDC to BASECO (of) the amount of s
allegedly representing the handling and incidental expenses
incurred by BASECO in the installation of said
equipment (so instead of NDC getting paid on its loan to
BASECO, it was made to pay BASECO instead the amount
of P18.285M); 2) the shipbuilding equipment procured from
reparations through EPZA, now in the possession of
BASECO and BSDI (Bay Shipyard & Drydocking, Inc.) be
transferred to LUSTEVECO through PNOC; and 3) the
shipbuilding equipment (thus) transferred be invested by
LUSTEVECO, acting through PNOC and NDC, as the
government's equity participation in a shipbuilding
corporation to be established in partnership with the private
sector.
xxx xxx xxx
And so, through a simple letter of instruction and
memorandum, BASECO's loan obligation to NDC and
REPACOM * * in the total amount of P83.365M and BSD's
REPACOM loan of P32.438M were wiped out and converted
into non-voting preferred shares. 95
20. Evidence of Marcos'
Ownership of BASECO
It cannot therefore be gainsaid that, in the context of the proceedings at bar,
the actuality of the control by President Marcos of BASECO has been
sufficiently shown.
Other evidence submitted to the Court by the Solicitor General proves that
President Marcos not only exercised control over BASECO, but also that
he actually owns well nigh one hundred percent of its outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986, there
were 218,819 shares of stock outstanding, ostensibly owned by twenty (20)
stockholders. 96 Four of these twenty are juridical persons: (1) Metro Bay
Drydock, recorded as holding 136,370 shares; (2) Fidelity Management,
Inc., 65,882 shares; (3) Trident Management,7,412 shares; and (4) United
76
Phil. Lines, 1,240 shares. The first three corporations, among themselves,
own an aggregate of 209,664 shares of BASECO stock, or 95.82% of the
outstanding stock.
Now, the Solicitor General has drawn the Court's attention to the intriguing
circumstance that found in Malacanang shortly after the sudden flight of
President Marcos, were certificates corresponding to more than ninety-five
percent (95%) of all the outstanding shares of stock of BASECO, endorsed in
blank, together with deeds of assignment of practically all the outstanding
shares of stock of the three (3) corporations above mentioned (which
hold 95.82% of all BASECO stock), signed by the owners thereof although
not notarized. 97
More specifically, found in Malacanang (and now in the custody of the
PCGG) were:
1) the deeds of assignment of all 600 outstanding shares of
Fidelity Management Inc. which supposedly owns as
aforesaid 65,882 shares of BASECO stock;
2) the deeds of assignment of 2,499,995 of the 2,500,000
outstanding shares of Metro Bay Drydock Corporation
which allegedly owns 136,370 shares of BASECO stock;
3) the deeds of assignment of 800 outstanding shares of
Trident Management Co., Inc. which allegedly owns 7,412
shares of BASECO stock, assigned in blank; 98 and
4) stock certificates corresponding to 207,725 out of the
218,819 outstanding shares of BASECO stock; that is, all but
5 % all endorsed in blank. 99
While the petitioner's counsel was quick to dispute this asserted fact,
assuring this Court that the BASECO stockholders were still in possession of
their respective stock certificates and had "never endorsed * * them in blank
or to anyone else," 100 that denial is exposed by his own prior and
subsequent recorded statements as a mere gesture of defiance rather than a
verifiable factual declaration.
By resolution dated September 25, 1986, this Court granted BASECO's
counsel a period of 10 days "to SUBMIT, as undertaken by him, * * the
certificates of stock issued to the stockholders of * * BASECO as of April 23,
1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved for
extension; and in his motion dated October 2, 1986, he declared inter
alia that "said certificates of stock are in the possession of third parties,
among whom being the respondents themselves * * and petitioner is still
endeavoring to secure copies thereof from them." 102 On the same day he
filed another motion praying that he be allowed "to secure copies of the
Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other
Certificates, of Stock of petitioner's stockholders in possession of
respondents." 103
In a Manifestation dated October 10, 1986,, 104 the Solicitor General not
unreasonably argued that counsel's aforestated motion to secure copies of
the stock certificates "confirms the fact that stockholders of petitioner
corporation are not in possession of * * (their) certificates of stock," and the
reason, according to him, was "that 95% of said shares * * have been
endorsed in blank and found in Malacaang after the former President and
his family fled the country." To this manifestation BASECO's counsel replied
on November 5, 1986, as already mentioned, Stubbornly insisting that the
firm's stockholders had not really assigned their stock. 105
In view of the parties' conflicting declarations, this Court resolved on
November 27, 1986 among other things "to require * * the petitioner * *
to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals
of the stock certificates alleged to be in its possession or accessible to it,
mentioned and described in Annex 'P' of its petition, (and other pleadings) * *
within ten (10) days from notice." 106 In a motion filed on December 5,
1986, 107 BASECO's counsel made the statement, quite surprising in the
premises, that "it will negotiate with the owners (of the BASECO stock in
question) to allow petitioner to borrow from them, if available, the certificates
referred to" but that "it needs a more sufficient time therefor" (sic). BASECO's
counsel however eventually had to confess inability to produce the originals
77
of the stock certificates, putting up the feeble excuse that while he had
"requested the stockholders to allow * * (him) to borrow said certificates, * *
some of * * (them) claimed that they had delivered the certificates to third
parties by way of pledge and/or to secure performance of obligations, while
others allegedly have entrusted them to third parties in view of last national
emergency." 108 He has conveniently omitted, nor has he offered to give the
details of the transactions adverted to by him, or to explain why he had not
impressed on the supposed stockholders the primordial importance of
convincing this Court of their present custody of the originals of the stock, or
if he had done so, why the stockholders are unwilling to agree to some sort
of arrangement so that the originals of their certificates might at the very least
be exhibited to the Court. Under the circumstances, the Court can only
conclude that he could not get the originals from the stockholders for the
simple reason that, as the Solicitor General maintains, said stockholders in
truth no longer have them in their possession, these having already been
assigned in blank to then President Marcos.
21. Facts Justify Issuance of Sequestration and Takeover Orders
In the light of the affirmative showing by the Government that, prima facie at
least, the stockholders and directors of BASECO as of April, 1986 109 were
mere "dummies," nominees or alter egos of President Marcos; at any rate,
that they are no longer owners of any shares of stock in the corporation, the
conclusion cannot be avoided that said stockholders and directors have no
basis and no standing whatever to cause the filing and prosecution of the
instant proceeding; and to grant relief to BASECO, as prayed for in the
petition, would in effect be to restore the assets, properties and business
sequestered and taken over by the PCGG to persons who are "dummies,"
nominees or alter egos of the former president.
From the standpoint of the PCGG, the facts herein stated at some length do
indeed show that the private corporation known as BASECO was "owned or
controlled by former President Ferdinand E. Marcos * * during his
administration, * * through nominees, by taking advantage of * * (his) public
office and/or using * * (his) powers, authority, influence * *," and that
NASSCO and other property of the government had been taken over by
BASECO; and the situation justified the sequestration as well as the
provisional takeover of the corporation in the public interest, in accordance
with the terms of Executive Orders No. 1 and 2, pending the filing of the
requisite actions with the Sandiganbayan to cause divestment of title thereto
from Marcos, and its adjudication in favor of the Republic pursuant to
Executive Order No. 14.
As already earlier stated, this Court agrees that this assessment of the facts
is correct; accordingly, it sustains the acts of sequestration and takeover by
the PCGG as being in accord with the law, and, in view of what has thus far
been set out in this opinion, pronounces to be without merit the theory that
said acts, and the executive orders pursuant to which they were done, are
fatally defective in not according to the parties affected prior notice and
hearing, or an adequate remedy to impugn, set aside or otherwise obtain
relief therefrom, or that the PCGG had acted as prosecutor and judge at the
same time.
22. Executive Orders Not a Bill of Attainder
Neither will this Court sustain the theory that the executive orders in question
are a bill of attainder. 110 "A bill of attainder is a legislative act which inflicts
punishment without judicial trial." 111 "Its essence is the substitution of a
legislative for a judicial determination of guilt." 112
In the first place, nothing in the executive orders can be reasonably
construed as a determination or declaration of guilt. On the contrary, the
executive orders, inclusive of Executive Order No. 14, make it perfectly clear
that any judgment of guilt in the amassing or acquisition of "ill-gotten wealth"
is to be handed down by a judicial tribunal, in this case,
the Sandiganbayan, upon complaint filed and prosecuted by the PCGG. In
the second place, no punishment is inflicted by the executive orders, as the
merest glance at their provisions will immediately make apparent. In no
sense, therefore, may the executive orders be regarded as a bill of attainder.
23. No Violation of Right against Self-Incrimination and Unreasonable
Searches and Seizures
78
BASECO also contends that its right against self incrimination and * * The corporation is a creature of the state. It is presumed
unreasonable searches and seizures had been transgressed by the Order of to be incorporated for the benefit of the public. It received
April 18, 1986 which required it "to produce corporate records from 1973 to certain special privileges and franchises, and holds them
1986 under pain of contempt of the Commission if it fails to do so." The order subject to the laws of the state and the limitations of its
was issued upon the authority of Section 3 (e) of Executive Order No. 1, charter. Its powers are limited by law. It can make no
treating of the PCGG's power to "issue subpoenas requiring * * the contract not authorized by its charter. Its rights to act as a
production of such books, papers, contracts, records, statements of accounts corporation are only preserved to it so long as it obeys the
and other documents as may be material to the investigation conducted by laws of its creation. There is a reserve right in the legislature
the Commission, " and paragraph (3), Executive Order No. 2 dealing with its to investigate its contracts and find out whether it has
power to "require all persons in the Philippines holding * * (alleged "ill- exceeded its powers. It would be a strange anomaly to hold
gotten") assets or properties, whether located in the Philippines or abroad, in that a state, having chartered a corporation to make use of
their names as nominees, agents or trustees, to make full disclosure of the certain franchises, could not, in the exercise of sovereignty,
same * *." The contention lacks merit. inquire how these franchises had been employed, and
whether they had been abused, and demand the production
It is elementary that the right against self-incrimination has no application to of the corporate books and papers for that purpose. The
juridical persons. defense amounts to this, that an officer of the corporation
which is charged with a criminal violation of the statute may
While an individual may lawfully refuse to answer plead the criminality of such corporation as a refusal to
incriminating questions unless protected by an immunity produce its books. To state this proposition is to answer
statute, it does not follow that a corporation, vested with it. While an individual may lawfully refuse to answer
special privileges and franchises, may refuse to show its incriminating questions unless protected by an immunity
hand when charged with an abuse ofsuchprivileges * * 113 statute, it does not follow that a corporation, vested with
special privileges and franchises may refuse to show its
hand when charged with an abuse of such
Relevant jurisprudence is also cited by the Solicitor General. 114
privileges. (Wilson v. United States, 55 Law Ed., 771, 780
[emphasis, the Solicitor General's])
* * corporations are not entitled to all of the constitutional
protections which private individuals have. * * They are not
At any rate, Executive Order No. 14-A, amending Section 4 of Executive
at all within the privilege against self-incrimination, although
Order No. 14 assures protection to individuals required to produce evidence
this court more than once has said that the privilege runs
before the PCGG against any possible violation of his right against self-
very closely with the 4th Amendment's Search and Seizure
incrimination. It gives them immunity from prosecution on the basis of
provisions. It is also settled that an officer of the company
testimony or information he is compelled to present. As amended, said
cannot refuse to produce its records in its possession upon
Section 4 now provides that
the plea that they will either incriminate him or may
incriminate it." (Oklahoma Press Publishing Co. v. Walling,
327 U.S. 186; emphasis, the Solicitor General's). xxx xxx xxx

79
 The witness may not refuse to comply with the order on the
basis of his privilege against self-incrimination; but no
testimony or other information compelled under the order (or
any information directly or indirectly derived from such
testimony, or other information) may be used against the
witness in any criminal case, except a prosecution for
perjury, giving a false statement, or otherwise failing to
comply with the order.
The constitutional safeguard against unreasonable searches and seizures
finds no application to the case at bar either. There has been no search
undertaken by any agent or representative of the PCGG, and of course no
seizure on the occasion thereof.
24. Scope and Extent of Powers of the PCGG
One other question remains to be disposed of, that respecting the scope and
extent of the powers that may be wielded by the PCGG with regard to the
properties or businesses placed under sequestration or provisionally taken
over. Obviously, it is not a question to which an answer can be easily given,
much less one which will suffice for every conceivable situation.
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG cannot
exercise acts of dominion over property sequestered, frozen or provisionally
taken over. AS already earlier stressed with no little insistence, the act of
sequestration; freezing or provisional takeover of property does not import or
bring about a divestment of title over said property; does not make the PCGG
the owner thereof. In relation to the property sequestered, frozen or
provisionally taken over, the PCGG is a conservator, not an
owner. Therefore, it can not perform acts of strict ownership; and this is
specially true in the situations contemplated by the sequestration rules
where, unlike cases of receivership, for example, no court exercises effective
supervision or can upon due application and hearing, grant authority for the
performance of acts of dominion.
Equally evident is that the resort to the provisional remedies in question
should entail the least possible interference with business operations or
activities so that, in the event that the accusation of the business enterprise
being "ill gotten" be not proven, it may be returned to its rightful owner as far
as possible in the same condition as it was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the
property or business sequestered or provisionally taken over, much like a
court-appointed receiver, 115 such as to bring and defend actions in its own
name; receive rents; collect debts due; pay outstanding debts; and generally
do such other acts and things as may be necessary to fulfill its mission as
conservator and administrator. In this context, it may in addition enjoin or
restrain any actual or threatened commission of acts by any person or entity
that may render moot and academic, or frustrate or otherwise make
ineffectual its efforts to carry out its task; punish for direct or indirect
contempt in accordance with the Rules of Court; and seek and secure the
assistance of any office, agency or instrumentality of the government. 116 In
the case of sequestered businesses generally (i.e., going concerns,
businesses in current operation), as in the case of sequestered objects, its
essential role, as already discussed, is that of conservator, caretaker,
"watchdog" or overseer. It is not that of manager, or innovator, much less an
owner.
c. Powers over Business Enterprises Taken Over by Marcos
or Entities or Persons Close to him; Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to
have been "taken over by the government of the Marcos Administration or by
entities or persons close to former President Marcos," 117 the PCGG is
given power and authority, as already adverted to, to "provisionally take (it)
over in the public interest or to prevent * * (its) disposal or dissipation;" and
since the term is obviously employed in reference to going concerns, or
business enterprises in operation, something more than mere physical
custody is connoted; the PCGG may in this case exercise some measure of
80
control in the operation, running, or management of the business itself. But
even in this special situation, the intrusion into management should be
restricted to the minimum degree necessary to accomplish the legislative will,
which is "to prevent the disposal or dissipation" of the business enterprise.
There should be no hasty, indiscriminate, unreasoned replacement or
substitution of management officials or change of policies, particularly in
respect of viable establishments. In fact, such a replacement or substitution
should be avoided if at all possible, and undertaken only when justified by
demonstrably tenable grounds and in line with the stated objectives of the
PCGG. And it goes without saying that where replacement of management
officers may be called for, the greatest prudence, circumspection, care and
attention - should accompany that undertaking to the end that truly
competent, experienced and honest managers may be recruited. There
should be no role to be played in this area by rank amateurs, no matter how
wen meaning. The road to hell, it has been said, is paved with good
intentions. The business is not to be experimented or played around with, not
run into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight
should never be lost sight of the ultimate objective of the whole exercise,
which is to turn over the business to the Republic, once judicially established
to be "ill-gotten." Reason dictates that it is only under these conditions and
circumstances that the supervision, administration and control of business
enterprises provisionally taken over may legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances
that the PCGG may properly exercise the prerogative to vote sequestered
stock of corporations, granted to it by the President of the Philippines through
a Memorandum dated June 26, 1986. That Memorandum authorizes the
PCGG, "pending the outcome of proceedings to determine the ownership of *
* (sequestered) shares of stock," "to vote such shares of stock as it may
have sequestered in corporations at all stockholders' meetings called for the
election of directors, declaration of dividends, amendment of the Articles of
Incorporation, etc." The Memorandum should be construed in such a manner
as to be consistent with, and not contradictory of the Executive Orders earlier
promulgated on the same matter. There should be no exercise of the right to
vote simply because the right exists, or because the stocks sequestered
constitute the controlling or a substantial part of the corporate voting power.
The stock is not to be voted to replace directors, or revise the articles or by-
laws, or otherwise bring about substantial changes in policy, program or
practice of the corporation except for demonstrably weighty and defensible
grounds, and always in the context of the stated purposes of sequestration or
provisional takeover, i.e., to prevent the dispersion or undue disposal of the
corporate assets. Directors are not to be voted out simply because the power
to do so exists. Substitution of directors is not to be done without reason or
rhyme, should indeed be shunned if at an possible, and undertaken only
when essential to prevent disappearance or wastage of corporate property,
and always under such circumstances as assure that the replacements are
truly possessed of competence, experience and probity.
In the case at bar, there was adequate justification to vote the incumbent
directors out of office and elect others in their stead because the evidence
showed prima facie that the former were just tools of President Marcos and
were no longer owners of any stock in the firm, if they ever were at all. This is
why, in its Resolution of October 28, 1986; 118 this Court declared that
Petitioner has failed to make out a case of grave abuse or
excess of jurisdiction in respondents' calling and holding of a
stockholders' meeting for the election of directors as
authorized by the Memorandum of the President * * (to the
PCGG) dated June 26, 1986, particularly, where as in this
case, the government can, through its designated directors,
properly exercise control and management over what appear
to be properties and assets owned and belonging to the
government itself and over which the persons who appear in
this case on behalf of BASECO have failed to show any right
or even any shareholding in said corporation.
It must however be emphasized that the conduct of the PCGG nominees in
the BASECO Board in the management of the company's affairs should
henceforth be guided and governed by the norms herein laid down. They
should never for a moment allow themselves to forget that they are
conservators, not owners of the business; they are fiduciaries, trustees, of
81
whom the highest degree of diligence and rectitude is, in the premises,
required.

25. No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation

or revision, and the execution of certain contracts, inclusive of the termination
of the employment of some of its executives, 119 this Court cannot, in the
present state of the evidence on record, pass upon them. It is not necessary
to do so. The issues arising therefrom may and will be left for initial
determination in the appropriate action. But the Court will state that absent
any showing of any important cause therefor, it will not normally substitute its
judgment for that of the PCGG in these individual transactions. It is clear
however, that as things now stand, the petitioner cannot be said to have
established the correctness of its submission that the acts of the PCGG in
question were done without or in excess of its powers, or with grave abuse of
discretion.

WHEREFORE, the petition is dismissed. The temporary restraining order

issued on October 14, 1986 is lifted. G.R. No. L-22619 December 2, 1924

Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur. NATIONAL COAL COMPANY, plaintiff-appellee,
vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellant.

Attorney-General Villa-Real for appellant.

Perfecto J. Salas Rodriguez for appellee.

JOHNSON, J.:

This action was brought in the Court of First Instance of the City of Manila on
the 17th day of July, 1923, for the purpose of recovering the sum of
P12,044.68, alleged to have been paid under protest by the plaintiff company
to the defendant, as specific tax on 24,089.3 tons of coal. Said company is a

82
corporation created by Act No. 2705 of the Philippine Legislature for the
purpose of developing the coal industry in the Philippine Islands and is
actually engaged in coal mining on reserved lands belonging to the
Government. It claimed exemption from taxes under the provision of sections
14 and 15 of Act No. 2719, and prayed for a judgment ordering the defendant
to refund to the plaintiff said sum of P12,044.68, with legal interest from the
date of the presentation of the complaint, and costs against the defendant.
The defendant answered denying generally and specifically all the material
allegations of the complaint, except the legal existence and personality of the
plaintiff. As a special defense, the defendant alleged (a) that the sum of
P12,044.68 was paid by the plaintiff without protests, and (b) that said sum
was due and owing from the plaintiff to the Government of the Philippine
Islands under the provisions of section 1496 of the Administrative Code and
prayed that the complaint be dismissed, with costs against the plaintiff.
Upon the issue thus presented, the case was brought on for trial. After a
consideration of the evidence adduced by both parties, the Honorable Pedro
Conception, judge, held that the words "lands owned by any person, etc.," in
section 15 of Act No. 2719 should be understood to mean "lands held in
lease or usufruct," in harmony with the other provision of said Act; that the
coal lands possessed by the plaintiff, belonging to the Government, fell within
the provisions of section 15 of Act No. 2719; and that a tax of P0.04 per ton
of 1,016 kilos on each ton of coal extracted therefrom, as provided in said
section, was the only tax which should be collected from the plaintiff; and
sentenced the defendant to refund to the plaintiff the sum of P11,081.11
which is the difference between the amount collected under section 1496 of
the Administrative Code and the amount which should have been collected
under the provisions of said section 15 of Act No. 2719. From that sentence
the defendant appealed, and now makes the following assignments of error:
I. The court below erred in holding that section 15 of Act No. 2719 does not
refer to coal lands owned by persons and corporations.
II. The court below erred in holding that the plaintiff was not subject to the tax
prescribed in section 1496 of the Administrative Code.
The question confronting us in this appeal is whether the plaintiff is subject to
the taxes under section 15 of Act No. 2719, or to the specific taxes under
section 1496 of the Administrative Code.
The plaintiff corporation was created on the 10th day of March, 1917, by Act
No. 2705, for the purpose of developing the coal industry in the Philippine
Island, in harmony with the general plan of the Government to encourage the
development of the natural resources of the country, and to provided facilities
therefor. By said Act, the company was granted the general powers of a
corporation "and such other powers as may be necessary to enable it to
prosecute the business of developing coal deposits in the Philippine Island
and of mining, extracting, transporting and selling the coal contained in said
deposits." (Sec. 2, Act No. 2705.) By the same law (Act No. 2705) the
Government of the Philippine Islands is made the majority stockholder,
evidently in order to insure proper government supervision and control, and
thus to place the Government in a position to render all possible
encouragement, assistance and help in the prosecution and furtherance of
the company's business.
On May 14, 1917, two months after the passage of Act No. 2705, creating
the National Coal Company, the Philippine Legislature passed Act No. 2719
"to provide for the leasing and development of coal lands in the Philippine
Islands." On October 18, 1917, upon petition of the National Coal Company,
the Governor-General, by Proclamation No. 39, withdrew "from settlement,
entry, sale or other disposition, all coal-bearing public lands within the
Province of Zamboanga, Department of Mindanao and Sulu, and the Island
of Polillo, Province of Tayabas." Almost immediately after the issuance of
said proclamation the National Coal Company took possession of the coal
lands within the said reservation, with an area of about 400 hectares, without
any further formality, contract or lease. Of the 30,000 shares of stock issued
by the company, the Government of the Philippine Islands is the owner of
29,809 shares, that is, of 99 1/3 per centum of the whole capital stock.
If we understand the theory of the plaintiff-appellee, it is, that it claims to be
the owner of the land from which it has mined the coal in question and is
therefore subject to the provisions of section 15 of Act No. 2719 and not to
the provisions of the section 1496 of the Administrative Code. That
83
contention of the plaintiff leads us to an examination of the evidence upon
the question of the ownership of the land from which the coal in question was
mined. Was the plaintiff the owner of the land from which the coal in question
was mined? If the evidence shows the affirmative, then the judgment should
be affirmed. If the evidence shows that the land does not belong to the
plaintiff, then the judgment should be reversed, unless the plaintiff's rights fall
under section 3 of said Act.
The only witness presented by the plaintiff upon the question of the
ownership of the land in question was Mr. Dalmacio Costas, who stated that
he was a member of the board of directors of the plaintiff corporation; that the
plaintiff corporation took possession of the land in question by virtue of the
proclamation of the Governor-General, known as Proclamation No. 39 of the
year 1917; that no document had been issued in favor of the plaintiff
corporation; that said corporation had received no permission from the
Secretary of Agriculture and Natural Resources; that it took possession of
said lands covering an area of about 400 hectares, from which the coal in
question was mined, solely, by virtue of said proclamation (Exhibit B, No. 39).
Said proclamation (Exhibit B) was issued by Francis Burton Harrison, then
Governor-General, on the 18th day of October, 1917, and provided:
"Pursuant to the provision of section 71 of Act No. 926, I hereby withdraw
from settlement, entry, sale, or other disposition, all coal-bearing public lands
within the Province of Zamboanga, Department of Mindanao and Sulu, and
the Island of Polillo, Province of Tayabas." It will be noted that said
proclamation only provided that all coal-bearing public lands within said
province and island should be withdrawn from settlement, entry, sale, or
other disposition. There is nothing in said proclamation which authorizes the
plaintiff or any other person to enter upon said reversations and to mine coal,
and no provision of law has been called to our attention, by virtue of which
the plaintiff was entitled to enter upon any of the lands so reserved by said
proclamation without first obtaining permission therefor.
The plaintiff is a private corporation. The mere fact that the Government
happens to the majority stockholder does not make it a public corporation.
Act No. 2705, as amended by Act No. 2822, makes it subject to all of the
provisions of the Corporation Law, in so far as they are not inconsistent with
said Act (No. 2705). No provisions of Act No. 2705 are found to be
inconsistent with the provisions of the Corporation Law. As a private
corporation, it has no greater rights, powers or privileges than any other
corporation which might be organized for the same purpose under the
Corporation Law, and certainly it was not the intention of the Legislature to
give it a preference or right or privilege over other legitimate private
corporations in the mining of coal. While it is true that said proclamation No.
39 withdrew "from settlement, entry, sale, or other disposition of coal-bearing
public lands within the Province of Zamboanga . . . and the Island of Polillo,"
it made no provision for the occupation and operation by the plaintiff, to the
exclusion of other persons or corporations who might, under proper
permission, enter upon the operate coal mines.
On the 14th day of May, 1917, and before the issuance of said proclamation,
the Legislature of the Philippine Island in "an Act for the leasing and
development of coal lands in the Philippine Islands" (Act No. 2719), made
liberal provision. Section 1 of said Act provides: "Coal-bearing lands of the
public domain in the Philippine Island shall not be disposed of in any manner
except as provided in this Act," thereby giving a clear indication that no "coal-
bearing lands of the public domain" had been disposed of by virtue of said
proclamation.
Neither is there any provision in Act No. 2705 creating the National Coal
Company, nor in the amendments thereof found in Act No. 2822, which
authorizes the National Coal Company to enter upon any of the reserved
coal lands without first having obtained permission from the Secretary of
Agriculture and Natural Resources.lawphi1.net
The following propositions are fully sustained by the facts and the law:
(1) The National Coal Company is an ordinary private corporation organized
under Act No. 2705, and has no greater powers nor privileges than the
ordinary private corporation, except those mentioned, perhaps, in section 10
of Act No. 2719, and they do not change the situation here.
84
(2) It mined on public lands between the month of July, 1920, and the months
of March, 1922, 24,089.3 tons of coal.
(3) Upon demand of the Collector of Internal Revenue it paid a tax of P0.50 a
ton, as taxes under the provisions of article 1946 of the Administrative Code
on the 15th day of December, 1922.
(4) It is admitted that it is neither the owner nor the lessee of the lands upon
which said coal was mined.
(5) The proclamation of Francis Burton Harrison, Governor-General, of the
18th day of October, 1917, by authority of section 1 of Act No. 926,
withdrawing from settlement, entry, sale, or other dispositon all coal-bearing
public lands within the Province of Zamboanga and the Island of Polillo, was
not a reservation for the benefit of the National Coal Company, but for any
person or corporation of the Philippine Islands or of the United States.
(6) That the National Coal Company entered upon said land and mined said
coal, so far as the record shows, without any lease or other authority from
either the Secretary of Agriculture and Natural Resources or any person
having the power to grant a leave or authority.
From all of the foregoing facts we find that the issue is well defined between
the plaintiff and the defendant. The plaintiff contends that it was liable only to
pay the internal revenue and other fees and taxes provided for under section
15 of Act No. 2719; while the defendant contends, under the facts of record,
the plaintiff is obliged to pay the internal revenue duty provided for in section
1496 of the Administrative Code. That being the issue, an examination of the
provisions of Act No. 2719 becomes necessary.
An examination of said Act (No. 2719) discloses the following facts important
for consideration here:
First. All "coal-bearing lands of the public domain in the Philippine Islands
shall not be disposed of in any manner except as provided in this Act."
Second. Provisions for leasing by the Secretary of Agriculture and Natural
Resources of "unreserved, unappropriated coal-bearing public lands," and
the obligation to the Government which shall be imposed by said Secretary
upon the lessee.lawphi1.net
Third. The internal revenue duty and tax which must be paid upon coal-
bearing lands owned by any person, firm, association or corporation.
To repeat, it will be noted, first, that Act No. 2719 provides an internal
revenue duty and tax upon unreserved, unappropriated coal-bearing public
lands which may be leased by the Secretary of Agriculture and Natural
Resources; and, second, that said Act (No. 2719) provides an internal
revenue duty and tax imposed upon any person, firm, association or
corporation, who may be the owner of "coal-bearing lands." A reading of said
Act clearly shows that the tax imposed thereby is imposed upon two classes
of persons only lessees and owners.
The lower court had some trouble in determining what was the correct
interpretation of section 15 of said Act, by reason of what he believed to be
some difference in the interpretation of the language used in Spanish and
English. While there is some ground for confusion in the use of the language
in Spanish and English, we are persuaded, considering all the provisions of
said Act, that said section 15 has reference only to persons, firms,
associations or corporations which had already, prior to the existence of said
Act, become the owners of coal lands. Section 15 cannot certainty refer to
"holders or lessees of coal lands' for the reason that practically all of the
other provisions of said Act has reference to lessees or holders. If section 15
means that the persons, firms, associations, or corporation mentioned
therein are holders or lessees of coal lands only, it is difficult to understand
why the internal revenue duty and tax in said section was made different
from the obligations mentioned in section 3 of said Act, imposed upon
lessees or holders.
From all of the foregoing, it seems to be made plain that the plaintiff is neither
a lessee nor an owner of coal-bearing lands, and is, therefore, not subject to
any other provisions of Act No. 2719. But, is the plaintiff subject to the
provisions of section 1496 of the Administrative Code?
85
Section 1496 of the Administrative Code provides that "on all coal and coke
there shall be collected, per metric ton, fifty centavos." Said section (1496) is
a part of article, 6 which provides for specific taxes. Said article provides for a
specific internal revenue tax upon all things manufactured or produced in the
Philippine Islands for domestic sale or consumption, and upon things
imported from the United States or foreign countries. It having been
demonstrated that the plaintiff has produced coal in the Philippine Islands
and is not a lessee or owner of the land from which the coal was produced,
we are clearly of the opinion, and so hold, that it is subject to pay the internal
revenue tax under the provisions of section 1496 of the Administrative Code,
and is not subject to the payment of the internal revenue tax under section 15
of Act No. 2719, nor to any other provisions of said Act.

Therefore, the judgment appealed from is hereby revoked, and the defendant
is hereby relieved from all responsibility under the complaint. And, without
any finding as to costs, it is so ordered.

Street, Malcolm, Avancea, Villamor, Ostrand and Romualdez, JJ., concur.

PHILIPPINE SOCIETY FOR G.R. No. 169752

THE PREVENTION OF

CRUELTY TO ANIMALS,

Petitioners, Members:

PUNO, C.J.

86
 QUISUMBING, VELASCO, JR.,

NACHURA, and
YNARES-SANTIAGO,
REYES, JJ.

SANDOVAL-GUTIERREZ,
COMMISSION ON AUDIT,

CARPIO, DIR. RODULFO J. ARIESGA

(in his official capacity as Director

AUSTRIA-MARTINEZ,
of the Commission on Audit), MS.

CORONA, MERLE M. VALENTIN and MS.

SUSAN GUARDIAN (in their official

- versus - CARPIO-MORALES,
capacities as Team Leader and Team

Member, respectively, of the audit

AZCUNA,

Team of the Commission on Audit), Promulgated:

TINGA,

Respondents. September 25, 2007

CHICO-NAZARIO,

x-------------------------------------------------------
----x
GARCIA,
DECISION

87

AUSTRIA-MARTINEZ, J.:
Before the Court is a special civil action for Certiorari and Prohibition under
Rule 65 of the Rules of Court, in relation to Section 2 of Rule 64, filed by the
petitioner assailing Office Order No. 2005-021[1] dated September 14, 2005
issued by the respondents which constituted the audit team, as well as its
September 23, 2005 Letter[2] informing the petitioner that respondents audit
team shall conduct an audit survey on the petitioner for a detailed audit of its
accounts, operations, and financial transactions. No temporary restraining
order was issued.
The petitioner was incorporated as a juridical entity over one hundred years
ago by virtue of Act No. 1285, enacted on January 19, 1905, by the
Philippine Commission. The petitioner, at the time it was created, was
composed of animal aficionados and animal propagandists. The objects of
the petitioner, as stated in Section 2 of its charter, shall be to enforce laws
relating to cruelty inflicted upon animals or the protection of animals in the
Philippine Islands, and generally, to do and perform all things which may tend
in any way to alleviate the suffering of animals and promote their welfare. [3]
At the time of the enactment of Act No. 1285, the original Corporation Law,
Act No. 1459, was not yet in existence. Act No. 1285 antedated both the
Corporation Law and the constitution of the Securities and Exchange
Commission. Important to note is that the nature of the petitioner as a
corporate entity is distinguished from the sociedad anonimasunder the
Spanish Code of Commerce.
For the purpose of enhancing its powers in promoting animal welfare and
enforcing laws for the protection of animals, the petitioner was initially
imbued under its charter with the power to apprehend violators of animal
welfare laws. In addition, the petitioner was to share one-half (1/2) of the
fines imposed and collected through its efforts for violations of the laws
related thereto. As originally worded, Sections 4 and 5 of Act No. 1285
provide:
SEC. 4. The said society is authorized to appoint not
to exceed five agents in the City of Manila, and not to exceed
two in each of the provinces of the Philippine Islands who
shall have all the power and authority of a police officer to
make arrests for violation of the laws enacted for the
prevention of cruelty to animals and the protection of
animals, and to serve any process in connection with the
execution of such laws; and in addition thereto, all the police
force of the Philippine Islands, wherever organized, shall, as
occasion requires, assist said society, its members or
agents, in the enforcement of all such laws.
SEC. 5. One-half of all the fines imposed and
collected through the efforts of said society, its members or
its agents, for violations of the laws enacted for the
prevention of cruelty to animals and for their protection, shall
belong to said society and shall be used to promote its
objects.
(emphasis supplied)
88
Subsequently, however, the power to make arrests as well as the privilege to
retain a portion of the fines collected for violation of animal-related laws were
recalled by virtue of Commonwealth Act (C.A.) No. 148, [4] which reads, in its Sec. 3. This Act shall take effect upon its approval.
entirety, thus:

Approved, November 8, 1936. (Emphasis supplied)

Be it enacted by the National Assembly of the Philippines:

Section 1. Section four of Act Numbered Twelve hundred

and eighty-five as amended by Act Numbered Thirty five Immediately thereafter, then President Manuel L. Quezon issued Executive
hundred and forty-eight, is hereby further amended so as to Order (E.O.) No. 63 dated November 12, 1936, portions of which provide:
read as follows:

Whereas, during the first regular session of the National

Sec. 4. The said society is authorized to
appoint not to exceed ten agents in the City
of Manila, and not to exceed one in each
municipality of the Philippines who shall
have the authority to denounce to regular
peace officers any violation of the laws
enacted for the prevention of cruelty to
animals and the protection of animals and to
cooperate with said peace officers in the
prosecution of transgressors of such laws.
Assembly, Commonwealth Act Numbered One Hundred
Forty Eight was enacted depriving the agents of the Society
for the Prevention of Cruelty to Animals of their power to
arrest persons who have violated the laws prohibiting cruelty
to animals thereby correcting a serious defect in one of the
laws existing in our statute books.
xxxx

Sec. 2. The full amount of the fines collected for violation of

the laws against cruelty to animals and for the protection of Whereas, the cruel treatment of animals is an offense
animals, shall accrue to the general fund of the against the State, penalized under our statutes, which the
Municipality where the offense was committed. Government is duty bound to enforce;

89

Now, therefore, I, Manuel L. Quezon, President of the
Philippines, pursuant to the authority conferred upon me by
the Constitution, hereby decree, order, and direct the
Commissioner of Public Safety, the Provost Marshal General
as head of the Constabulary Division of the Philippine Army,
every Mayor of a chartered city, and every municipal
president to detail and organize special members of the
police force, local, national, and the Constabulary to watch,
capture, and prosecute offenders against the laws enacted
to prevent cruelty to animals. (Emphasis supplied)
On December 1, 2003, an audit team from respondent Commission on Audit
(COA) visited the office of the petitioner to conduct an audit survey pursuant
to COA Office Order No. 2003-051 dated November 18, 2003[5] addressed to
the petitioner. The petitioner demurred on the ground that it was a private
entity not under the jurisdiction of COA, citing Section 2(1) of Article IX of the
Constitution which specifies the general jurisdiction of the COA, viz:
Section 1. General Jurisdiction. The Commission on Audit
shall have the power, authority, and duty to examine, audit,
and settle all accounts pertaining to the revenue and
receipts of, and expenditures or uses of funds and property,
owned or held in trust by, or pertaining to the Government,
or any of its subdivisions, agencies, or instrumentalities,
including government-owned and controlled corporations
with original charters, and on a post-audit basis: (a)
constitutional bodies, commissions and officers that have
been granted fiscal autonomy under the Constitution; (b)
autonomous state colleges and universities; (c) other
government-owned or controlled corporations and their
subsidiaries; and (d) such non-governmental entities
receiving subsidy or equity, directly or indirectly, from or
through the government, which are required by law or the
granting institution to submit to such audit as a condition of
subsidy or equity.However, where the internal control system
of the audited agencies is inadequate, the Commission may
adopt such measures, including temporary or special pre-
audit, as are necessary and appropriate to correct the
deficiencies. It shall keep the general accounts of the
Government, and for such period as may be provided by law,
preserve the vouchers and other supporting papers
pertaining thereto. (Emphasis supplied)
Petitioner explained thus:
a. Although the petitioner was created by special legislation, this
necessarily came about because in January 1905 there was as
yet neither a Corporation Law or any other general law under
which it may be organized and incorporated, nor a Securities and
Exchange Commission which would have passed upon its
organization and incorporation.
b. That Executive Order No. 63, issued during the Commonwealth
period, effectively deprived the petitioner of its power to make
arrests, and that the petitioner lost its operational funding,
underscore the fact that it exercises no governmental function. In
fine, the government itself, by its overt acts, confirmed petitioners
status as a private juridical entity.
90
The COA General Counsel issued a Memorandum [6] dated May 6, 2004,
asserting that the petitioner was subject to its audit authority. In a letter
dated May 17, 2004,[7]respondent COA informed the petitioner of the result of
the evaluation, furnishing it with a copy of said Memorandum dated May 6,
2004 of the General Counsel. Hence, herein Petition on the following grounds:

A.

Petitioner thereafter filed with the respondent COA a Request for Re-
evaluation dated May 19, 2004,[8] insisting that it was a private domestic
corporation.
RESPONDENT COMMISSION ON AUDIT COMMITTED
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION WHEN IT RULED THAT
PETITIONER IS SUBJECT TO ITS AUDIT AUTHORITY.
Acting on the said request, the General Counsel of respondent COA, in a
Memorandum dated July 13, 2004,[9] affirmed her earlier opinion that the
petitioner was a government entity that was subject to the audit jurisdiction of
respondent COA. In a letter dated September 14, 2004, the respondent COA
B.
informed the petitioner of the result of the re-evaluation, maintaining its
position that the petitioner was subject to its audit jurisdiction, and requested
an initial conference with the respondents.

PETITIONER IS ENTITLED TO THE RELIEF SOUGHT,

In a Memorandum dated September 16, 2004, Director Delfin Aguilar
reported to COA Assistant Commissioner Juanito Espino, Corporate
Government Sector, that the audit survey was not conducted due to the
refusal of the petitioner because the latter maintained that it was a private
corporation.
THERE BEING NO APPEAL, NOR ANY PLAIN, SPEEDY
AND ADEQUATE REMEDY IN THE ORDINARY COURSE
OF LAW AVAILABLE TO IT.[10]
The essential question before this Court is whether the petitioner qualifies as
a government agency that may be subject to audit by respondent COA.

Petitioner received on September 27, 2005 the subject COA Office Order Petitioner argues: first, even though it was created by special legislation in
2005-021 dated September 14, 2005 and the COA Letter dated September 1905 as there was no general law then existing under which it may be
23, 2005. organized or incorporated, it exercises no governmental functions because
these have been revoked by C.A. No. 148 and E.O. No. 63; second, nowhere

91
in its charter is it indicated that it is a public corporation, unlike, for instance,
C.A. No. 111 which created the Boy Scouts of the Philippines, defined its
powers and purposes, and specifically stated that it was An Act to Create a
Public Corporation in which, even as amended by Presidential Decree No.
460, the law still adverted to the Boy Scouts of the Philippines as a public
corporation, all of which are not obtaining in the charter of the
petitioner; third, if it were a government body, there would have been no
need for the State to grant it tax exemptions under Republic Act No. 1178,
and the fact that it was so exempted strengthens its position that it is a
private institution; fourth, the employees of the petitioner are registered and
covered by the Social Security System at the latters initiative and not through
the Government Service Insurance System, which should have been the
case had the employees been considered government employees; fifth, the
petitioner does not receive any form of financial assistance from the
government, since C.A. No. 148, amending Section 5 of Act No. 1285, states
that the full amount of the fines, collected for violation of the laws against
cruelty to animals and for the protection of animals, shall accrue to the
general fund of the Municipality where the offense was committed; sixth, C.A.
No. 148 effectively deprived the petitioner of its powers to make arrests and
serve processes as these functions were placed in the hands of the police
force; seventh, no government appointee or representative sits on the board
of trustees of the petitioner; eighth, a reading of the provisions of its charter
(Act No. 1285) fails to show that any act or decision of the petitioner is
subject to the approval of or control by any government agency, except to the
extent that it is governed by the law on private corporations in general; and
finally, ninth, the Committee on Animal Welfare, under the Animal Welfare Act
of 1998, includes members from both the private and the public sectors.
The respondents contend that since the petitioner is a body politic created by
virtue of a special legislation and endowed with a governmental purpose,
then, indubitably, the COA may audit the financial activities of the
latter. Respondents in effect divide their contentions into six strains: first, the
test to determine whether an entity is a government corporation lies in the
manner of its creation, and, since the petitioner was created by virtue of a
special charter, it is thus a government corporation subject to respondents
auditing power; second, the petitioner exercises sovereign powers, that is, it
is tasked to enforce the laws for the protection and welfare of animals which
ultimately redound to the public good and welfare, and, therefore, it is
deemed to be a government instrumentality as defined under the
Administrative Code of 1987, the purpose of which is connected with the
administration of government, as purportedly affirmed by American
jurisprudence; third, by virtue of Section 23, [11] Title II, Book III of the same
Code, the Office of the President exercises supervision or control over the
petitioner; fourth, under the same Code, the requirement under its special
charter for the petitioner to render a report to the Civil Governor, whose
functions have been inherited by the Office of the President, clearly reflects
the nature of the petitioner as a government instrumentality; fifth, despite the
passage of the Corporation Code, the law creating the petitioner had not
been abolished, nor had it been re-incorporated under any general
corporation law; and finally, sixth, Republic Act No. 8485, otherwise known as
the Animal Welfare Act of 1998, designates the petitioner as a member of its
Committee on Animal Welfare which is attached to the Department of
Agriculture.
In view of the phrase One-half of all the fines imposed and collected through
the efforts of said society, the Court, in a Resolution dated January 30, 2007,
required the Office of the Solicitor General (OSG) and the parties to
comment on: a) petitioner's authority to impose fines and the validity of the
provisions of Act No. 1285 and Commonwealth Act No. 148 considering that
there are no standard measures provided for in the aforecited laws as to the
manner of implementation, the specific violations of the law, the person/s
authorized to impose fine and in what amount; and, b) the effect of the 1935
and 1987 Constitutions on whether petitioner continues to exist or should
organize as a private corporation under the Corporation Code, B.P. Blg. 68
as amended.
92
Petitioner and the OSG filed their respective Comments. Respondents filed a
Manifestation stating that since they were being represented by the OSG
which filed its Comment, they opted to dispense with the filing of a separate First, the Court agrees with the petitioner that the charter test cannot be
one and adopt for the purpose that of the OSG. applied.

The petitioner avers that it does not have the authority to impose fines for Essentially, the charter test as it stands today provides:
violation of animal welfare laws; it only enjoyed the privilege of sharing in the
fines imposed and collected from its efforts in the enforcement of animal
welfare laws; such privilege, however, was subsequently abolished by C.A.
No. 148; that it continues to exist as a private corporation since it was
[T]he test to determine whether a corporation is government
created by the Philippine Commission before the effectivity of the
owned or controlled, or private in nature is simple. Is it
Corporation law, Act No. 1459; and the 1935 and 1987 Constitutions.
created by its own charter for the exercise of a public
function, or by incorporation under the general corporation
law? Those with special charters are government
corporations subject to its provisions, and its employees are
The OSG submits that Act No. 1285 and its amendatory laws did not give under the jurisdiction of the Civil Service Commission, and
petitioner the authority to impose fines for violation of laws [12] relating to the are compulsory members of the Government Service
prevention of cruelty to animals and the protection of animals; that even prior Insurance System. xxx (Emphasis supplied)[13]
to the amendment of Act No. 1285, petitioner was only entitled to share in the
fines imposed; C.A. No. 148 abolished that privilege to share in the fines
collected; that petitioner is a public corporation and has continued to exist
since Act No. 1285; petitioner was not repealed by the 1935 and 1987
The petitioner is correct in stating that the charter test is predicated, at best,
Constitutions which contain transitory provisions maintaining all laws issued
on the legal regime established by the 1935 Constitution, Section 7, Article
not inconsistent therewith until amended, modified or repealed.
XIII, which states:

The petition is impressed with merit.

Sec. 7. The National Assembly shall not, except by general
law, provide for the formation, organization, or regulation of
private corporations, unless such corporations are owned or
controlled by the Government or any subdivision or
The arguments of the parties, interlaced as they are, can be disposed of in instrumentality thereof.[14]
five points.

93

The foregoing proscription has been carried over to the 1973 and the 1987
Constitutions. Section 16 of Article XII of the present Constitution provides:
Sec. 16. The Congress shall not, except by general
law, provide for the formation, organization, or regulation of
private corporations. Government-owned or controlled
corporations may be created or established by special
charters in the interest of the common good and subject to
the test of economic viability.
Section 16 is essentially a re-enactment of Section 7 of Article XVI of the
1935 Constitution and Section 4 of Article XIV of the 1973 Constitution.
During the formulation of the 1935 Constitution, the Committee on
Franchises recommended the foregoing proscription to prevent the pressure
of special interests upon the lawmaking body in the creation of corporations
or in the regulation of the same. To permit the lawmaking body by special law
to provide for the organization, formation, or regulation of private
corporations would be in effect to offer to it the temptation in many cases to
favor certain groups, to the prejudice of others or to the prejudice of the
interests of the country.[15]
And since the underpinnings of the charter test had been introduced by the
1935 Constitution and not earlier, it follows that the test cannot apply to the
petitioner, which was incorporated by virtue of Act No. 1285, enacted
on January 19, 1905. Settled is the rule that laws in general have no
retroactive effect, unless the contrary is provided. [16] All statutes are to be
construed as having only a prospective operation, unless the purpose and
intention of the legislature to give them a retrospective effect is expressly
declared or is necessarily implied from the language used. In case of doubt,
the doubt must be resolved against the retrospective effect. [17]
There are a few exceptions. Statutes can be given retroactive effect in the
following cases: (1) when the law itself so expressly provides; (2) in case of
remedial statutes; (3) in case of curative statutes; (4) in case of laws
interpreting others; and (5) in case of laws creating new rights. [18] None of the
exceptions is present in the instant case.
The general principle of prospectivity of the law likewise applies to Act No.
1459, otherwise known as the Corporation Law, which had been enacted by
virtue of the plenary powers of the Philippine Commission on March 1, 1906,
a little over a year after January 19, 1905, the time the petitioner emerged as
a juridical entity. Even the Corporation Law respects the rights and powers of
juridical entities organized beforehand, viz:
SEC. 75. Any corporation or sociedad anonima formed,
organized, and existing under the
laws of the Philippine Islands and lawfully transacting busine
ss in the Philippine Islands on the date of the passage of this
Act, shall be subject to the provisions hereof so far as such
provisions may be applicable and shall
be entitled at its option either to continue business as such
corporation or to reform and organize under and by virtue of
the provisions of this Act, transferring all corporate interests
to the new corporation which, if a stock corporation, is
authorized to issue its shares of stock at par to the
94
 stockholders or members of the old corporation according to
their interests. (Emphasis supplied).
As pointed out by the OSG, both the 1935 and 1987 Constitutions contain
transitory provisions maintaining all laws issued not inconsistent therewith
until amended, modified or repealed.[19]
In a legal regime where the charter test doctrine cannot be applied, the mere
fact that a corporation has been created by virtue of a special law does not
necessarily qualify it as a public corporation.
What then is the nature of the petitioner as a corporate entity? What legal
regime governs its rights, powers, and duties?
As stated, at the time the petitioner was formed, the applicable law was the
Philippine Bill of 1902, and, emphatically, as also stated above, no
proscription similar to the charter test can be found therein.
The textual foundation of the charter test, which placed a limitation on the
power of the legislature, first appeared in the 1935 Constitution. However, the
petitioner was incorporated in 1905 by virtue of Act No. 1258, a law
antedating the Corporation Law (Act No. 1459) by a year, and the 1935
Constitution, by thirty years. There being neither a general law on the
formation and organization of private corporations nor a restriction on the
legislature to create private corporations by direct legislation, the Philippine
Commission at that moment in history was well within its powers in 1905 to
constitute the petitioner as a private juridical entity.
Time and again the Court must caution even the most brilliant scholars of the
law and all constitutional historians on the danger of imposing legal concepts
of a later date on facts of an earlier date.[20]
The amendments introduced by C.A. No. 148 made it clear that the petitioner
was a private corporation and not an agency of the government. This was
evident in Executive Order No. 63, issued by then President of the
Philippines Manuel L. Quezon, declaring that the revocation of the powers of
the petitioner to appoint agents with powers of arrest corrected a serious
defect in one of the laws existing in the statute books.
As a curative statute, and based on the doctrines so far discussed, C.A. No.
148 has to be given retroactive effect, thereby freeing all doubt as to which
class of corporations the petitioner belongs, that is, it is a quasi-public
corporation, a kind of private domestic corporation, which the Court will
further elaborate on under the fourth point.
Second, a reading of petitioners charter shows that it is not subject to control
or supervision by any agency of the State, unlike government-owned and
-controlled corporations.No government representative sits on the board of
trustees of the petitioner. Like all private corporations, the successors of its
members are determined voluntarily and solely by the petitioner in
accordance with its by-laws, and may exercise those powers generally
accorded to private corporations, such as the powers to hold property, to sue
and be sued, to use a common seal, and so forth. It may adopt by-laws for its
internal operations: the petitioner shall be managed or operated by its
officers in accordance with its by-laws in force. The pertinent provisions of
the charter provide:
95
 Section 1. Anna L. Ide, Kate S. Wright, John L.
Chamberlain, William F. Tucker, Mary S.
Fergusson, Amasa S. Crossfield, Spencer Cosby, Sealy
B. Rossiter, Richard P. Strong, Jose Robles Lahesa,
Josefina R. de Luzuriaga, and such other persons as may be
associated with them in conformity with this act, and their
successors, are hereby constituted and created a body
politic and corporate at law, under the name and style of The
Philippines Society for the Prevention of Cruelty to Animals.
As incorporated by this Act, said society shall have
the power to add to its organization such and as many
members as it desires, to provide for and choose such
officers as it may deem advisable,
and in such manner as it may wish, and to remove members
as it shall provide.
It shall have the right to sue and be sued, to use a
common seal, to
receive legacies and donations, to conduct social enterprises
for the purpose of obtaining funds, to levy dues upon
itsmembers and provide for their collection to hold real and
personal estate such as may be necessary for the
accomplishment of the purposes of the society, and to adopt
such by-laws for its government as may not be inconsistent
with law or this charter.
xxxx
Sec. 3. The said society shall be operated under the
direction of its officers, in accordance with its by-laws in
force, and this charter.
xxxx
Sec. 6. The principal office of the society shall be
kept in the city of Manila, and the society shall have full
power to locate and establish branch offices of the society
wherever it may deem advisable in the Philippine Islands,
such branch offices to be under the supervision and control
of the principal office.
Third. The employees of the petitioner are registered and covered by the
Social Security System at the latters initiative, and not through the
Government Service Insurance System, which should be the case if the
employees are considered government employees. This is another indication
of petitioners nature as a private entity. Section 1 of Republic Act No. 1161,
as amended by Republic Act No. 8282, otherwise known as the Social
Security Act of 1997, defines the employer:
Employer Any person, natural or juridical, domestic
or foreign, who carries on in the Philippines any trade,
business, industry, undertaking or activity of any kind and
uses the services of another person who is under his orders
as regards the employment, except the Government and any
96
 of its political subdivisions, branches or instrumentalities,
including corporations owned or controlled by the
Government: Provided, That a self-employed person shall be
both employee and employer at the same time. (Emphasis
supplied)
Fourth. The respondents contend that the petitioner is a body politic because
its primary purpose is to secure the protection and welfare of animals which,
in turn, redounds to the public good.
This argument, is, at best, specious. The fact that a certain juridical entity is
impressed with public interest does not, by that circumstance alone, make
the entity a public corporation, inasmuch as a corporation may be private
although its charter contains provisions of a public character, incorporated
solely for the public good. This class of corporations may be considered
quasi-public corporations, which are private corporations that render public
service, supply public wants,[21] or pursue other eleemosynary
objectives. While purposely organized for the gain or benefit of its members,
they are required by law to discharge functions for the public
benefit. Examples of these corporations are utility,[22] railroad, warehouse,
telegraph, telephone, water supply corporations and transportation
companies.[23] It must be stressed that a quasi-public corporation is a
species of private corporations, but the qualifying factor is the type of
service the former renders to the public: if it performs a public service, then it
becomes a quasi-public corporation.[24]
Authorities are of the view that the purpose alone of the corporation cannot
be taken as a safe guide, for the fact is that almost all corporations are
nowadays created to promote the interest, good, or convenience of the
public. A bank, for example, is a private corporation; yet, it is created for a
public benefit. Private schools and universities are likewise private
corporations; and yet, they are rendering public service. Private hospitals and
wards are charged with heavy social responsibilities. More so with all
common carriers. On the other hand, there may exist a public corporation
even if it is endowed with gifts or donations from private individuals.
The true criterion, therefore, to determine whether a corporation is public or
private is found in the totality of the relation of the corporation to the State. If
the corporation is created by the State as the latters own agency or
instrumentality to help it in carrying out its governmental functions, then that
corporation is considered public; otherwise, it is private. Applying the above
test, provinces, chartered cities, and barangays can best exemplify public
corporations. They are created by the State as its own device and agency for
the accomplishment of parts of its own public works.[25]
It is clear that the amendments introduced by C.A. No. 148 revoked the
powers of the petitioner to arrest offenders of animal welfare laws and the
power to serve processes in connection therewith.
Fifth. The respondents argue that since the charter of the petitioner requires
the latter to render periodic reports to the Civil Governor, whose functions
have been inherited by the President, the petitioner is, therefore, a
government instrumentality.
This contention is inconclusive. By virtue of the fiction that all corporations
owe their very existence and powers to the State, the reportorial requirement
is applicable to all corporations of whatever nature, whether they are public,
quasi-public, or private corporationsas creatures of the State, there is a
97
reserved right in the legislature to investigate the activities of a corporation to hand when charged with an abuse of such privileges.
determine whether it acted within its powers. In other words, the reportorial (Wilson v. United States, 55 Law Ed., 771, 780.)[27]
requirement is the principal means by which the State may see to it that its
creature acted according to the powers and functions conferred upon
it. These principles were extensively discussed in Bataan Shipyard &
Engineering Co., Inc. v. Presidential Commission on Good Government. WHEREFORE, the petition is GRANTED. Petitioner is DECLARED a private
[26]
Here, the Court, in holding that the subject corporation could not invoke domestic corporation subject to the jurisdiction of the Securities and
the right against self-incrimination whenever the State demanded the Exchange Commission. The respondents are ENJOINED from investigating,
production of its corporate books and papers, extensively discussed the examining and auditing the petitioner's fiscal and financial affairs.
purpose of reportorial requirements, viz:

SO ORDERED.
x x x The corporation is a creature of the state. It is
presumed to be incorporated for the benefit of the public. It
received certain special privileges and franchises, and holds
them subject to the laws of the state and the limitations of its
charter. Its powers are limited by law. It can make no
contract not authorized by its charter. Its rights to act as a
corporation are only preserved to it so long as it obeys the
laws of its creation. There is a reserve[d] right in the
legislature to investigate its contracts and find out whether it
has exceeded its powers. It would be a strange anomaly to
hold that a state, having chartered a corporation to make
use of certain franchises, could not, in the exercise of
sovereignty, inquire how these franchises had been G.R. No. 95237-38 September 13, 1991
employed, and whether they had been abused, and demand
the production of the corporate books and papers for that
DAVAO CITY WATER DISTRICT, CAGAYAN DE ORO CITY WATER
purpose. The defense amounts to this, that an officer of the
DISTRICT, METRO CEBU WATER DISTRICT, ZAMBOANGA CITY WATER
corporation which is charged with a criminal violation of the
DISTRICT, LEYTE METRO WATER DISTRICT, BUTUAN CITY WATER
statute may plead the criminality of such corporation as a
DISTRICT, CAMARINES NORTE WATER DISTRICT, LAGUNA WATER
refusal to produce its books. To state this proposition is to
DISTRICT, DUMAGUETE CITY WATER DISTRICT, LA UNION WATER
answer it. While an individual may lawfully refuse to answer
DISTRICT, BAYBAY WATER DISTRICT, METRO LINGAYEN WATER
incriminating questions unless protected by an immunity
DISTRICT, URDANETA WATER DISTRICT, COTABATO CITY WATER
statute, it does not follow that a corporation vested with
DISTRICT, MARAWI WATER DISTRICT, TAGUM WATER DISTRICT,
special privileges and franchises may refuse to show its
DIGOS WATER DISTRICT, BISLIG WATER DISTRICT, and MECAUAYAN

98
WATER DISTRICT,petitioners,
vs.
CIVIL SERVICE COMMISSION, and COMMISSION ON
AUDIT, respondents.
Rodolfo S. De Jesus for petitioners.
Evalyn H. Itaas-Fetalino, Rogelio C. Limare and Daisy B. Garcia-Tingzon for
CSC.
MEDIALDEA, J.:p
Whether or not the Local Water Districts formed and created pursuant to the
provisions of Presidential Decree No. 198, as amended, are government-
owned or controlled corporations with original charter falling under the Civil
Service Law and/or covered by the visitorial power of the Commission on
Audit is the issue which the petitioners entreat this Court, en banc, to shed
light on.
Petitioners are among the more than five hundred (500) water districts
existing throughout the country formed pursuant to the provisions of
Presidential Decree No. 198, as amended by Presidential Decrees Nos. 768
and 1479, otherwise known as the "Provincial Water Utilities Act of 1973."
Presidential Decree No. 198 was issued by the then President Ferdinand E.
Marcos by virtue of his legislative power under Proclamation No. 1081. It
authorized the different local legislative bodies to form and create their
respective water districts through a resolution they will pass subject to the
guidelines, rules and regulations therein laid down. The decree further
created and formed the "Local Water Utilities Administration" (LWUA), a
national agency attached to the National Economic and Development
Authority (NEDA), and granted with regulatory power necessary to optimize
public service from water utilities operations.
The respondents, on the other hand, are the Civil Service Commission (CSC)
and the Commission on Audit (COA), both government agencies and
represented in this case by the Solicitor General.
On April 17, 1989, this Court ruled in the case of Tanjay Water District v.
Gabaton, et al. (G.R. No. 63742, 172 SCRA 253):
Significantly, Article IX (B), Section 2(1) of the 1987
Constitution provides that the Civil Service embraces all
branches, subdivisions, instrumentalities, and agencies of
the government, including government-owned and controlled
corporations with original charters. Inasmuch as PD No. 198,
as amended, is the original charter of the petitioner, Tanjay
Water District, and respondent Tarlac Water District and all
water districts in the country, they come under the coverage
of the Civil Service Law, rules and regulations. (Sec. 35, Art.
VIII and Sec. 37, Art. IX of PD No. 807).
As an offshoot of the immediately cited ruling, the CSC. issued Resolution
No. 90-575, the dispositive portion of which reads:
NOW THEREFORE, in view of all the foregoing, the
Commission resolved, as it hereby resolves to rule that Local
Water Districts, being quasi-public corporations created by
law to perform public services and supply public wants, the
matter of hiring and firing of its officers and employees
should be governed by the Civil Service Law, rules and
regulations. Henceforth, all appointments of personnel of the
different local water districts in the country shall be submitted
to the Commission for appropriate action. (Rollo. p. 22).
However, on May 16, 1990, in G.R. No. 85760, entitled "Metro Iloilo Water
District v. National Labor Relations Commission, et al.," the Third Division of
this Court ruled in a minute resolution:
xxx xxx xxx
99
 Considering that PD 198 is a general legislation empowering
and/or authorizing government agencies and entities to
create water districts, said PD 198 cannot be considered as
the charter itself creating the Water District. Public
respondent NLRC did not commit any grave abuse of
discretion in holding that the operative act, that created the
Metro Iloilo Water District was the resolution of the
Sangguniang Panglunsod of Iloilo City. Hence, the
employees of Water Districts are not covered by Civil
Service Laws as the latter do (sic) not have original charters.
In adherence to the just cited ruling, the CSC suspended the implementation
of Resolution No. 90-575 by issuing Resolution No. 90-770 which reads:
xxx xxx xxx
NOW, THEREFORE, in view of all the foregoing, the
Commission resolved to rule, as it hereby rules, that the
implementation of CSC. Resolution No. 575 dated June 27,
1990 be deferred in the meantime pending clarification from
the Supreme Court are regards its conflicting decisions in
the cases of Tanjay Water District v. Gabaton and Metro
Iloilo Water District v. National Labor Relations
Commission. (p. 26, Rollo)
In the meanwhile, there exists a divergence of opinions between COA on one
hand, and the (LWUA), on the other hand, with respect to the authority of
COA to audit the different water districts.
COA opined that the audit of the water districts is simply an act of
discharging the visitorial power vested in them by law (letter of COA to LWUA
dated August 13, 1985, pp. 29-30, Rollo).
On the other hand, LWUA maintained that only those water districts with
subsidies from the government fall within the COA's jurisdiction and only to
the extent of the amount of such subsidies, pursuant to the provision of the
Government Auditing Code of the Phils.
It is to be observed that just like the question of whether the employees of
the water districts falls under the coverage of the Civil Service Law, the
conflict between the water districts and the COA is also dependent on the
final determination of whether or not water districts are government-owned or
controlled corporations with original charter. The reason behind this is Sec.
2(1), Article IX-D of the 1987 constitution which reads:
Sec. 2(1) The Commission on Audit shall have the power,
authority, and duty to examine, audit, and settle all accounts
pertaining to the revenue and receipts of, and expenditures
or uses of funds and property, owned or held in trust by, or
pertaining to the Government, or any of its subdivisions,
agencies or instrumentalities, including government-owned
or controlled corporations with original charters, and on a
post audit basis. (emphasis supplied)
Petitioners' main argument is that they are private corporations without
original charter, hence they are outside the jurisdiction of respondents CSC
and COA. Reliance is made on the Metro Iloilo case which declared
petitioners as quasi-public corporations created by virtue of PD 198, a
general legislation which cannot be considered as the charter itself creating
the water districts. Holding on to this ruling, petitioners contend that they are
private corporations which are only regarded as quasi-public or semi-public
because they serve public interest and convenience and that since PD 198 is
a general legislation, the operative act which created a water district is not
the said decree but the resolution of the sanggunian concerned.
After a fair consideration of the parties' arguments coupled with a careful
study of the applicable laws as well as the constitutional provisions involved,
We rule against the petitioners and reiterate Our ruling in Tanjay case
declaring water districts government-owned or controlled corporations with
original charter.
100
As early as Baguio Water District v. Trajano, et al., (G.R. No. 65428,
February 20, 1984, 127 SCRA 730), We already ruled that a water district is
a corporation created pursuant to a special law P.D. No. 198, as
amended, and as such its officers and employees are covered by the Civil
Service Law.
In another case (Hagonoy Water District v. NLRC, G.R. No. 81490, August
31, 1988, 165 SCRA 272), We ruled once again that local water districts are
quasi-public corporations whose employees belong to the Civil Service. The
Court's pronoucement in this case, as extensively quoted in
the Tanjay case, supra, partly reads:
"The only question here is whether or not local water districts
are governmkent owned or controlled corporations whose
employees are subject to the provisions of the Civil Service
Law. The Labor Arbiter asserted jurisdiction over the alleged
illegal dismissal of private respondent Villanueva by relying
on Section 25 of Presidential decree No. 198, known as the
Provincial Water Utilities Act of 1973" which went onto effect
in 25 May 1973, and which provides as follows:
Exemption from Civil Service. The district
and its employees, being engaged in a
proprietary function, are hereby exempt from
the provisions of the Civil Service Law.
Collective Bargaining shall be available only
to personnel below supervisory
levels: Provided, however, That the total of
all salaries, wages emoluments, benefits or
other compensation paid to all employees in
any month shall not exceed fifty percent
(50%) of average net monthy revenue. Said
net revenue representing income from water
sales and sewerage service charges, less
pro-rata share of debt service and expenses
for fuel or energy for pumping during the
preceding fiscal year.
The Labor Arbiter failed to take into accout the provisions of
Presidential Decree No. 1479, which went into effect on 11
June 1978, P.D. No. 1479, wiped away Section 25 of PD 198
quoted above, and Section 26 of PD 198 was renumbered
as Section 25 in the following manner:
Section 26 of the same decree PD 198 is hereby amended
to read as Section 25 as follows:
Section 25. Authorization. The district may exercise all
the powers which are expressly granted by this Title or which
are necessarily implied from or incidental to the powers and
purposes herein stated. For the purpose of carrying out the
objectives of this Act, a district is hereby granted the power
of eminent domain, the exercise thereof shall, however, be
subject to review by the Administration.
Thus, Section 25 of PD 198 exempting the employees of
water districts from the application of the Civil Service Law
was removed from the statute books:
xxx xxx xxx
We grant the petition for the following reasons:
1. Section 25 of PD No. 198 was repealed by Section 3 of
PD No. 1479; Section 26 of PD No. 198 was amended ro
read as Sec. 25 by Sec. 4 of PD No. 1479. The amendatory
decree took effect on June 11, 1978.
xxx xxx xxx
3. The BWD is a corporation created pursuant to a special
law PD No. 198, as amended. As such its officers and
employees are part of the Civil Service (Sec. 1, Art. XII-B,
[1973] Constitution; PD No. 868).
101
Ascertained from a consideration of the whole statute, PD 198 is a special
law applicable only to the different water districts created pursuant thereto. In
all its essential terms, it is obvious that it pertains to a special purpose which
is intended to meet a particular set of conditions and cirmcumstances. The
fact that said decree generally applies to all water districts throughout the
country does not change the fact that PD 198 is a special law. Accordingly,
this Court's resolution in Metro Iloilo case declaring PD 198 as a general
legislation is hereby abandoned.
By "government-owned or controlled corporation with original charter," We
mean government owned or controlled corporation created by a special law
and not under the Corporation Code of the Philippines. Thus, in the case
of Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170 SCRA 79, 82),
We held:
The Court, in National Service Corporation (NASECO) v.
National Labor Relations Commission, G.R. No 69870,
promulgated on 29 November 1988, quoting extensively
from the deliberations of 1986 Constitutional Commission in
respect of the intent and meaning of the new phrase "with
original character," in effect held that government-owned
and controlled corporations with original charter refer to
corporations chartered by special law as distinguished from
corporations organized under our general incorporation
statute the Corporations Code. In NASECO, the company
involved had been organized under the general incorporation
statute and was a sbusidiary of the National Investment
Development Corporation (NIDC) which in turn was a
subsidiary of the Philippine National Bank, a bank chartered
by a special statute. Thus, government-owned or controlled
corporations like NASECO are effectively, excluded from the
scope of the Civil Service. (emphasis supplied)
From the foregoing pronouncement, it is clear that what has been excluded
from the coverage of the CSC are those corporations created pursuant to the
Corporation Code. Significantly, petitioners are not created under the said
code, but on the contrary, they were created pursuant to a special law and
are governed primarily by its provision.
No consideration may thus be given to petitioners' contention that the
operative act which created the water districts are the resolutions of the
respective local sanggunians and that consequently, PD 198, as amended,
cannot be considered as their charter.
It is to be noted that PD 198, as amended is the source of authorization and
power to form and maintain a district. Section 6 of said decree provides:
Sec. 6. Formation of District. This Act is the source of
authorization and power to form and maintain a district.
Once formed, a district is subject to the provisions of this Act
and not under the jurisdiction of any political
subdivision, . . . .
Moreover, it must be observed that PD 198, contains all the essential terms
necessary to constitute a charter creating a juridical person. For example,
Section 6(a) provides for the name that will be used by a water district, thus:
Sec. 6. . . . To form a district, the legislative body of any city,
municipality or province shall enact a resolution containing
the following:
a) The name of the local water district, which shall include
the name of the city, municipality, or province, or region
thereof, served by said system, followed by the words "Water
District."
It also prescribes for the numbers and qualifications of the members of the
Board of Directors:
Sec. 8. Number and Qualification. The Board of Directors
of a district shall be composed of five citizens of the
Philippines who are of voting age and residents within the
102
 district. One member shall be a representative of civic-
oriented service clubs, one member of representative of
professional associations, one member a representative of
business, commercial or financial organizations, one
member a representative of educational institutions and one
member a representative of women's organization. No public
official shall serve as director. Provided, however, that if the
district has availed of the financial assistance of the
Administration, the Administration may appoint any of its
personnel to sit in the board of directors with all the rights
and privileges appertaining to a regular member for such
period as the indebtedness remains unpaid in which case
the board shall be composed of six members; (as amended
by PDs Nos. 768 and 1479).
the manner of their appointment and nominations;
Sec. 9. Appointment. Board members shall be appointed
by the appointing authority. Said appointments shall be made
from a list of nominees, if any, submitted pursuant to Section
10. If no nominations are submitted, the appointing authority
shall appoint any qualified person of the category to the
vacant position;
Sec.10. Nominations. On or before October 1 of each
even numbered year, the secretary of the district shall
contact each known organization, association, or institution
being represented by the director whose term will expire on
December 31 and solicit nominations from these
organizations to fill the position for the ensuing term. One
nomination may be submitted in writing by each such
organization to the Secretary of the district on or before
November 1 of such year: This list of nominees shall be
transmitted by the Secretary of the district to the office of the
appointing authority on or before November 15 of such year
and he shall make his appointment from the list submitted on
or before December 15. In the event the appointing authority
fails to make his appointments on or before December 15,
selection shall be made from said list of nominees by
majority vote of the seated directors of the district
constituting a quorum. Initial nominations for all five seats of
the board shall be solicited by the legislative body or bodies
at the time of adoption of the resolution forming the district.
Thirty days thereafter, a list of nominees shall be submitted
to the provincial governor in the event the resolution forming
the district is by a provincial board, or the mayor of the city or
municipality in the event the resolution forming the adoption
of the district is by the city or municipal board of councilors,
who shall select the initial directors therefrom within 15 days
after receipt of such nominations;
their terms of office:
Sec. 11. Term of Office. Of the five initial directors of each
newly formed district, two shall be appointed for a maximum
term of two years, two for a maximum term of four years, and
one for a maximum term of six years. Terms of office of all
directors in a given district shall be such that the term of at
least one director, but not more then two, shall expire on
December 31 of each even-numbered year. Regular terms of
office after the initial terms shall be for six years commencing
on January 1 of odd-numbered years. Directors may be
removed for cause only, subject to review and approval of
the Administration; (as amended by PD 768).
the manner of filling up vacancies:
Sec. 12. Vacancies. In the event of a vacancy in the
board of directors occurring more than six months before
expiration of any director's term, the remaining directors shall
within 30 days, serve notice to or request the secretary of the
district for nominations and within 30 days, thereafter a list of
nominees shall be submitted to the appointing authority for
103
 his appointment of a replacement director from the list of
nominees. In the absence of such nominations, the
appointing authority shall make such appointment. If within
30 days after submission to him of a list of nominees the
appointing authority fails to make an appointment, the
vacancy shall be filled from such list by a majority vote of the
remaining members of the Board of Directors constituting a
quorum. Vacancies occurring within the last six months of an
unexpired term shall also be filled by the Board in the above
manner. The director thus appointed shall serve the
unexpired term only; (as amended by PD 768).
and the compensation and personal liability of the members of the Board of
Directors:
Sec. 13. Compensation. Each director shall receive a per
diem, to be determined by the board, for each meeting of the
board actually attended by him, but no director shag receive
per diems in any given month in excess of the equivalent of
the total per diems of four meetings in any given month. No
director shall receive other compensation for services to the
district.
Any per diem in excess of P50.00 shall be subject to
approval of the Administration (as amended by PD 768).
Sec. 14. Personal Liability. No director may be held to be
personally liable for any action of the district.
Noteworthy, the above quoted provisions of PD 198, as amended, are similar
to those which are actually contained in other corporate charters. The
conclusion is inescapable that the said decree is in truth and in fact the
charter of the different water districts for it clearly defines the latter's primary
purpose and its basic organizational set-up. In other words, PD 198, as
amended, is the very law which gives a water district juridical personality.
While it is true that a resolution of a local sanggunian is still necessary for the
final creation of a district, this Court is of the opinion that said resolution
cannot be considered as its charter, the same being intended only to
implement the provisions of said decree. In passing a resolution forming a
water district, the local sanggunian is entrusted with no authority or discretion
to grant a charter for the creation of a private corporation. It is merely given
the authority for the formation of a water district, on a local option basis, to be
exercised under and in pursuance of PD 198.
More than the aforequoted provisions, what is of important interest in the
case at bar is Section 3, par. (b) of the same decree which reads:
Sec. 3(b). Appointing authority. The person empowered to
appoint the members of the Board of Directors of a local
water district, depending upon the geographic coverage and
population make-up of the particular district. In the event that
more than seventy-five percent of the total active water
service connections of a local water districts are within the
boundary of any city or municipality, the appointing authority
shall be the mayor of that city or municipality, as the case
may be; otherwise, the appointing authority shall be the
governor of the province within which the district is
located: Provided, That if the existing waterworks system in
the city or municipality established as a water district under
this Decree is operated and managed by the province, initial
appointment shall be extended by the governor of the
province. Subsequent appointments shall be as specified
herein.
If portions of more than one province are included within the
boundary of the district, and the appointing authority is to be
the governors then the power to appoint shall rotate between
the governors involved with the initial appointments made by
the governor in whose province the greatest number of
service connections exists (as amended by PD 768).
104
The above-quoted section definitely sets to naught petitioners' contention
that they are private corporations. It is clear therefrom that the power to
appoint the members who will comprise the Board of Directors belongs to the
local executives of the local subdivision units where such districts are
located. In contrast, the members of the Board of Directors or trustees of a
private corporation are elected from among the members and stockholders
thereof. It would not be amiss to emphasize at this point that a private
corporation is created for the private purpose, benefit, aim and end of its
members or stockholders. Necessarily, said members or stockholders should
be given a free hand to choose those who will compose the governing body
of their corporation. But this is not the case here and this clearly indicates
that petitioners are definitely not private corporations.

The foregoing disquisition notwithstanding, We are, however, not unaware of

the serious repercussion this may bring to the thousands of water districts'
employees throughout the country who stand to be affected because they do
not have the necessary civil service eligibilities. As these employees are
equally protected by the constitutional guarantee to security of tenure, We
find it necessary to rule for the protection of such right which cannot be
impaired by a subsequent ruling of this Court. Thus, those employees who
have already acquired their permanent employment status at the time of the
promulgation of this decision cannot be removed by the mere reason that
they lack the necessary civil service eligibilities.

ACCORDINGLY, the petition is hereby DISMISSED. Petitioners are declared

"government-owned or controlled corporations with original charter" which fall
under the jurisdiction of the public respondents CSC and COA.

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Padilla, Grio-

Aquino, Regalado and Davide, Jr., JJ., concur.

Gutierrez, Jr., Feliciano and Sarmiento, JJ., are on leave.

105
106
G.R. No. L-6776 May 21, 1955

THE REGISTER OF DEEDS OF RIZAL, petitioner-appellee,

vs.
UNG SIU SI TEMPLE, respondent-appellant.

Alejo F. Candido for appellant.

Office of the Solicitor General Querube C. Makalintal and Solicitor Felix V.
Makasiar for appellee.

REYES, J.B.L., J.:

The Register of Deeds for the province of Rizal refused to accept for record a
deed of donation executed in due form on January 22, 1953, by Jesus Dy, a
Filipino citizen, conveying a parcel of residential land, in Caloocan, Rizal,
known as lot No. 2, block 48-D, PSD-4212, G.L.R.O. Record No. 11267, in
favor of the unregistered religious organization "Ung Siu Si Temple",
operating through three trustees all of Chinese nationality. The donation was
duly accepted by Yu Juan, of Chinese nationality, founder and deaconess of
the Temple, acting in representation and in behalf of the latter and its
trustees.

The refusal of the Registrar was elevated en Consultato the IVth Branch of
the Court of First Instance of Manila. On March 14, 1953, the Court upheld
the action of the Rizal Register of Deeds, saying:

The question raised by the Register of Deeds in the above

transcribed consulta is whether a deed of donation of a parcel of land
executed in favor of a religious organization whose founder, trustees
and administrator are Chinese citizens should be registered or not.

It appearing from the record of the Consulta that UNG SIU SI

TEMPLE is a religious organization whose deaconess, founder,
trustees and administrator are all Chinese citizens, this Court is of
the opinion and so hold that in view of the provisions of the sections
1 and 5 of Article XIII of the Constitution of the Philippines limiting the

107
 acquisition of land in the Philippines to its citizens, or to corporations
or associations at least sixty per centum of the capital stock of which
is owned by such citizens adopted after the enactment of said Act
No. 271, and the decision of the Supreme Court in the case of
Krivenko vs. the Register of Deeds of Manila, the deed of donation in
question should not be admitted for admitted for registration. (Printed
Rec. App. pp 17-18).
Not satisfied with the ruling of the Court of First Instance, counsel for the
donee Uy Siu Si Temple has appealed to this Court, claiming: (1) that the
acquisition of the land in question, for religious purposes, is authorized and
permitted by Act No. 271 of the old Philippine Commission, providing as
follows:
SECTION 1. It shall be lawful for all religious associations, of
whatever sort or denomination, whether incorporated in the
Philippine Islands or in the name of other country, or not incorporated
at all, to hold land in the Philippine Islands upon which to build
churches, parsonages, or educational or charitable institutions.
SEC. 2. Such religious institutions, if not incorporated, shall hold the
land in the name of three Trustees for the use of such
associations; . . .. (Printed Rec. App. p. 5.)
and (2) that the refusal of the Register of Deeds violates the freedom of
religion clause of our Constitution [Art. III, Sec. 1(7)].
We are of the opinion that the Court below has correctly held that in view of
the absolute terms of section 5, Title XIII, of the Constitution, the provisions
of Act No. 271 of the old Philippine Commission must be deemed repealed
since the Constitution was enacted, in so far as incompatible therewith. In
providing that,
Save in cases of hereditary succession, no private agricultural land
shall be transferred or assigned except to individuals, corporations or
associations qualified to acquire or hold lands of the public domain in
the Philippines,
the Constitution makes no exception in favor of religious associations.
Neither is there any such saving found in sections 1 and 2 of Article XIII,
restricting the acquisition of public agricultural lands and other natural
resources to "corporations or associations at least sixty per centum of the
capital of which is owned by such citizens" (of the Philippines).
The fact that the appellant religious organization has no capital stock does
not suffice to escape the Constitutional inhibition, since it is admitted that its
members are of foreign nationality. The purpose of the sixty per centum
requirement is obviously to ensure that corporations or associations allowed
to acquire agricultural land or to exploit natural resources shall be controlled
by Filipinos; and the spirit of the Constitution demands that in the absence of
capital stock, the controlling membership should be composed of Filipino
citizens.
To permit religious associations controlled by non-Filipinos to acquire
agricultural lands would be to drive the opening wedge to revive alien
religious land holdings in this country. We can not ignore the historical fact
that complaints against land holdings of that kind were among the factors
that sparked the revolution of 1896.
As to the complaint that the disqualification under article XIII is violative of the
freedom of religion guaranteed by Article III of the Constitution, we are by no
means convinced (nor has it been shown) that land tenure is indispensable
to the free exercise and enjoyment of religious profession or worship; or that
one may not worship the Deity according to the dictates of his own
conscience unless upon land held in fee simple.
The resolution appealed from is affirmed, with costs against appellant.
Pablo, Acting C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo,
Labrador, and Concepcion, JJ., concur.
108
109
110

G.R. No. L-6055 June 12, 1953
THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
WILLIAM H. QUASHA, defendant-appellant.
Jose P. Laurel for appellant and William H. Quasha in his own behalf.
Office of the Solicitor General Juan R. Liwag and Assistant Solicitor General
Francisco Carreon for appellee.
REYES, J.:
William H. Quasha, a member of the Philippine bar, was charged in the Court
of First Instance of Manila with the crime of falsification of a public and
commercial document in that, having been entrusted with the preparation
and registration of the article of incorporation of the Pacific Airways
Corporation, a domestic corporation organized for the purpose of engaging in
business as a common carrier, he caused it to appear in said article of
incorporation that one Arsenio Baylon, a Filipino citizen, had subscribed to
and was the owner of 60.005 per cent of the subscribed capital stock of the
corporation when in reality, as the accused well knew, such was not the case,
the truth being that the owner of the portion of the capital stock subscribed to
by Baylon and the money paid thereon were American citizen whose name
did not appear in the article of incorporation, and that the purpose for making
this false statement was to circumvent the constitutional mandate that no
corporation shall be authorize to operate as a public utility in the Philippines
unless 60 per cent of its capital stock is owned by Filipinos.
Found guilty after trial and sentenced to a term of imprisonment and a fine,
the accused has appealed to this Court.
The essential facts are not in dispute. On November 4,1946, the Pacific
Airways Corporation registered its articles of incorporation with the Securities
and Exchanged Commission. The article were prepared and the registration
was effected by the accused, who was in fact the organizer of the
corporation. The article stated that the primary purpose of the corporation
was to carry on the business of a common carrier by air, land or water; that
its capital stock was P1,000,000, represented by 9,000 preferred and
100,000 common shares, each preferred share being of the par value of
p100 and entitled to 1/3 vote and each common share, of the par value of P1
and entitled to one vote; that the amount capital stock actually subscribed
was P200,000, and the names of the subscribers were Arsenio Baylon, Eruin
E. Shannahan, Albert W. Onstott, James O'Bannon, Denzel J. Cavin, and
William H. Quasha, the first being a Filipino and the other five all Americans;
that Baylon's subscription was for 1,145 preferred shares, of the total value of
P114,500, and for 6,500 common shares, of the total par value of P6,500,
while the aggregate subscriptions of the American subscribers were for 200
preferred shares, of the total par value of P20,000, and 59,000 common
shares, of the total par value of P59,000; and that Baylon and the American
subscribers had already paid 25 per cent of their respective subscriptions.
Ostensibly the owner of, or subscriber to, 60.005 per cent of the subscribed
capital stock of the corporation, Baylon nevertheless did not have the
controlling vote because of the difference in voting power between the
preferred shares and the common shares. Still, with the capital structure as it
was, the article of incorporation were accepted for registration and a
certificate of incorporation was issued by the Securities and Exchange
Commission.
There is no question that Baylon actually subscribed to 60.005 per cent of
the subscribed capital stock of the corporation. But it is admitted that the
money paid on his subscription did not belong to him but to the Americans
subscribers to the corporate stock. In explanation, the accused testified,
without contradiction, that in the process of organization Baylon was made a
trustee for the American incorporators, and that the reason for making Baylon
such trustee was as follows:
111
 Q. According to this article of incorporation Arsenio Baylon
subscribed to 1,135 preferred shares with a total value of P1,135. Do
you know how that came to be?
A. Yes.
The people who were desirous of forming the corporation, whose names are
listed on page 7 of this certified copy came to my house, Messrs.
Shannahan, Onstott, O'Bannon, Caven, Perry and Anastasakas one evening.
There was considerable difficulty to get them all together at one time
because they were pilots. They had difficulty in deciding what their respective
share holdings would be. Onstott had invested a certain amount of money in
airplane surplus property and they had obtained a considerable amount of
money on those planes and as I recall they were desirous of getting a
corporation formed right away. And they wanted to have their respective
shares holdings resolved at a latter date. They stated that they could get
together that they feel that they had no time to settle their respective share
holdings. We discussed the matter and finally it was decided that the best
way to handle the things was not to put the shares in the name of anyone of
the interested parties and to have someone act as trustee for their respective
shares holdings. So we looked around for a trustee. And he said "There are a
lot of people whom I trust." He said, "Is there someone around whom we
could get right away?" I said, "There is Arsenio. He was my boy during the
liberation and he cared for me when i was sick and i said i consider him my
friend." I said. They all knew Arsenio. He is a very kind man and that was
what was done. That is how it came about.
Defendant is accused under article 172 paragraph 1, in connection with
article 171, paragraph 4, of the Revised Penal Code, which read:
ART. 171. Falsification by public officer, employee, or notary or
ecclesiastic minister. The penalty of prision mayor and a fine not
to exceed 5,000 pesos shall be imposed upon any public officer,
employee, or notary who, taking advantage of his official position,
shall falsify a document by committing any of the following acts:
xxx xxx xxx
4. Making untruthful statements in a narration of facts.
ART. 172. Falsification by private individuals and use of falsified
documents. The penalty of prision correccional in its medium and
maximum period and a fine of not more than 5,000 pesos shall be
imposed upon:
xxx xxx xxx
1. Any private individual who shall commit any of the falsifications
enumerated in the next preceding article in any public or official
document or letter of exchange or any other kind of commercial
document.
Commenting on the above provision, Justice Albert, in his well-known work
on the Revised Penal Code ( new edition, pp. 407-408), observes, on the
authority of U.S. vs. Reyes, (1 Phil., 341), that the perversion of truth in the
narration of facts must be made with the wrongful intent of injuring a third
person; and on the authority of U.S. vs. Lopez (15 Phil., 515), the same
author further maintains that even if such wrongful intent is proven, still the
untruthful statement will not constitute the crime of falsification if there is no
legal obligation on the part of the narrator to disclose the truth. Wrongful
intent to injure a third person and obligation on the part of the narrator to
disclose the truth are thus essential to a conviction for a crime of falsification
under the above article of the Revised Penal Code.
Now, as we see it, the falsification imputed in the accused in the present
case consists in not disclosing in the articles of incorporation that Baylon was
a mere trustee ( or dummy as the prosecution chooses to call him) of his
American co-incorporators, thus giving the impression that Baylon was the
owner of the shares subscribed to by him which, as above stated, amount to
60.005 per cent of the sub-scribed capital stock. This, in the opinion of the
trial court, is a malicious perversion of the truth made with the wrongful intent
circumventing section 8, Article XIV of the Constitution, which provides that "
112
no franchise, certificate, or any other form of authorization for the operation
of a public utility shall be granted except to citizens of the Philippines or to
corporation or other entities organized under the law of the Philippines,
sixty per centum of the capital of which is owned by citizens of the
Philippines . . . ." Plausible though it may appear at first glance, this opinion
loses validity once it is noted that it is predicated on the erroneous
assumption that the constitutional provision just quoted was meant to prohibit
the mere formation of a public utility corporation without 60 per cent of its
capital being owned by the Filipinos, a mistaken belief which has induced the
lower court to that the accused was under obligation to disclose the whole
truth about the nationality of the subscribed capital stock of the corporation
by revealing that Baylon was a mere trustee or dummy of his American co-
incorporators, and that in not making such disclosure defendant's intention
was to circumvent the Constitution to the detriment of the public interests.
Contrary to the lower court's assumption, the Constitution does not prohibit
the mere formation of a public utility corporation without the required
formation of Filipino capital. What it does prohibit is the granting of a
franchise or other form of authorization for the operation of a public utility to
a corporation already in existence but without the requisite proportion of
Filipino capital. This is obvious from the context, for the constitutional
provision in question qualifies the terms " franchise", "certificate", or "any
other form of authorization" with the phrase "for the operation of a public
utility," thereby making it clear that the franchise meant is not the "primary
franchise" that invest a body of men with corporate existence but the
"secondary franchise" or the privilege to operate as a public utility after the
corporation has already come into being.
If the Constitution does not prohibit the mere formation of a public utility
corporation with the alien capital, then how can the accused be charged with
having wrongfully intended to circumvent that fundamental law by not
revealing in the articles of incorporation that Baylon was a mere trustee of his
American co-incorporation and that for that reason the subscribed capital
stock of the corporation was wholly American? For the mere formation of the
corporation such revelation was not essential, and the Corporation Law does
not require it. Defendant was, therefore, under no obligation to make it. In the
absence of such obligation and of the allege wrongful intent, defendant
cannot be legally convicted of the crime with which he is charged.
It is urged, however, that the formation of the corporation with 60 per cent of
its subscribed capital stock appearing in the name of Baylon was an
indispensable preparatory step to the subversion of the constitutional
prohibition and the laws implementing the policy expressed therein. This view
is not correct. For a corporation to be entitled to operate a public utility it is
not necessary that it be organized with 60 per cent of its capital owned by
Filipinos from the start. A corporation formed with capital that is entirely alien
may subsequently change the nationality of its capital through transfer of
shares to Filipino citizens. conversely, a corporation originally formed with
Filipino capital may subsequently change the national status of said capital
through transfer of shares to foreigners. What need is there then for a
corporation that intends to operate a public utility to have, at the time of its
formation, 60 per cent of its capital owned by Filipinos alone? That condition
may anytime be attained thru the necessary transfer of stocks. The moment
for determining whether a corporation is entitled to operate as a public utility
is when it applies for a franchise, certificate, or any other form of
authorization for that purpose. And that can be done after the corporation has
already come into being and not while it is still being formed. And at that
moment, the corporation must show that it has complied not only with the
requirement of the Constitution as to the nationality of its capital, but also
with the requirements of the Civil Aviation Law if it is a common carrier by air,
the Revised Administrative Code if it is a common carrier by water, and the
Public Service Law if it is a common carrier by land or other kind of public
service.
Equally untenable is the suggestion that defendant should at least be held
guilty of an "impossible crime" under article 59 of the Revised Penal Code. It
not being possible to suppose that defendant had intended to commit a crime
for the simple reason that the alleged constitutional prohibition which he is
charged for having tried to circumvent does not exist, conviction under that
article is out of the question.
The foregoing consideration can not but lead to the conclusion that the
defendant can not be held guilty of the crime charged. The majority of the
court, however, are also of the opinion that, even supposing that the act
imputed to the defendant constituted falsification at the time it was
perpetrated, still with the approval of the Party Amendment to the
113
Constitution in March, 1947, which placed Americans on the same footing as
Filipino citizens with respect to the right to operate public utilities in the
Philippines, thus doing away with the prohibition in section 8, Article XIV of
the Constitution in so far as American citizens are concerned, the said act
has ceased to be an offense within the meaning of the law, so that defendant
can no longer be held criminally liable therefor.

In view of the foregoing, the judgment appealed from is reversed and the
defendant William H. Quasha acquitted, with costs de oficio.

Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Jugo, Bautista Angelo, and
Labrador, JJ., concur.

114
 Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.

PARAS, C.J.:

On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co.,

Inc., after payment of corresponding premium, obtained from the petitioner
,Filipinas Cia. de Seguros, fire policy No. 29333 in the sum of P1000,000,
covering merchandise contained in a building located at No. 711 Roman
Street, Binondo Manila. On February 27, 1942, or during the Japanese
military occupation, the building and insured merchandise were burned. In
due time the respondent submitted to the petitioner its claim under the policy.
The salvage goods were sold at public auction and, after deducting their
value, the total loss suffered by the respondent was fixed at P92,650. The
petitioner refused to pay the claim on the ground that the policy in favor of
the respondent had ceased to be in force on the date the United States
declared war against Germany, the respondent Corporation (though
organized under and by virtue of the laws of the Philippines) being controlled
by the German subjects and the petitioner being a company under American
jurisdiction when said policy was issued on October 1, 1941. The petitioner,
however, in pursuance of the order of the Director of Bureau of Financing,
Philippine Executive Commission, dated April 9, 1943, paid to the respondent
the sum of P92,650 on April 19, 1943.

The present action was filed on August 6, 1946, in the Court of First Instance
of Manila for the purpose of recovering from the respondent the sum of
P92,650 above mentioned. The theory of the petitioner is that the insured
merchandise were burned up after the policy issued in 1941 in favor of the
respondent corporation has ceased to be effective because of the outbreak
of the war between the United States and Germany on December 10, 1941,
G.R. No. L-2294 May 25, 1951 and that the payment made by the petitioner to the respondent corporation
during the Japanese military occupation was under pressure. After trial, the
FILIPINAS COMPAIA DE SEGUROS, petitioner, Court of First Instance of Manila dismissed the action without pronouncement
vs. as to costs. Upon appeal to the Court of Appeals, the judgment of the Court
CHRISTERN, HUENEFELD and CO., INC., respondent. of First Instance of Manila was affirmed, with costs. The case is now before
us on appeal by certiorari from the decision of the Court of Appeals.

115
The Court of Appeals overruled the contention of the petitioner that the
respondent corporation became an enemy when the United States declared
war against Germany, relying on English and American cases which held that
a corporation is a citizen of the country or state by and under the laws of
which it was created or organized. It rejected the theory that nationality of
private corporation is determine by the character or citizenship of its
controlling stockholders.
There is no question that majority of the stockholders of the respondent
corporation were German subjects. This being so, we have to rule that said
respondent became an enemy corporation upon the outbreak of the war
between the United States and Germany. The English and American cases
relied upon by the Court of Appeals have lost their force in view of the latest
decision of the Supreme Court of the United States in Clark vs. Uebersee
Finanz Korporation, decided on December 8, 1947, 92 Law. Ed. Advance
Opinions, No. 4, pp. 148-153, in which the controls test has been adopted. In
"Enemy Corporation" by Martin Domke, a paper presented to the Second
International Conference of the Legal Profession held at the Hague
(Netherlands) in August. 1948 the following enlightening passages appear:
Since World War I, the determination of enemy nationality of
corporations has been discussion in many countries, belligerent and
neutral. A corporation was subject to enemy legislation when it was
controlled by enemies, namely managed under the influence of
individuals or corporations, themselves considered as enemies. It
was the English courts which first the Daimler case applied this new
concept of "piercing the corporate veil," which was adopted by the
peace of Treaties of 1919 and the Mixed Arbitral established after the
First World War.
The United States of America did not adopt the control test during
the First World War. Courts refused to recognized the concept
whereby American-registered corporations could be considered as
enemies and thus subject to domestic legislation and administrative
measures regarding enemy property.
World War II revived the problem again. It was known that German
and other enemy interests were cloaked by domestic corporation
structure. It was not only by legal ownership of shares that a material
influence could be exercised on the management of the corporation
but also by long term loans and other factual situations. For that
reason, legislation on enemy property enacted in various countries
during World War II adopted by statutory provisions to the control
test and determined, to various degrees, the incidents of control.
Court decisions were rendered on the basis of such newly enacted
statutory provisions in determining enemy character of domestic
corporation.
The United States did not, in the amendments of the Trading with the
Enemy Act during the last war, include as did other legislations the
applications of the control test and again, as in World War I, courts
refused to apply this concept whereby the enemy character of an
American or neutral-registered corporation is determined by the
enemy nationality of the controlling stockholders.
Measures of blocking foreign funds, the so called freezing
regulations, and other administrative practice in the treatment of
foreign-owned property in the United States allowed to large degree
the determination of enemy interest in domestic corporations and
thus the application of the control test. Court decisions sanctioned
such administrative practice enacted under the First War Powers Act
of 1941, and more recently, on December 8, 1947, the Supreme
Court of the United States definitely approved of the control theory. In
Clark vs. Uebersee Finanz Korporation, A. G., dealing with a Swiss
corporation allegedly controlled by German interest, the Court: "The
property of all foreign interest was placed within the reach of the
vesting power (of the Alien Property Custodian) not to appropriate
friendly or neutral assets but to reach enemy interest which
masqueraded under those innocent fronts. . . . The power of seizure
and vesting was extended to all property of any foreign country or
national so that no innocent appearing device could become a Trojan
horse."
116
It becomes unnecessary, therefore, to dwell at length on the authorities cited
in support of the appealed decision. However, we may add that, in Haw Pia
vs. China Banking Corporation,* 45 Off Gaz., (Supp. 9) 299, we already held
that China Banking Corporation came within the meaning of the word
"enemy" as used in the Trading with the Enemy Acts of civilized countries not
only because it was incorporated under the laws of an enemy country but
because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as amended,) in section 8,
provides that "anyone except a public enemy may be insured." It stands to
reason that an insurance policy ceases to be allowable as soon as an
insured becomes a public enemy.
Effect of war, generally. All intercourse between citizens of
belligerent powers which is inconsistent with a state of war is
prohibited by the law of nations. Such prohibition includes all
negotiations, commerce, or trading with the enemy; all acts which will
increase, or tend to increase, its income or resources; all acts of
voluntary submission to it; or receiving its protection; also all acts
concerning the transmission of money or goods; and all contracts
relating thereto are thereby nullified. It further prohibits insurance
upon trade with or by the enemy, upon the life or lives of aliens
engaged in service with the enemy; this for the reason that the
subjects of one country cannot be permitted to lend their assistance
to protect by insurance the commerce or property of belligerent, alien
subjects, or to do anything detrimental too their country's interest.
The purpose of war is to cripple the power and exhaust the
resources of the enemy, and it is inconsistent that one country
should destroy its enemy's property and repay in insurance the value
of what has been so destroyed, or that it should in such manner
increase the resources of the enemy, or render it aid, and the
commencement of war determines, for like reasons, all trading
intercourse with the enemy, which prior thereto may have been
lawful. All individuals therefore, who compose the belligerent powers,
exist, as to each other, in a state of utter exclusion, and are public
enemies. (6 Couch, Cyc. of Ins. Law, pp. 5352-5353.)
In the case of an ordinary fire policy, which grants insurance only
from year, or for some other specified term it is plain that when the
parties become alien enemies, the contractual tie is broken and the
contractual rights of the parties, so far as not vested. lost. (Vance,
the Law on Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation on December 10,
1941, the insurance policy issued in its favor on October 1, 1941, by the
petitioner (a Philippine corporation) had ceased to be valid and enforcible,
and since the insured goods were burned after December 10, 1941, and
during the war, the respondent was not entitled to any indemnity under said
policy from the petitioner. However, elementary rules of justice (in the
absence of specific provision in the Insurance Law) require that the premium
paid by the respondent for the period covered by its policy from December
11, 1941, should be returned by the petitioner.
The Court of Appeals, in deciding the case, stated that the main issue hinges
on the question of whether the policy in question became null and void upon
the declaration of war between the United States and Germany on December
10, 1941, and its judgment in favor of the respondent corporation was
predicated on its conclusion that the policy did not cease to be in force. The
Court of Appeals necessarily assumed that, even if the payment by the
petitioner to the respondent was involuntary, its action is not tenable in view
of the ruling on the validity of the policy. As a matter of fact, the Court of
Appeals held that "any intimidation resorted to by the appellee was not unjust
but the exercise of its lawful right to claim for and received the payment of
the insurance policy," and that the ruling of the Bureau of Financing to the
effect that "the appellee was entitled to payment from the appellant was, well
founded." Factually, there can be no doubt that the Director of the Bureau of
Financing, in ordering the petitioner to pay the claim of the respondent,
merely obeyed the instruction of the Japanese Military Administration, as
may be seen from the following: "In view of the findings and conclusion of
this office contained in its decision on Administrative Case dated February 9,
1943 copy of which was sent to your office and the concurrence therein of
the Financial Department of the Japanese Military Administration,
and following the instruction of said authority, you are hereby ordered to pay
the claim of Messrs. Christern, Huenefeld & Co., Inc. The payment of said
117
claim, however, should be made by means of crossed check." (Emphasis
supplied.)

It results that the petitioner is entitled to recover what paid to the respondent
under the circumstances on this case. However, the petitioner will be entitled
to recover only the equivalent, in actual Philippines currency of P92,650 paid
on April 19, 1943, in accordance with the rate fixed in the Ballantyne scale.

Wherefore, the appealed decision is hereby reversed and the respondent

corporation is ordered to pay to the petitioner the sum of P77,208.33,
Philippine currency, less the amount of the premium, in Philippine currency,
that should be returned by the petitioner for the unexpired term of the policy
in question, beginning December 11, 1941. Without costs. So ordered.

Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo and Bautista Angelo,

JJ., concur.

118
G.R. No. L-8451 December 20, 1957

THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO,

INC., petitioner,
vs.
THE LAND REGISTRATION COMMISSION and THE REGISTER OF
DEEDS OF DAVAO CITY, respondents.

Teodoro Padilla, for petitioner.

Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General
Jose G. Bautista and Troadio T. Quianzon, Jr., for respondents.

119

FELIX, J.:
This is a petition for mandamus filed by the Roman Catholic Apostolic
Administrator of Davao seeking the reversal of a resolution by the Land
Registration Commissioner in L.R.C. Consulta No. 14. The facts of the case
are as follows:
On October 4, 1954, Mateo L. Rodis, a Filipino citizen and resident of the
City of Davao, executed a deed of sale of a parcel of land located in the
same city covered by Transfer Certificate No. 2263, in favor of the Roman
Catholic Apostolic Administrator of Davao Inc., s corporation sole organized
and existing in accordance with Philippine Laws, with Msgr. Clovis Thibault, a
Canadian citizen, as actual incumbent. When the deed of sale was presented
to Register of Deeds of Davao for registration, the latter.
having in mind a previous resolution of the Fourth Branch of the
Court of First Instance of Manila wherein the Carmelite Nuns of
Davao were made to prepare an affidavit to the effect that 60 per
cent of the members of their corporation were Filipino citizens when
they sought to register in favor of their congregation of deed of
donation of a parcel of land
required said corporation sole to submit a similar affidavit declaring that 60
per cent of the members thereof were Filipino citizens.
The vendee in the letter dated June 28, 1954, expressed willingness to
submit an affidavit, both not in the same tenor as that made the Progress of
the Carmelite Nuns because the two cases were not similar, for whereas the
congregation of the Carmelite Nuns had five incorporators, the corporation
sole has only one; that according to their articles of incorporation, the
organization of the Carmelite Nuns became the owner of properties donated
to it, whereas the case at bar, the totality of the Catholic population of Davao
would become the owner of the property bought to be registered.
As the Register of Deeds entertained some doubts as to the registerability if
the document, the matter was referred to the Land Registration
Commissioner en consulta for resolution in accordance with section 4 of
Republic Act No. 1151. Proper hearing on the matter was conducted by the
Commissioner and after the petitioner corporation had filed its memorandum,
a resolution was rendered on September 21, 1954, holding that in view of the
provisions of Section 1 and 5 of Article XIII of the Philippine Constitution, the
vendee was not qualified to acquire private lands in the Philippines in the
absence of proof that at least 60 per centum of the capital, property, or
assets of the Roman Catholic Apostolic Administrator of Davao, Inc., was
actually owned or controlled by Filipino citizens, there being no question that
the present incumbent of the corporation sole was a Canadian citizen. It was
also the opinion of the Land Registration Commissioner that section 159 of
the corporation Law relied upon by the vendee was rendered operative by
the aforementioned provisions of the Constitution with respect to real estate,
unless the precise condition set therein that at least 60 per cent of its
capital is owned by Filipino citizens be present, and, therefore, ordered
the Registered Deeds of Davao to deny registration of the deed of sale in the
absence of proof of compliance with such condition.
After the motion to reconsider said resolution was denied, an action
for mandamus was instituted with this Court by said corporation sole, alleging
that under the Corporation Law as well as the settled jurisprudence on the
matter, the deed of sale executed by Mateo L. Rodis in favor of petitioner is
actually a deed of sale in favor of the Catholic Church which is qualified to
acquire private agricultural lands for the establishment and maintenance of
places of worship, and prayed that judgment be rendered reserving and
setting aside the resolution of the Land Registration Commissioner in
question. In its resolution of November 15, 1954, this Court gave due course
to this petition providing that the procedure prescribed for appeals from the
Public Service Commission of the Securities and Exchange Commissions
(Rule 43), be followed.
Section 5 of Article XIII of the Philippine Constitution reads as follows:
SEC. 5. Save in cases of hereditary succession, no private
agricultural land shall be transferred or assigned except to
120
 individuals, corporations, or associations qualified to acquire or hold
lands of the public domain in the Philippines.
Section 1 of the same Article also provides the following:
SECTION 1. All agricultural, timber, and mineral lands of the public domain,
water, minerals, coal, petroleum, and other mineral oils, all forces of potential
energy, and other natural resources of the Philippines belong to the State,
and their disposition, exploitation, development, or utilization shall be limited
to cititzens of the Philippines, or to corporations or associations at least sixty
per centum of the capital of which is owned by such citizens, SUBJECT TO
ANY EXISTING RIGHT, grant, lease, or concession AT THE TIME OF THE
INAUGURATION OF THE GOVERNMENT ESTABLISHED UNDER
CONSTITUTION. Natural resources, with the exception of public agricultural
land, shall not be alienated, and no license, concession, or leases for the
exploitation, development, or utilization of any of the natural resources shall
be granted for a period exceeding twenty-five years, renewable for another
twenty-five years, except as to water rights for irrigation, water supply,
fisheries, or industrial uses other than the development of water power, in
which cases other than the development and limit of the grant.
In virtue of the foregoing mandates of the Constitution, who are considered
"qualified" to acquire and hold agricultural lands in the Philippines? What is
the effect of these constitutional prohibition of the right of a religious
corporation recognized by our Corporation Law and registered as
a corporation sole, to possess, acquire and register real estates in its name
when the Head, Manager, Administrator or actual incumbent is an alien?
Petitioner consistently maintained that a corporation sole, irrespective of the
citizenship of its incumbent, is not prohibited or disqualified to acquire and
hold real properties. The Corporation Law and the Canon Law are explicit in
their provisions that a corporation sole or "ordinary" is not the owner of the of
the properties that he may acquire but merely the administrator thereof. The
Canon Law also specified that church temporalities are owned by the
Catholic Church as a "moral person" or by the diocess as minor "moral
persons" with the ordinary or bishop as administrator.
And elaborating on the composition of the Catholic Church in the Philippines,
petitioner explained that as a religious society or organization, it is made up
of 2 elements or divisions the clergy or religious members and the faithful
or lay members. The 1948 figures of the Bureau of Census showed that
there were 277,551 Catholics in Davao and aliens residing therein numbered
3,465. Ever granting that all these foreigners are Catholics, petitioner
contends that Filipino citizens form more than 80 per cent of the entire
Catholics population of that area. As to its clergy and religious composition,
counsel for petitioner presented the Catholic Directory of the Philippines for
1954 (Annex A) which revealed that as of that year, Filipino clergy and
women novices comprise already 60.5 per cent of the group. It was,
therefore, allowed that the constitutional requirement was fully met and
satisfied.
Respondents, on the other hand, averred that although it might be true that
petitioner is not the owner of the land purchased, yet he has control over the
same, with full power to administer, take possession of, alienate, transfer,
encumber, sell or dispose of any or all lands and their improvements
registered in the name of the corporation sole and can collect, receive,
demand or sue for all money or values of any kind that may be kind that may
become due or owing to said corporation, and vested with authority to enter
into agreements with any persons, concerns or entities in connection with
said real properties, or in other words, actually exercising all rights of
ownership over the properties. It was their stand that the theory that
properties registered in the name of the corporation sole are held in true for
the benefit of the Catholic population of a place, as of Davao in the case at
bar should be sustained because a conglomeration of persons cannot just be
pointed out as the cestui que trust or recipient of the benefits from the
property allegedly administered in their behalf. Neither can it be said that the
mass of people referred to as such beneficiary exercise ant right of
ownership over the same. This set-up, respondents argued, falls short of a
trust. The respondents instead tried to prove that in reality, the beneficiary of
ecclesiastical properties are not members or faithful of the church but
someone else, by quoting a portion a portion of the ought of fidelity
subscribed by a bishop upon his elevation to the episcopacy wherein he
promises to render to the Pontificial Father or his successors an account of
his pastoral office and of all things appertaining to the state of this church.
121
Respondents likewise advanced the opinion that in construing the
constitutional provision calling for 60 per cent of Filipino citizenship, the
criterion of the properties or assets thereof.
In solving the problem thus submitted to our consideration, We can say the
following: A corporation sole is a special form of corporation usually
associated with the clergy. Conceived and introduced into the common law
by sheer necessity, this legal creation which was referred to as "that unhappy
freak of English law" was designed to facilitate the exercise of the functions
of ownership carried on by the clerics for and on behalf of the church which
was regarded as the property owner (See I Couvier's Law Dictionary, p. 682-
683).
A corporation sole consists of one person only, and his successors (who will
always be one at a time), in some particular station, who are incorporated by
law in order to give them some legal capacities and advantages, particularly
that of perpetuity, which in their natural persons they could not have had. In
this sense, the king is a sole corporation; so is a bishop, or dens, distinct
from their several chapters (Reid vs. Barry, 93 Fla. 849, 112 So. 846).
The provisions of our Corporation law on religious corporations are
illuminating and sustain the stand of petitioner. Section 154 thereof provides:
SEC. 154. For the administration of the temporalities of any
religious denomination, society or church and the management of
the estates and the properties thereof, it shall be lawful for the
bishop, chief priest, or presiding either of any such religious
denomination, society or church to become a corporation sole,
unless inconsistent wit the rules, regulations or discipline of his
religious denomination, society or church or forbidden by competent
authority thereof.
See also the pertinent provisions of the succeeding sections of the same
Corporation Law copied hereunder:
SEC. 155. In order to become a corporation sole the bishop, chief
priest, or presiding elder of any religious denomination, society or
church must file with the Securities and Exchange Commissioner
articles of incorporation setting forth the following facts:
xxx xxx xxx.
(3) That as such bishop, chief priest, or presiding elder he is charged
with the administration of the temporalities and the management of
the estates and properties of his religious denomination, society, or
church within its territorial jurisdiction, describing it;
xxx xxx xxx.
(As amended by Commonwealth Act No. 287).
SEC. 157. From and after the filing with the Securities and Exchange
Commissioner of the said articles of incorporation, which verified by
affidavit or affirmation as aforesaid and accompanied by the copy of
the commission, certificate of election, or letters of appointment of
the bishop, chief priest, or presiding elder, duly certified as
prescribed in the section immediately preceding such the bishop,
chief priest, or presiding elder, as the case may be, shall become a
corporation sole and all temporalities, estates, and properties the
religious denomination, society, or church therefore administered or
managed by him as such bishop, chief priest, or presiding elder,
shall be held in trust by him as a corporation sole, for the use,
purpose, behalf, and sole benefit of his religious denomination,
society, or church, including hospitals, schools, colleges, orphan,
asylums, parsonages, and cemeteries thereof. For the filing of such
articles of incorporation, the Securities and Exchange Commissioner
shall collect twenty-five pesos. (As amended by Commonwealth Act.
No. 287); and.
SEC. 163. The right to administer all temporalities and all property
held or owned by a religious order or society, or by the diocese,
122
 synod, or district organization of any religious denomination or
church shall, on its incorporation, pass to the corporation and shall
be held in trust for the use, purpose behalf, and benefit of the
religious society, or order so incorporated or of the church of which
the diocese, or district organization is an organized and constituent
part.
The Cannon Law contains similar provisions regarding the duties of the
corporation sole or ordinary as administrator of the church properties, as
follows:
Al Ordinario local pertenence vigilar diligentemente sobre
la administracion de todos los bienes eclesiasticos que se hallan en
su territorio y no estuvieren sustraidos de su jurisdiccion, salvs las
prescriciones legitimas que le concedan mas aamplios derechos.
Teniendo en cuenta los derechos y las legitimas costumbres y
circunstancias, procuraran los Ordinarios regular todo lo
concerniente a la administracion de los bienes eclesciasticos, dando
las oportunas instucciones particularles dentro del narco del derecho
comun. (Title XXVIII, Codigo de Derecho Canonico, Lib. III, Canon
1519).1
That leaves no room for doubt that the bishops or archbishops, as the case
may be, as corporation's sole are merely administrators of the church
properties that come to their possession, in which they hold in trust for the
church. It can also be said that while it is true that church properties could be
administered by a natural persons, problems regarding succession to said
properties can not be avoided to rise upon his death. Through this legal
fiction, however, church properties acquired by the incumbent of a
corporation sole pass, by operation of law, upon his death not his personal
heirs but to his successor in office. It could be seen, therefore, that a
corporation sole is created not only to administer the temporalities of the
church or religious society where he belongs but also to hold and transmit
the same to his successor in said office. If the ownership or title to the
properties do not pass to the administrators, who are the owners of church
properties?.
Bouscaren and Elis, S.J., authorities on cannon law, on their treatise
comment:
In matters regarding property belonging to the Universal Church and
to the Apostolic See, the Supreme Pontiff exercises his office of
supreme administrator through the Roman Curia; in matters
regarding other church property, through the administrators of the
individual moral persons in the Church according to that norms, laid
down in the Code of Cannon Law. This does not mean, however,
that the Roman Pontiff is the owner of all the church property; but
merely that he is the supreme guardian (Bouscaren and Ellis,
Cannon Law, A Text and Commentary, p. 764).
and this Court, citing Campes y Pulido, Legislacion y Jurisprudencia
Canonica, ruled in the case of Trinidad vs. Roman Catholic Archbishop of
Manila, 63 Phil. 881, that:
The second question to be decided is in whom the ownership of the
properties constituting the endowment of the ecclesiastical or
collative chaplaincies is vested.
Canonists entertain different opinions as to the persons in whom the
ownership of the ecclesiastical properties is vested, with respect to
which we shall, for our purpose, confine ourselves to stating with
Donoso that, while many doctors cited by Fagnano believe that it
resides in the Roman Pontiff as Head of the Universal Church, it is
more probable that ownership, strictly speaking, does not reside in
the latter, and, consequently, ecclesiastical properties are owned by
the churches, institutions and canonically established private
corporations to which said properties have been donated.
Considering that nowhere can We find any provision conferring ownership of
church properties on the Pope although he appears to be the supreme
123
administrator or guardian of his flock, nor on the corporation sole or heads of
dioceses as they are admittedly mere administrators of said properties,
ownership of these temporalities logically fall and develop upon the church,
diocese or congregation acquiring the same. Although this question of
ownership of ecclesiastical properties has off and on been mentioned in
several decisions of the Court yet in no instance was the subject of
citizenship of this religious society been passed upon.
We are not unaware of the opinion expressed by the late Justice Perfecto in
his dissent in the case of Agustines vs. Court of First Instance of Bulacan, 80
Phil. 565, to the effect that "the Roman Catholic Archbishop of Manila is only
a branch of a universal church by the Pope, with permanent residence in
Rome, Italy". There is no question that the Roman Catholic Church existing
in the Philippines is a tributary and part of the international religious
organization, for the word "Roman" clearly expresses its unity with and
recognizes the authority of the Pope in Rome. However, lest We become
hasty in drawing conclusions, We have to analyze and take note of the
nature of the government established in the Vatican City, of which it was said:
GOVERNMENT. In the Roman Catholic Church supreme authority
and jurisdiction over clergy and laity alike as held by the pope who
(since the Middle Ages) is elected by the cardinals assembled in
conclave, and holds office until his death or legitimate abdication. . .
While the pope is obviously independent of the laws made, and the
officials appointed, by himself or his predecessors, he usually
exercises his administrative authority according to the code of canon
law and through the congregations, tribunals and offices of the Curia
Romana. In their respective territories (called generally dioceses)
and over their respective subjects, the patriarchs, metropolitans or
archbishops and bishops exercise a jurisdiction which is called
ordinary (as attached by law to an office given to a person. . .
(Collier's Encyclopedia, Vol. 17, p. 93).
While it is true and We have to concede that in the profession of their faith,
the Roman Pontiff is the supreme head; that in the religious matters, in the
exercise of their belief, the Catholic congregation of the faithful throughout
the world seeks the guidance and direction of their Spiritual Father in the
Vatican, yet it cannot be said that there is a merger of personalities resultant
therein. Neither can it be said that the political and civil rights of the faithful,
inherent or acquired under the laws of their country, are affected by that
relationship with the Pope. The fact that the Roman Catholic Church in
almost every country springs from that society that saw its beginning in
Europe and the fact that the clergy of this faith derive their authorities and
receive orders from the Holy See do not give or bestow the citizenship of the
Pope upon these branches. Citizenship is a political right which cannot be
acquired by a sort of "radiation". We have to realize that although there is a
fraternity among all the catholic countries and the dioceses therein all over
the globe, the universality that the word "catholic" implies, merely
characterize their faith, a uniformity in the practice and the interpretation of
their dogma and in the exercise of their belief, but certainly they are separate
and independent from one another in jurisdiction, governed by different laws
under which they are incorporated, and entirely independent on the others in
the management and ownership of their temporalities. To allow theory that
the Roman Catholic Churches all over the world follow the citizenship of their
Supreme Head, the Pontifical Father, would lead to the absurdity of finding
the citizens of a country who embrace the Catholic faith and become
members of that religious society, likewise citizens of the Vatican or of Italy.
And this is more so if We consider that the Pope himself may be an Italian or
national of any other country of the world. The same thing be said with
regard to the nationality or citizenship of the corporation sole created under
the laws of the Philippines, which is not altered by the change of citizenship
of the incumbent bishops or head of said corporation sole.
We must therefore, declare that although a branch of the Universal Roman
Catholic Apostolic Church, every Roman Catholic Church in different
countries, if it exercises its mission and is lawfully incorporated in accordance
with the laws of the country where it is located, is considered an entity or
person with all the rights and privileges granted to such artificial being under
the laws of that country, separate and distinct from the personality of the
Roman Pontiff or the Holy See, without prejudice to its religious relations with
the latter which are governed by the Canon Law or their rules and
regulations.
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We certainly are conscious of the fact that whatever conclusion We may
draw on this matter will have a far reaching influence, nor can We overlook
the pages of history that arouse indignation and criticisms against church
landholdings. This nurtured feeling that snowbailed into a strong nationalistic
sentiment manifested itself when the provisions on natural to be embodied in
the Philippine Constitution were framed, but all that has been said on this
regard referred more particularly to landholdings of religious corporations
known as "Friar Estates" which have already bee acquired by our
government, and not to properties held by corporations sole which, We
repeat, are properties held in trust for the benefit of the faithful residing within
its territorial jurisdiction. Though that same feeling probably precipitated and
influenced to a large extent the doctrine laid down in the celebrated Krivenco
decision, We have to take this matter in the light of legal provisions and
jurisprudence actually obtaining, irrespective of sentiments.
The question now left for our determination is whether the Universal Roman
Catholic Apostolic Church in the Philippines, or better still, the corporation
sole named the Roman Catholic Apostolic Administrator of Davao, Inc., is
qualified to acquire private agricultural lands in the Philippines pursuant to
the provisions of Article XIII of the Constitution.
We see from sections 1 and 5 of said Article quoted before, that only persons
or corporations qualified to acquire hold lands of the public domain in the
Philippines may acquire or be assigned and hold private agricultural lands.
Consequently, the decisive factor in the present controversy hinges on the
proposition or whether or not the petitioner in this case can acquire
agricultural lands of the public domain.
From the data secured from the Securities and Exchange Commission, We
find that the Roman Catholic Bishop of Zamboanga was incorporated (as a
corporation sole) in September, 1912, principally to administer its
temporalities and manage its properties. Probably due to the ravages of the
last war, its articles of incorporation were reconstructed in the Securities and
Exchange Commission on April 8, 1948. At first, this corporation sole
administered all the temporalities of the church existing or located in the
island of Mindanao. Later on, however, new dioceses were formed and new
corporations sole were created to correspond with the territorial jurisdiction of
the new dioceses, one of them being petitioner herein, the Roman Catholic
Apostolic Administrator of Davao, Inc., which was registered with the
Securities and Exchange Commission on September 12, 1950, and
succeeded in the administrative for all the "temporalities" of the Roman
Catholic Church existing in Davao.
According to our Corporation Law, Public Act No. 1549, approved April 1,
1906, a corporation sole.
is organized and composed of a single individual, the head of any
religious society or church, for the ADMINISTRATION of the
temporalities of such society or church. By "temporalities" is meant
estate and properties not used exclusively for religious worship. The
successor in office of such religious head or chief priest incorporated
as a corporation sole shall become the corporation sole on
ascension to office, and shall be permitted to transact business as
such on filing with the Securities and Exchange Commission a copy
of his commission, certificate of election or letter of appointment duly
certified by any notary public or clerk of court of record (Guevara's
The Philippine Corporation Law, p. 223).
The Corporation Law also contains the following provisions:
SECTION 159. Any corporation sole may purchase and hold real
estate and personal; property for its church, charitable, benevolent,
or educational purposes, and may receive bequests or gifts of such
purposes. Such corporation may mortgage or sell real property held
by it upon obtaining an order for that purpose from the Court of First
Instance of the province in which the property is situated; but before
making the order proof must be made to the satisfaction of the Court
that notice of the application for leave to mortgage or sell has been
given by publication or otherwise in such manner and for such time
as said Court or the Judge thereof may have directed, and that it is
to the interest of the corporation that leave to mortgage or sell must
be made by petition, duly verified by the bishop, chief priest, or
presiding elder acting as corporation sole, and may be opposed by
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 any member of the religious denomination, society or church
represented by the corporation sole: Provided, however, That in
cases where the rules, regulations, and discipline of the religious
denomination, society or church concerned represented by such
corporation sole regulate the methods of acquiring, holding, selling
and mortgaging real estate and personal property, such rules,
regulations, and discipline shall control and the intervention of the
Courts shall not be necessary.
It can, therefore, be noticed that the power of a corporation sole to
purchase real property, like the power exercised in the case at bar, it is not
restricted although the power to sell or mortgage sometimes is, depending
upon the rules, regulations, and discipline of the church concerned
represented by said corporation sole. If corporations sole can purchase and
sell real estate for its church, charitable, benevolent, or educational
purposes, can they register said real properties? As provided by law, lands
held in trust for specific purposes me be subject of registration (section 69,
Act 496), and the capacity of a corporation sole, like petitioner herein, to
register lands belonging to it is acknowledged, and title thereto may be
issued in its name (Bishop of Nueva Segovia vs. Insular Government, 26
Phil. 300-1913). Indeed it is absurd that while the corporations sole that
might be in need of acquiring lands for the erection of temples where the
faithful can pray, or schools and cemeteries which they are expressly
authorized by law to acquire in connection with the propagation of the Roman
Catholic Apostolic faith or in furtherance of their freedom of religion they
could not register said properties in their name. As professor Javier J.
Nepomuceno very well says "Man in his search for the immortal and
imponderable, has, even before the dawn of recorded history, erected
temples to the Unknown God, and there is no doubt that he will continue to
do so for all time to come, as long as he continues 'imploring the aid of
Divine Providence'" (Nepomuceno's Corporation Sole, VI Ateneo Law
Journal, No. 1, p. 41, September, 1956). Under the circumstances of this
case, We might safely state that even before the establishment of the
Philippine Commonwealth and of the Republic of the Philippines every
corporation sole then organized and registered had by express provision of
law the necessary power and qualification to purchase in its name private
lands located in the territory in which it exercised its functions or ministry and
for which it was created, independently of the nationality of its incumbent
unique and single member and head, the bishop of the dioceses. It can be
also maintained without fear of being gainsaid that the Roman Catholic
Apostolic Church in the Philippines has no nationality and that the framers of
the Constitution, as will be hereunder explained, did not have in mind the
religious corporations sole when they provided that 60 per centum of the
capital thereof be owned by Filipino citizens.
There could be no controversy as to the fact that a duly registered
corporation sole is an artificial being having the right of succession and the
power, attributes, and properties expressly authorized by law or incident to its
existence (section 1, Corporation Law). In outlining the general powers of a
corporation. Public Act. No. 1459 provides among others:
SEC. 13. Every corporation has the power:
(5) To purchase, hold, convey, sell, lease, lot, mortgage, encumber,
and otherwise deal with such real and personal property as the
purpose for which the corporation was formed may permit, and the
transaction of the lawful business of the corporation may reasonably
and necessarily require, unless otherwise prescribed in this Act: . . .
In implementation of the same and specially made applicable to a form of
corporation recognized by the same law, Section 159 aforequoted expressly
allowed the corporation sole to purchase and hold real as well as personal
properties necessary for the promotion of the objects for which said
corporation sole is created. Respondent Land Registration Commissioner,
however, maintained that since the Philippine Constitution is a later
enactment than public Act No. 1459, the provisions of Section 159 in
amplification of Section 13 thereof, as regard real properties, should be
considered repealed by the former.
There is a reason to believe that when the specific provision of the
Constitution invoked by respondent Commissioner was under consideration,
the framers of the same did not have in mind or overlooked this particular
form of corporation. It is undeniable that the naturalization and conservation
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of our national resources was one of the dominating objectives of the
Convention and in drafting the present Article XII of the Constitution, the
delegates were goaded by the desire (1) to insure their conservation for
Filipino posterity; (2) to serve as an instrument of national defense, helping
prevent the extension into the country of foreign control through peaceful
economic penetration; and (3) to prevent making the Philippines a source of
international conflicts with the consequent danger to its internal security and
independence (See The Framing of the Philippine Constitution by Professor
Jose M. Aruego, a Delegate to the Constitutional Convention, Vol. II. P. 592-
604). In the same book Delegate Aruego, explaining the reason behind the
first consideration, wrote:
At the time of the framing of Philippine Constitution, Filipino capital
had been to be rather shy. Filipinos hesitated s a general rule to
invest a considerable sum of their capital for the development,
exploitation and utilization of the natural resources of the country.
They had not as yet been so used to corporate as the peoples of the
west. This general apathy, the delegates knew, would mean the
retardation of the development of the natural resources, unless
foreign capital would be encouraged to come and help in that
development. They knew that the naturalization of the natural
resources would certainly not encourage theINVESTMENT OF
FOREIGN CAPITAL into them. But there was a general feeling in the
Convention that it was better to have such a development retarded
or even postpone together until such time when the Filipinos would
be ready and willing to undertake it rather than permit the natural
resources to be placed under the ownership or control of foreigners
in order that they might be immediately be developed, with the
Filipinos of the future serving not as owners but utmost as tenants or
workers under foreign masters. By all means, the delegates
believed, the natural resources should be conserved for Filipino
posterity.
It could be distilled from the foregoing that the farmers of the Constitution
intended said provisions as barrier for foreigners or corporations financed by
such foreigners to acquire, exploit and develop our natural resources, saving
these undeveloped wealth for our people to clear and enrich when they are
already prepared and capable of doing so. But that is not the case of
corporations sole in the Philippines, for, We repeat, they are mere
administrators of the "temporalities" or properties titled in their name and for
the benefit of the members of their respective religion composed of an
overwhelming majority of Filipinos. No mention nor allusion whatsoever is
made in the Constitution as to the prohibition against or the liability of the
Roman Catholic Church in the Philippines to acquire and hold agricultural
lands. Although there were some discussions on landholdings, they were
mostly confined in the inclusion of the provision allowing the Government to
break big landed estates to put an end to absentee landlordism.
But let us suppose, for the sake of argument, that the above referred to
inhibitory clause of Section 1 of Article XIII of the constitution does have
bearing on the petitioner's case; even so the clause requiring that at least 60
per centum of the capital of the corporation be owned by Filipinos is
subordinated to the petitioner's aforesaid right already existing at the time of
the inauguration of the Commonwealth and the Republic of the Philippines.
In the language of Mr. Justice Jose P. Laurel (a delegate to the Constitutional
Convention), in his concurring opinion of the case of Gold Creek mining
Corporation, petitioner vs. Eulogio Rodriguez, Secretary of Agriculture and
Commerce, and Quirico Abadilla, Director of the Bureau of Mines,
respondent, 66 Phil. 259:
The saving clause in the section involved of the Constitution was
originally embodied in the report submitted by the Committee on
Naturalization and Preservation of Land and Other Natural
Resources to the Constitutional Convention on September 17, 1954.
It was later inserted in the first draft of the Constitution as section 13
of Article XIII thereof, and finally incorporated as we find it now. Slight
have been the changes undergone by the proviso from the time
when it comes out of the committee until it was finally adopted. When
first submitted and as inserted to the first draft of the Constitution it
reads: 'subject to any right, grant, lease, or concession existing in
respect thereto on the date of the adoption of the Constitution'. As
finally adopted, the proviso reads: 'subject to any existing right, grant,
lease, or concession at the time of the inauguration of the
Government established under this Constitution'. This recognition is
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 not mere graciousness but springs form the just character of the
government established. The framers of the Constitution were not
obscured by the rhetoric of democracy or swayed to hostility by an
intense spirit of nationalism. They well knew that conservation of our
natural resources did not mean destruction or annihilation of
acquired property rights. Withal, they erected a government neither
episodic nor stationary but well-nigh conservative in the protection of
property rights. This notwithstanding nationalistic and socialistic traits
discoverable upon even a sudden dip into a variety of the provisions
embodied in the instrument.
The writer of this decision wishes to state at this juncture that during the
deliberation of this case he submitted to the consideration of the Court the
question that may be termed the "vested right saving clause" contained in
Section 1, Article XII of the Constitution, but some of the members of this
Court either did not agree with the theory of the writer, or were not ready to
take a definite stand on the particular point I am now to discuss deferring our
ruling on such debatable question for a better occasion, inasmuch as the
determination thereof is not absolutely necessary for the solution of the
problem involved in this case. In his desire to face the issues squarely, the
writer will endeavor, at least as a disgression, to explain and develop his
theory, not as a lucubration of the Court, but of his own, for he deems it
better and convenient to go over the cycle of reasons that are linked to one
another and that step by step lead Us to conclude as We do in the dispositive
part of this decision.
It will be noticed that Section 1 of Article XIII of the Constitution provides,
among other things, that "all agricultural lands of the public domain and their
disposition shall be limited to citizens of the Philippines or to corporations at
least 60 per centum of the capital of which is owned by such citizens,
SUBJECT TO ANY EXISTING RIGHT AT THE TIME OF THE
INAUGURATION OF THE GOVERNMENT ESTABLISHED UNDER THIS
CONSTITUTION."
As recounted by Mr. Justice Laurel in the aforementioned case of Gold Creek
Mining Corporation vs. Rodriguez et al., 66 Phil. 259, "this recognition (in the
clause already quoted), is not mere graciousness but springs from the just
character of the government established. The farmers of the Constitution
were not obscured by the rhetoric of democracy or swayed to hostility by an
intense spirit of nationalism. They well knew that conservation of our natural
resources did not mean destruction or annihilation of ACQUIRED
PROPERTY RIGHTS".
But respondents' counsel may argue that the preexisting right of acquisition
of public or private lands by a corporation which does not fulfill this 60 per
cent requisite, refers to purchases of the Constitution and not to later
transactions. This argument would imply that even assuming that petitioner
had at the time of the enactment of the Constitution the right to purchase real
property or right could not be exercised after the effectivity of our
Constitution, because said power or right of corporations sole, like the herein
petitioner, conferred in virtue of the aforequoted provisions of the Corporation
Law, could no longer be exercised in view of the requisite therein prescribed
that at least 60 per centum of the capital of the corporation had to be Filipino.
It has been shown before that: (1) the corporation sole, unlike the ordinary
corporations which are formed by no less than 5 incorporators, is composed
of only one persons, usually the head or bishop of the diocese, a unit which
is not subject to expansion for the purpose of determining any percentage
whatsoever; (2) the corporation sole is only the administrator and not the
owner of the temporalities located in the territory comprised by said
corporation sole; (3) such temporalities are administered for and on behalf of
the faithful residing in the diocese or territory of the corporation sole; and (4)
the latter, as such, has no nationality and the citizenship of the incumbent
Ordinary has nothing to do with the operation, management or administration
of the corporation sole, nor effects the citizenship of the faithful connected
with their respective dioceses or corporation sole.
In view of these peculiarities of the corporation sole, it would seem obvious
that when the specific provision of the Constitution invoked by respondent
Commissioner (section 1, Art. XIII), was under consideration, the framers of
the same did not have in mind or overlooked this particular form of
corporation. If this were so, as the facts and circumstances already indicated
tend to prove it to be so, then the inescapable conclusion would be that this
requirement of at least 60 per cent of Filipino capital was never intended to
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apply to corporations sole, and the existence or not a vested right becomes
unquestionably immaterial.
But let us assumed that the questioned proviso is material. yet We might say
that a reading of said Section 1 will show that it does not refer to any actual
acquisition of land up to the right, qualification or power to acquire and hold
private real property. The population of the Philippines, Catholic to a high
percentage, is ever increasing. In the practice of religion of their faithful the
corporation sole may be in need of more temples where to pray, more
schools where the children of the congregation could be taught in the
principles of their religion, more hospitals where their sick could be treated,
more hallow or consecrated grounds or cemeteries where Catholics could be
buried, many more than those actually existing at the time of the enactment
of our Constitution. This being the case, could it be logically maintained that
because the corporation sole which, by express provision of law, has the
power to hold and acquire real estate and personal property of its churches,
charitable benevolent, or educational purposes (section 159, Corporation
Law) it has to stop its growth and restrain its necessities just because the
corporation sole is a non-stock corporation composed of only one person
who in his unity does not admit of any percentage, especially when that
person is not the owner but merely an administrator of the temporalities of
the corporation sole? The writer leaves the answer to whoever may read and
consider this portion of the decision.
Anyway, as stated before, this question is not a decisive factor in disposing
the case, for even if We were to disregard such saving clause of the
Constitution, which reads: subject to any existing right, grant, etc., at the
same time of the inauguration of the Government established under this
Constitution, yet We would have, under the evidence on record, sufficient
grounds to uphold petitioner's contention on this matter.
In this case of the Register of Deeds of Rizal vs. Ung Sui Si Temple, 2 G.R.
No. L-6776, promulgated May 21, 1955, wherein this question was
considered from a different angle, this Court through Mr. Justice J.B.L.
Reyes, said:
The fact that the appellant religious organization has no capital stock
does not suffice to escape the Constitutional inhibition, since it is
admitted that its members are of foreign nationality. The purpose of
the sixty per centum requirement is obviously to ensure that
corporation or associations allowed to acquire agricultural land or to
exploit natural resources shall be controlled by Filipinos; and the
spirit of the Constitution demands that in the absence of capital
stock, the controlling membership should be composed of Filipino
citizens.
In that case respondent-appellant Ung Siu Si Temple was not a corporation
sole but a corporation aggregate, i.e., an unregistered organization operating
through 3 trustees, all of Chinese nationality, and that is why this Court laid
down the doctrine just quoted. With regard to petitioner, which likewise is a
non-stock corporation, the case is different, because it is a registered
corporation sole, evidently of no nationality and registered mainly to
administer the temporalities and manage the properties belonging to the
faithful of said church residing in Davao. But even if we were to go over the
record to inquire into the composing membership to determine whether the
citizenship requirement is satisfied or not, we would find undeniable proof
that the members of the Roman Catholic Apostolic faith within the territory of
Davao are predominantly Filipino citizens. As indicated before, petitioner has
presented evidence to establish that the clergy and lay members of this
religion fully covers the percentage of Filipino citizens required by the
Constitution. These facts are not controverted by respondents and our
conclusion in this point is sensibly obvious.
Dissenting OpinionDiscussed. After having developed our theory in the
case and arrived at the findings and conclusions already expressed in this
decision. We now deem it proper to analyze and delve into the basic
foundation on which the dissenting opinion stands up. Being aware of the
transcendental and far-reaching effects that Our ruling on the matter might
have, this case was thoroughly considered from all points of view, the Court
sparing no effort to solve the delicate problems involved herein.
At the deliberations had to attain this end, two ways were open to a prompt
dispatch of the case: (1) the reversal of the doctrine We laid down in the
129
celebrated Krivenko case by excluding urban lots and properties from the
group of the term "private agricultural lands" use in this section 5, Article XIII
of the Constitution; and (2) by driving Our reasons to a point that might
indirectly cause the appointment of Filipino bishops or Ordinary to head the
corporations sole created to administer the temporalities of the Roman
Catholic Church in the Philippines. With regard to the first way, a great
majority of the members of this Court were not yet prepared nor agreeable to
follow that course, for reasons that are obvious. As to the second way, it
seems to be misleading because the nationality of the head of a diocese
constituted as a corporation sole has no material bearing on the functions of
the latter, which are limited to the administration of the temporalities of the
Roman Catholic Apostolic Church in the Philippines.
Upon going over the grounds on which the dissenting opinion is based, it
may be noticed that its author lingered on the outskirts of the issues, thus
throwing the main points in controversy out of focus. Of course We fully
agree, as stated by Professor Aruego, that the framers of our Constitution
had at heart to insure the conservation of the natural resources of Our
motherland of Filipino posterity; to serve them as an instrument of national
defense, helping prevent the extension into the country of foreign
control through peaceful economic penetration; and to prevent making the
Philippines a source of international conflicts with the consequent danger to
its internal security and independence. But all these precautions adopted by
the Delegates to Our Constitutional Assembly could have not been intended
for or directed against cases like the one at bar. The emphasis and
wonderings on the statement that once the capacity of a corporation sole to
acquire private agricultural lands is admitted there will be no limit to the areas
that it may hold and that this will pave the way for the "revival or revitalization
of religious landholdings that proved so troublesome in our past", cannot
even furnish the "penumbra" of a threat to the future of the Filipino people. In
the first place, the right of Filipino citizens, including those of foreign
extraction, and Philippine corporations, to acquire private lands is not subject
to any restriction or limit as to quantity or area, and We certainly do not see
any wrong in that. The right of Filipino citizens and corporations to acquire
public agricultural lands is already limited by law. In the second place,
corporations sole cannot be considered as aliens because they have no
nationality at all. Corporations sole are, under the law, mere administrators of
the temporalities of the Roman Catholic Church in the Philippines. In the third
place, every corporation, be it aggregate or sole, is only entitled to purchase,
convey, sell, lease, let, mortgage, encumber and otherwise deal with real
properties when it is pursuant to or in consonance with the purposes for
which the corporation was formed, and when the transactions of the lawful
business of the corporation reasonably and necessarily require such dealing
section 13-(5) of the Corporation Law, Public Act No. 1459 and
considering these provisions in conjunction with Section 159 of the same law
which provides that a corporation sole may only "purchase and hold real
estate and personal properties for its church, charitable, benevolent or
educational purposes", the above mentioned fear of revitalization of religious
landholdings in the Philippines is absolutely dispelled. The fact that the law
thus expressly authorizes the corporations sole to receive bequests or gifts
of real properties (which were the main source that the friars had to acquire
their big haciendas during the Spanish regime), is a clear indication that the
requisite that bequests or gifts of real estate be for charitable, benevolent, or
educational purposes, was, in the opinion of the legislators, considered
sufficient and adequate protection against the revitalization of religious
landholdings.
Finally, and as previously stated, We have reason to believe that when the
Delegates to the Constitutional Convention drafted and approved Article XIII
of the Constitution they do not have in mind the corporation sole. We come to
this finding because the Constitutional Assembly, composed as it was by a
great number of eminent lawyers and jurists, was like any other legislative
body empowered to enact either the Constitution of the country or any public
statute, presumed to know the conditions existing as to particular subject
matter when it enacted a statute (Board of Commerce of Orange Country vs.
Bain, 92 S.E. 176; N. C. 377).
Immemorial customs are presumed to have been always in the mind
of the Legislature in enacting legislation. (In re Kruger's Estate, 121
A. 109; 277 P. 326).
The Legislative is presumed to have a knowledge of the state of the
law on the subjects upon which it legislates. (Clover Valley Land and
Stock Co. vs. Lamb et al., 187, p. 723,726.)
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 The Court in construing a statute, will assume that the legislature
acted with full knowledge of the prior legislation on the subject and
its construction by the courts. (Johns vs. Town of Sheridan, 89 N. E.
899, 44 Ind. App. 620.).
The Legislature is presumed to have been familiar with the subject
with which it was dealing . . . . (Landers vs. Commonwealth, 101 S.
E. 778, 781.).
The Legislature is presumed to know principles of statutory
construction. (People vs. Lowell, 230 N. W. 202, 250 Mich. 349,
followed in P. vs. Woodworth, 230 N.W. 211, 250 Mich. 436.).
It is not to be presumed that a provision was inserted in a
constitution or statute without reason, or that a result was intended
inconsistent with the judgment of men of common sense guided by
reason" (Mitchell vs. Lawden, 123 N.E. 566, 288 Ill. 326.) See City of
Decatur vs. German, 142 N. E. 252, 310 Ill. 591, and may other
authorities that can be cited in support hereof.
Consequently, the Constitutional Assembly must have known:
1. That a corporation sole is organized by and composed of a single
individual, the head of any religious society or church operating
within the zone, area or jurisdiction covered by said corporation sole
(Article 155, Public Act No. 1459);
2. That a corporation sole is a non-stock corporation;
3. That the Ordinary ( the corporation sole proper) does not own the
temporalities which he merely administers;
4. That under the law the nationality of said Ordinary or of any
administrator has absolutely no bearing on the nationality of the
person desiring to acquire real property in the Philippines by
purchase or other lawful means other than by hereditary succession,
who according to the Constitution must be a Filipino (sections 1 and
5, Article XIII).
5. That section 159 of the Corporation Law expressly authorized the
corporation sole to purchase and holdreal estate for its church,
charitable, benevolent or educational purposes, and to receive
bequests or giftsfor such purposes;
6. That in approving our Magna Carta the Delegates to the
Constitutional Convention, almost all of whom were Roman
Catholics, could not have intended to curtail the propagation of the
Roman Catholic faith or the expansion of the activities of their
church, knowing pretty well that with the growth of our population
more places of worship, more schools where our youth could be
taught and trained; more hallow grounds where to bury our dead
would be needed in the course of time.
Long before the enactment of our Constitution the law authorized the
corporations sole even to receive bequests or gifts of real estates and this
Court could not, without any clear and specific provision of the Constitution,
declare that any real property donated, let as say this year, could no longer
be registered in the name of the corporation sole to which it was conveyed.
That would be an absurdity that should not receive our sanction on the
pretext that corporations sole which have no nationality and are non-stock
corporations composed of only one person in the capacity of administrator,
have to establish first that at least sixty per centum of their capital belong to
Filipino citizens. The new Civil Code even provides:
ART. 10. In case of doubt in the interpretation or application of
laws, it is presumed that the lawmaking body intended right and
justice to prevail.
Moreover, under the laws of the Philippines, the administrator of the
properties of a Filipino can acquire, in the name of the latter, private lands
without any limitation whatsoever, and that is so because the properties thus
acquired are not for and would not belong to the administrator but to the
131
Filipino whom he represents. But the dissenting Justice inquires: If the
Ordinary is only the administrator, for whom does he administer? And who
can alter or overrule his acts? We will forthwith proceed to answer these
questions. The corporations sole by reason of their peculiar constitution and
form of operation have no designed owner of its temporalities, although by
the terms of the law it can be safely implied that the Ordinary holds them in
trust for the benefit of the Roman Catholic faithful to their respective locality
or diocese. Borrowing the very words of the law, We may say that the
temporalities of every corporation sole are held in trust for the use, purpose,
behalf and benefit of the religious society, or order so incorporated or of the
church to which the diocese, synod, or district organization is an organized
and constituent part (section 163 of the Corporation Law).
In connection with the powers of the Ordinary over the temporalities of the
corporation sole, let us see now what is the meaning and scope of the word
"control". According to the Merriam-Webster's New International Dictionary,
2nd ed., p. 580, on of the acceptations of the word "control" is:
4. To exercise restraining or directing influence over; to dominate;
regulate; hence, to hold from action; to curb; subject; also, Obs. to
overpower.
SYN: restrain, rule, govern, guide, direct; check, subdue.
It is true that under section 159 of the Corporation Law, the intervention of
the courts is not necessary, to mortgage or sell real property held by the
corporation sole where the rules, regulations and discipline of the religious
denomination, society or church concerned presented by such corporation
sole regulates the methods of acquiring, holding, selling and mortgaging real
estate, and that the Roman Catholic faithful residing in the jurisdiction of the
corporation sole has no say either in the manner of acquiring or of selling real
property. It may be also admitted that the faithful of the diocese cannot
govern or overrule the acts of the Ordinary, but all this does not mean that
the latter can administer the temporalities of the corporation sole without
check or restraint. We must not forget that when a corporation sole is
incorporated under Philippine laws, the head and only member thereof
subjects himself to the jurisdiction of the Philippine courts of justice and these
tribunals can thus entertain grievances arising out of or with respect to the
temporalities of the church which came into the possession of the corporation
sole as administrator. It may be alleged that the courts cannot intervene as to
the matters of doctrine or teachings of the Roman Catholic Church. That is
correct, but the courts may step in, at the instance of the faithful for whom the
temporalities are being held in trust, to check undue exercise by the
corporation sole of its power as administrator to insure that they are used for
the purpose or purposes for which the corporation sole was created.
American authorities have these to say:
It has been held that the courts have jurisdiction over an action
brought by persons claiming to be members of a church, who allege
a wrongful and fraudulent diversion of the church property to uses
foreign to the purposes of the church, since no ecclesiastical
question is involved and equity will protect from wrongful diversion of
the property (Hendryx vs. Peoples United Church, 42 Wash. 336, 4
L.R.A. n.s. 1154).
The courts of the State have no general jurisdiction and control over
the officers of such corporations in respect to the performance of
their official duties; but as in respect to the property which they hold
for the corporation, they stand in position of TRUSTEES and the
courts may exercise the same supervision as in other cases of
trust (Ramsey vs. Hicks, 174 Ind. 428, 91 N.E. 344, 92 N.E. 164, 30
L.R.A. n.s. 665; Hendryx vs. Peoples United Church, supra.).
Courts of the state do not interfere with the administration of church
rules or discipline unless civil rights become involved and which must
be protected (Morris St., Baptist Church vs. Dart, 67 S.C. 338, 45
S.E. 753, and others). (All cited in Vol. II, Cooley's Constitutional
Limitations, p. 960-964.).
If the Constitutional Assembly was aware of all the facts above enumerated
and of the provisions of law relative to existing conditions as to management
132
and operation of corporations sole in the Philippines, and if, on the other
hand, almost all of the Delegates thereto embraced the Roman Catholic faith,
can it be imagined even for an instant that when Article XIII of the
Constitution was approved the framers thereof intended to prevent or curtail
from then on the acquisition sole, either by purchase or donation, of real
properties that they might need for the propagation of the faith and for there
religious and Christian activities such as the moral education of the youth,
the care, attention and treatment of the sick and the burial of the dead of the
Roman Catholic faithful residing in the jurisdiction of the respective
corporations sole? The mere indulgence in said thought would impress upon
Us a feeling of apprehension and absurdity. And that is precisely the leit
motiv that permeates the whole fabric of the dissenting opinion.
It seems from the foregoing that the main problem We are confronted with in
this appeal, hinges around the necessity of a proper and adequate
interpretation of sections 1 and 5 of Article XIII of the Constitution. Let Us
then be guided by the principles of statutory construction laid down by the
authorities on the matter:
The most important single factor in determining the intention of the
people from whom the constitution emanated is the language in
which it is expressed. The words employed are to be taken in their
natural sense, except that legal or technical terms are to be given
their technical meaning. The imperfections of language as a vehicle
for conveying meanings result in ambiguities that must be resolved
by result to extraneous aids for discovering the intent of the framers.
Among the more important of these are a consideration of the history
of the times when the provision was adopted and of the purposes
aimed at in its adoption. The debates of constitutional convention,
contemporaneous construction, and practical construction by the
legislative and executive departments, especially if long continued,
may be resorted to resolve, but not to create,
ambiguities. . . . Consideration of the consequences flowing from
alternative constructions of doubtful provisions constitutes an
important interpretative device. . . . The purposes of many of the
broadly phrased constitutional limitations were the promotion of
policies that do not lend themselves to definite and specific
formulation. The courts have had to define those policies and have
often drawn on natural law and natural rights theories in doing so.
The interpretation of constitutions tends to respond to changing
conceptions of political and social values. The extent to which these
extraneous aids affect the judicial construction of constitutions
cannot be formulated in precise rules, but their influence cannot be
ignored in describing the essentials of the process (Rottschaeffer on
Constitutional Law, 1939 ed., p. 18-19).
There are times that when even the literal expression of legislation
may be inconsistent with the general objectives of policy behind it,
and on the basis of equity or spirit of the statute the courts rationalize
a restricted meaning of the latter. A restricted interpretation is usually
applied where the effect of literal interpretation will make for injustice
and absurdity or, in the words of one court, the language must be so
unreasonable 'as to shock general common sense'. (Vol. 3,
Sutherland on Statutory Construction, 3rd ed., 150.).
A constitution is not intended to be a limitation on the development of
a country nor an obstruction to its progress and foreign relations
(Moscow Fire Ins. Co. of Moscow, Russia vs. Bank of New York and
Trust Co., 294 N. Y. S.648; 56 N.E. 2d. 745, 293 N.Y. 749).
Although the meaning or principles of a constitution remain fixed and
unchanged from the time of its adoption, a constitution must be
construed as if intended to stand for a great length of time, and it is
progressive and not static. Accordingly, it should not receive too
narrow or literal an interpretation but rather the meaning given it
should be applied in such manner as to meet new or changed
conditions as they arise (U.S. vs. Lassic, 313 U.S. 299, 85 L. Ed.,
1368).
Effect should be given to the purpose indicated by a fair
interpretation of the language used and that construction which
effectuates, rather than that which destroys a plain intent or purpose
133
 of a constitutional provision, is not only favored but will be adopted
(State ex rel. Randolph Country vs. Walden, 206 S.W. 2d 979).
It is quite generally held that in arriving at the intent and purpose the
construction should be broad or liberal or equitable, as the better
method of ascertaining that intent, rather than technical (Great
Southern Life Ins. Co. vs. City of Austin, 243 S.W. 778).
All these authorities uphold our conviction that the framers of the Constitution
had not in mind the corporations sole, nor intended to apply them the
provisions of section 1 and 5 of said Article XIII when they passed and
approved the same. And if it were so as We think it is, herein petitioner, the
Roman Catholic Apostolic Administrator of Davao, Inc., could not be deprived
of the right to acquire by purchase or donation real properties for charitable,
benevolent and educational purposes, nor of the right to register the same in
its name with the Register of Deeds of Davao, an indispensable requisite
prescribed by the Land Registration Act for lands covered by the Torrens
system.
We leave as the last theme for discussion the much debated question above
referred to as "the vested right saving clause" contained in section 1, Article
XIII of the Constitution. The dissenting Justice hurls upon the personal
opinion expressed on the matter by the writer of the decision the most
pointed darts of his severe criticism. We think, however, that this strong
dissent should have been spared, because as clearly indicated before, some
members of this Court either did not agree with the theory of the writer or
were not ready to take a definite stand on that particular point, so that there
being no majority opinion thereon there was no need of any dissension
therefrom. But as the criticism has been made the writer deems it necessary
to say a few words of explanation.
The writer fully agrees with the dissenting Justice that ordinarily "a capacity
to acquire (property) in futuro, is not in itself a vested or existing property
right that the Constitution protects from impairment. For a property right to be
vested (or acquired) there must be a transition from the potential or
contingent to the actual, and the proprietary interest must have attached to a
thing; it must have become 'fixed and established'" (Balboa vs. Farrales, 51
Phil. 498). But the case at bar has to be considered as an exception to the
rule because among the rights granted by section 159 of the Corporation
Law was the right to receive bequests or gifts of real properties for charitable,
benevolent and educational purposes. And this right to receive such
bequests or gifts (which implies donations in futuro), is not a mere potentiality
that could be impaired without any specific provision in the Constitution to
that effect, especially when the impairment would disturbingly affect the
propagation of the religious faith of the immense majority of the Filipino
people and the curtailment of the activities of their Church. That is why the
writer gave us a basis of his contention what Professor Aruego said in his
book "The Framing of the Philippine Constitution" and the enlightening
opinion of Mr. Justice Jose P. Laurel, another Delegate to the Constitutional
Convention, in his concurring opinion in the case of Goldcreek Mining Co. vs.
Eulogio Rodriguez et al., 66 Phil. 259. Anyway the majority of the Court did
not deem necessary to pass upon said "vested right saving clause" for the
final determination of this case.
JUDGMENT
Wherefore, the resolution of the respondent Land Registration Commission
of September 21, 1954, holding that in view of the provisions of sections 1
and 5 of Article XIII of the Philippine Constitution the vendee (petitioner) is
not qualified to acquire lands in the Philippines in the absence of proof that at
least 60 per centum of the capital, properties or assets of the Roman
Catholic Apostolic Administrator of Davao, Inc. is actually owned or controlled
by Filipino citizens, and denying the registration of the deed of sale in the
absence of proof of compliance with such requisite, is hereby reversed.
Consequently, the respondent Register of Deeds of the City of Davao is
ordered to register the deed of sale executed by Mateo L. Rodis in favor of
the Roman Catholic Apostolic Administrator of Davao, Inc., which is the
subject of the present litigation. No pronouncement is made as to costs. It is
so ordered.
Bautista Angelo and Endencia, JJ., concur.
134
Paras, C.J., and Bengzon, J., concur in the result.

135
136
G.R. No. L-55289 June 29, 1982
REPUBLIC OF THE PHILIPPINES, represented by the Director of
Lands, petitioner-appellant,
vs.
JUDGE CANDIDO P. VILLANUEVA, of the Court of First Instance of
Bulacan, Malolos Branch VII, and IGLESIA NI CRISTO, as a corporation
sole, represented by ERAO G. MANALO, as Executive
Minister,respondents-appellees.
AQUINO, J.:
Like L-49623, Manila Electric Company vs. Judge Castro-Bartolome, this
case involves the prohibition in section 11, Article XIV of the Constitution that
"no private corporation or association may hold alienable lands of the public
domain except by lease not to exceed one thousand hectares in area".
Lots Nos. 568 and 569, located at Barrio Dampol, Plaridel, Bulacan, with an
area of 313 square meters and an assessed value of P1,350 were acquired
by the Iglesia Ni Cristo on January 9, 1953 from Andres Perez in exchange
for a lot with an area of 247 square meters owned by the said church (Exh.
D).
The said lots were already possessed by Perez in 1933. They are not
included in any military reservation. They are inside an area which was
certified as alienable or disposable by the Bureau of Forestry in 1927. The
lots are planted to santol and mango trees and banana plants. A chapel
exists on the said land. The land had been declared for realty tax purposes.
Realty taxes had been paid therefor (Exh. N).
On September 13, 1977, the Iglesia Ni Cristo, a corporation sole, duly
existing under Philippine laws, filed with the Court of First Instance of
Bulacan an application for the registration of the two lots. It alleged that it and
its predecessors-in-interest had possessed the land for more than thirty
years. It invoked section 48(b) of the Public Land Law, which provides:
Chapter VIII.Judicial confirmation of imperfect or
incomplete titles.
xxx xxx xxx
SEC. 48. The following-described citizens of the Philippines,
occupying lands of the public domain or claiming to own any
such lands or an interest therein, but whose titles have not
been perfected or completed, may apply to the Court of First
Instance of the province where the land is located for
confirmation of their claims and the issuance of a certificate
of title therefore, under the Land Register Act, to wit:
xxx xxx xxx
(b) Those who by themselves or through their predecessors-
in-interest have been in open, continuous, exclusive, and
notorious possession and occupation of agricultural lands of
the public domain, under a bona fide claim of acquisition of
ownership, for at least thirty years immediately preceding the
filing of the application for confirmation of title except when
prevented by war or force majeure. These shall be
conclusively presumed to have performed all the conditions
essential to a Government grant and shall be entitled to a
certificate of title under the provisions of this chapter." (As
amended by Republic Act No. 1942, approved on June 22,
1957.)
The Republic of the Philippines, through the Direct/r of Lands, opposed the
application on the grounds that applicant, as a private corporation, is
disqualified to hold alienable lands of the public domain, that the land applied
for is public land not susceptible of private appropriation and that the
applicant and its predecessors-in-interest have not been in the open,
137
continuous, exclusive and notorious possession of the land since June 12,
1945.
After hearing, the trial court ordered the registration of the two lots, as
described in Plan Ap-04-001344 (Exh. E), in the name of the Iglesia Ni
Cristo, a corporation sole, represented by Executive Minister Erao G.
Manalo, with office at the corner of Central and Don Mariano Marcos
Avenues, Quezon City, From that decision, the Republic of the Philippines
appealed to this Court under Republic Act No. 5440. The appeal should be
sustained.
As correctly contended by the Solicitor General, the Iglesia Ni Cristo, as a
corporation sole or a juridical person, is disqualified to acquire or hold
alienable lands of the public domain, like the two lots in question, because of
the constitutional prohibition already mentioned and because the said church
is not entitled to avail itself of the benefits of section 48(b) which applies only
to Filipino citizens or natural persons. A corporation sole (an "unhappy freak
of English law") has no nationality (Roman Catholic Apostolic Adm. of Davao,
Inc. vs. Land Registration Commission, 102 Phil. 596. See Register of Deeds
vs. Ung Siu Si Temple, 97 Phil. 58 and sec. 49 of the Public Land Law).
since time immemorial, for such possession would justify the presumption
that the land had never been part of the public domain or that it had been a
private property even before the Spanish conquest. "
In Uy Un vs. Perez, 71 Phil. 508, it was noted that the right of an occupant of
public agricultural land to obtain a confirmation of his title under section 48(b)
of the Public Land Law is a "derecho dominical incoativo"and that before the
issuance of the certificate of title the occupant is not in the juridical sense the
true owner of the land since it still pertains to the State.
The lower court's judgment is reversed and set aside. The application for
registration of the Iglesia Ni Cristo is dismissed with costs against said
applicant.
SO ORDERED.
Barredo, Makasiar, Guerrero, Melencio-Herrera, Escolin, Vasquez, Relova
and Gutierrez, Jr., JJ., concur.
Concepcion, Jr., J., is on leave.

The contention in the comments of the Iglesia Ni Cristo (its lawyer did not file
Plana, J., took no part.
any brief) that the two lots are private lands, following the rule laid down in
Susi vs. Razon and Director of Lands, 48 Phil. 424, is not correct. What was
considered private land in the Susi case was a parcel of land possessed by a
Filipino citizen since time immemorial, as in Cario vs. Insular
Government, 212 U.S. 449, 53 L. ed. 594, 41 Phil. 935 and 7 Phil. 132. The
lots sought to be registered in this case do not fall within that category. They
are still public lands. A land registration proceeding under section 48(b)
"presupposes that the land is public" (Mindanao vs. Director of Lands, L-
19535, July 10, 1967, 20 SCRA 641, 644).

As held in Oh Cho vs. Director of Lands, 75 Phil. 890, "all lands that were not
acquired from the Government, either by purchase or by grant, belong to the
public domain. An exception to the rule would be any land that should have
been in the possession of an occupant and of his predecessors-in-interest

138
139
 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
G.R. No. L-12719 May 31, 1962 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
THE COLLECTOR OF INTERNAL REVENUE, petitioner, overhead expenses and to improve its golf-course. In 1951. as a result of a
vs. capital surplus, arising from the re-valuation of its real properties, the value or
THE CLUB FILIPINO, INC. DE CEBU, respondent. price of which increased, the Club declared stock dividends; but no actual
cash dividends were distributed to the stockholders. In 1952, a BIR agent

140
discovered that the Club has never paid percentage tax on the gross receipts 2. Whether it is liable for the payment of the sum of P500.00 as compromise
of its bar and restaurant, although it secured B-4, B-9(a) and B-7 licenses. In penalty.
a letter dated December 22, 1852, the Collector of Internal Revenue
assessed against and demanded from the Club, the following sums: 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
As percentage tax on its gross receipts
provides in general that "the percentage taxes on business shall be payable
during the tax years 1946 to 1951 P9,599.07
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
Surcharge therein 2,399.77
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
As fixed tax for the years 1946 to 1952 70.00 factoattach 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
Compromise penalty 500.00 motive, and the term business when used without qualification, should be
construed in its plain and ordinary meaning, restricted to activities for profitor
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
The Club wrote the Collector, requesting for the cancellation of the full definitions of the word "business"; Coll. of Int. Rev. v. Sweeney, et al.
assessment. The request having been denied, the Club filed the instant [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts
petition for review. of which are similar to the ones at bar; Manila Polo Club v. B. L. Meer, etc.,
No. L-10854, Jan. 27, 1960).
The dominant issues involved in this case are twofold:
Having found as a fact that the Club was organized to develop and cultivate
1. Whether the respondent Club is liable for the payment of the sum of sports of all class and denomination, for the healthful recreation and
12,068.84, as fixed and percentage taxes and surcharges prescribed in entertainment of its stockholders and members; that upon its dissolution, its
sections 182, 183 and 191 of the Tax Code, under which the assessment remaining assets, after paying debts, shall be donated to a charitable
was made, in connection with the operation of its bar and restaurant, during Philippine Institution in Cebu; that it is operated mainly with funds derived
the periods mentioned above; and 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

141
to improve its golf-course (cost-plus-expenses-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
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.

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.

142
 Virgilio E. Dulay for petitioners.

Torres, Tobias, Azura & Jocson for private respondents.

NOCON, J.:

This is a petition for review on certiorari to annul and set aside the
decision 1 of the Court of Appeals affirming the decision 2 of the Regional Trial
Court of Pasay, Branch 114 Civil Cases Nos. 8198-P, and 2880-P, the
dispositive portion of which reads, as follows:

Wherefore, in view of all the foregoing considerations, in this

Court hereby renders judgment, as follows:

In Civil Case No. 2880-P, the petition filed by Manuel R.

Dulay Enterprises, Inc. and Virgilio E. Dulay for annulment or
declaration of nullity of the decision of the Metropolitan Trial
Court, Branch 46, Pasay City, in its Civil Case No. 38-81
entitled "Edgardo D. Pabalan, et al., vs. Spouses Florentino
Manalastas, et al.," is dismissed for lack of merits;

In Civil Case No. 8278-P, the complaint filed by Manuel R.

Dulay Enterprises, Inc. for cancellation of title of Manuel A.
Torres, Jr. (TCT No. 24799 of the Register of Deeds of
Pasay City) and reconveyance, is dismissed for lack or
G.R. No. 91889 August 27, 1993 merit, and,

MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND In Civil Case No. 8198-P, defendants Manuel R. Dulay
NEPOMUCENO REDOVAN, petitioners, Enterprises, Inc. and Virgilio E. Dulay are ordered to
vs. surrender and deliver possession of the parcel of land,
THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN, together with all the improvements thereon, described in
MANUEL A. TORRES, JR., MARIA THERESA V. VELOSO AND Transfer Certificate of Title No. 24799 of the Register of
CASTRENSE C. VELOSO, respondents. Deeds of Pasay City, in favor of therein plaintiffs Manuel A.
Torres, Jr. as owner and Edgardo D. Pabalan as real estate

143
 administrator of said Manuel A. Torres, Jr.; to account for and
return to said plaintiffs the rentals from dwelling unit No. 8-A
of the apartment building (Dulay Apartment) from June 1980
up to the present, to indemnify plaintiffs, jointly and severally,
expenses of litigation in the amount of P4,000.00 and
attorney's fees in the sum of P6,000.00, for all the three (3)
cases. Co-defendant Nepomuceno Redovan is ordered to
pay the current and subsequent rentals on the premises
leased by him to plaintiffs.
The counterclaim of defendants Virgilio E. Dulay and Manuel
R. Dulay Enterprises, Inc. and N. Redovan, dismissed for
lack of merit. With costs against the three (3) aforenamed
defendants. 3
The facts as found by the trial court are as follows:
Petitioner Manuel R. Dulay Enterprises, Inc, a domestic corporation with the
following as members of its Board of Directors: Manuel R. Dulay with 19,960
shares and designated as president, treasurer and general manager, Atty.
Virgilio E. Dulay with 10 shares and designated as vice-president; Linda E.
Dulay with 10 shares; Celia Dulay-Mendoza with 10 shares; and Atty. Plaridel
C. Jose with 10 shares and designated as secretary, owned a property
covered by TCT No. 17880 4 and known as Dulay Apartment consisting of
sixteen (16) apartment units on a six hundred eighty-nine (689) square
meters lot, more or less, located at Seventh Street (now Buendia Extension)
and F.B. Harrison Street, Pasay City.
Petitioner corporation through its president, Manuel Dulay, obtained various
loans for the construction of its hotel project, Dulay Continental Hotel (now
Frederick Hotel). It even had to borrow money from petitioner Virgilio Dulay
to be able to continue the hotel project. As a result of said loan, petitioner
Virgilio Dulay occupied one of the unit apartments of the subject property
since property since 1973 while at the same time managing the Dulay
Apartment at his shareholdings in the corporation was subsequently
increased by his father. 5
On December 23, 1976, Manuel Dulay by virtue of Board Resolution
No 18 6 of petitioner corporation sold the subject property to private
respondents spouses Maria Theresa and Castrense Veloso in the amount of
P300,000.00 as evidenced by the Deed of Absolute Sale. 7 Thereafter, TCT
No. 17880 was cancelled and TCT No. 23225 was issued to private
respondent Maria Theresa Veloso. 8 Subsequently, Manuel Dulay and private
respondents spouses Veloso executed a Memorandum to the Deed of
Absolute Sale of December 23, 1976 9 dated December 9, 1977 giving
Manuel Dulay within (2) years or until December 9, 1979 to repurchase the
subject property for P200,000.00 which was, however, not annotated either in
TCT No. 17880 or TCT No. 23225.
On December 24, 1976, private respondent Maria Veloso, without the
knowledge of Manuel Dulay, mortgaged the subject property to private
respondent Manuel A. Torres for a loan of P250,000.00 which was duly
annotated as Entry No. 68139 in TCT No. 23225. 10
Upon the failure of private respondent Maria Veloso to pay private
respondent Torres, the subject property was sold on April 5, 1978 to private
respondent Torres as the highest bidder in an extrajudicial foreclosure sale
as evidenced by the Certificate of Sheriff's Sale 11 issued on April 20, 1978.
On July 20, 1978, private respondent Maria Veloso executed a Deed of
Absolute Assignment of the Right to Redeem 12 in favor of Manuel Dulay
assigning her right to repurchase the subject property from private
respondent Torres as a result of the extra sale held on April 25, 1978.
As neither private respondent Maria Veloso nor her assignee Manuel Dulay
was able to redeem the subject property within the one year statutory period
for redemption, private respondent Torres filed an Affidavit of Consolidation of
Ownership 13 with the Registry of Deeds of Pasay City and TCT No.
24799 14 was subsequently issued to private respondent Manuel Torres on
April 23, 1979.
On October 1, 1979, private respondent Torres filed a petition for the
issuance of a writ of possession against private respondents spouses Veloso
144
and Manuel Dulay in LRC Case No. 1742-P. However, when petitioner
Virgilio Dulay was never authorized by the petitioner corporation to sell or
mortgage the subject property, the trial court ordered private respondent
Torres to implead petitioner corporation as an indispensable party but the
latter moved for the dismissal of his petition which was granted in an Order
dated April 8, 1980.
On June 20, 1980, private respondent Torres and Edgardo Pabalan, real
estate administrator of Torres, filed an action against petitioner corporation,
Virgilio Dulay and Nepomuceno Redovan, a tenant of Dulay Apartment Unit
No. 8-A for the recovery of possession, sum of money and damages with
preliminary injunction in Civil Case, No. 8198-P with the then Court of First
Instance of Rizal.
On July 21, 1980, petitioner corporation filed an action against private
respondents spouses Veloso and Torres for the cancellation of the Certificate
of Sheriff's Sale and TCT No. 24799 in Civil Case No. 8278-P with the then
Court of First Instance of Rizal.
On January 29, 1981, private respondents Pabalan and Torres filed an action
against spouses Florentino and Elvira Manalastas, a tenant of Dulay
Apartment Unit No. 7-B, with petitioner corporation as intervenor for
ejectment in Civil Case No. 38-81 with the Metropolitan Trial Court of Pasay
City which rendered a decision on April 25, 1985, dispositive portion of which
reads, as follows:
Wherefore, judgment is hereby rendered in favor of the
plaintiff (herein private respondents) and against the
defendants:
1. Ordering the defendants and all persons claiming
possession under them to vacate the premises.
2. Ordering the defendants to pay the rents in the sum of
P500.000 a month from May, 1979 until they shall have
vacated the premises with interest at the legal rate;
3. Ordering the defendants to pay attorney's fees in the sum
of P2,000.00 and P1,000.00 as other expenses of litigation
and for them to pay the costs of the suit. 15
Thereafter or on May 17, 1985, petitioner corporation and Virgilio Dulay filed
an action against the presiding judge of the Metropolitan Trial Court of Pasay
City, private respondents Pabalan and Torres for the annulment of said
decision with the Regional Trial Court of Pasay in Civil Case No. 2880-P.
Thereafter, the three (3) cases were jointly tried and the trial court rendered a
decision in favor of private respondents.
Not satisfied with said decision, petitioners appealed to the Court of Appeals
which rendered a decision on October 23, 1989, the dispositive portion of
which reads, as follows:
PREMISES CONSIDERED, the decision being appealed
should be as it is hereby AFFIRMED in full. 16
On November 8, 1989, petitioners filed a Motion for Reconsideration which
was denied on January 26, 1990.
Hence, this petition.
During the pendency of this petition, private respondent Torres died on April
3, 1991 as shown in his death certificate 17 and named Torres-Pabalan Realty
& Development Corporation as his heir in his holographic will 18 dated
October 31, 1986.
Petitioners contend that the respondent court had acted with grave abuse of
discretion when it applied the doctrine of piercing the veil of corporate entity
in the instant case considering that the sale of the subject property between
private respondents spouses Veloso and Manuel Dulay has no binding effect
on petitioner corporation as Board Resolution No. 18 which authorized the
sale of the subject property was resolved without the approval of all the
145
members of the board of directors and said Board Resolution was prepared
by a person not designated by the corporation to be its secretary.
We do not agree.
Section 101 of the Corporation Code of the Philippines provides:
Sec. 101. When board meeting is unnecessary or improperly
held. Unless the by-laws provide otherwise, any action by
the directors of a close corporation without a meeting shall
nevertheless be deemed valid if:
1. Before or after such action is taken, written consent
thereto is signed by all the directors, or
2. All the stockholders have actual or implied knowledge of
the action and make no prompt objection thereto in writing;
or
3. The directors are accustomed to take informal action with
the express or implied acquiese of all the stockholders, or
4. All the directors have express or implied knowledge of the
action in question and none of them makes prompt objection
thereto in writing.
If a directors' meeting is held without call or notice, an action
taken therein within the corporate powers is deemed ratified
by a director who failed to attend, unless he promptly files
his written objection with the secretary of the corporation
after having knowledge thereof.
In the instant case, 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. At any rate, corporate action taken at a board meeting without
proper call or notice in a close corporation is deemed ratified by the absent
director unless the latter promptly files his written objection with the secretary
of the corporation after having knowledge of the meeting which, in his case,
petitioner Virgilio Dulay failed to do.
It is relevant to note that although a corporation is an entity which has a
personality distinct and separate from its individual stockholders or
members, 19 the veil of corporate fiction may be pierced when it is used to
defeat public convenience justify wrong, protect fraud or defend crime. 20 The
privilege of being treated as an entity distinct and separate from its
stockholder or members is therefore confined to its legitimate uses and is
subject to certain limitations to prevent the commission of fraud or other
illegal or unfair act. When the corporation is used merely as an alter ego or
business conduit of a person, the law will regard the corporation as the act of
that person. 21 The Supreme Court had repeatedly disregarded the separate
personality of the corporation where the corporate entity was used to annul a
valid contract executed by one of its members.
Petitioners' claim that the sale of the subject property by its president,
Manuel Dulay, to private respondents spouses Veloso is null and void as the
alleged Board Resolution No. 18 was passed without the knowledge and
consent of the other members of the board of directors cannot be sustained.
As correctly pointed out by the respondent Court of Appeals:
Appellant Virgilio E. Dulay's protestations of complete
innocence to the effect that he never participated nor was
even aware of any meeting or resolution authorizing the
mortgage or sale of the subject premises (see par. 8,
affidavit of Virgilio E. Dulay, dated May 31, 1984, p. 14, Exh.
"21") is difficult to believe. On the contrary, he is very much
privy to the transactions involved. To begin with, he is a
incorporator and one of the board of directors designated at
the time of the organization of Manuel R. Dulay Enterprise,
Inc. In ordinary parlance, the said entity is loosely referred to
as a "family corporation". The nomenclature, if imprecise,
however, fairly reflects the cohesiveness of a group and the
parochial instincts of the individual members of such an
146
 aggrupation of which Manuel R. Dulay Enterprises, Inc. is
typical: four-fifths of its incorporators being close relatives
namely, three (3) children and their father whose name
identifies their corporation (Articles of Incorporation of
Manuel R. Dulay Enterprises, Inc. Exh. "31-A"). 22
Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an
affidavit 23 that he was a signatory witness to the execution of the post-dated
Deed of Absolute Sale of the subject property in favor of private respondent
Torres indicates that he was aware of the transaction executed between his
father and private respondents and had, therefore, adequate knowledge
about the sale of the subject property to private respondents.
Consequently, petitioner corporation is liable for the act of Manuel Dulay and
the sale of the subject property to private respondents by Manuel Dulay is
valid and binding. As stated by the trial court:
. . . the sale between Manuel R. Dulay Enterprises, Inc. and
the spouses Maria Theresa V. Veloso and Castrense C.
Veloso, was a corporate act of the former and not a personal
transaction of Manuel R. Dulay. This is so because Manuel
R. Dulay was not only president and treasurer but also the
general manager of the corporation. The corporation was a
closed family corporation and the only non-relative in the
board of directors was Atty. Plaridel C. Jose who appeared
on paper as the secretary. There is no denying the fact,
however, that Maria Socorro R. Dulay at times acted as
secretary. . . ., the Court can not lose sight of the fact that the
Manuel R. Dulay Enterprises, Inc. is a closed family
corporation where the incorporators and directors belong to
one single family. It cannot be concealed that Manuel R.
Dulay as president, treasurer and general manager almost
had absolute control over the business and affairs of the
corporation. 24
Moreover, the appellate courts will not disturb the findings of the trial judge
unless he has plainly overlooked certain facts of substance and value that, if
considered, might affect the result of the case, 25 which is not present in the
instant case.
Petitioners' contention that private respondent Torres never acquired
ownership over the subject property since the latter was never in actual
possession of the subject property nor was the property ever delivered to him
is also without merit.
Paragraph 1, Article 1498 of the New Civil Code provides:
When the sale is made through a public instrument, the
execution thereof shall be equivalent to the delivery of the
thing which is the object of the contract, if from the deed the
contrary do not appear or cannot clearly be inferred.
Under the aforementioned article, the mere execution of the deed of sale in a
public document is equivalent to the delivery of the property. Likewise, this
Court had held that:
It is settled that the buyer in a foreclosure sale becomes the
absolute owner of the property purchased if it is not
redeemed during the period of one year after the registration
of the sale. As such, he is entitled to the possession of the
said property and can demand it at any time following the
consolidation of ownership in his name and the issuance to
him of a new transfer certificate of title. The buyer can in fact
demand possession of the land even during the redemption
period except that he has to post a bond in accordance with
Section 7 of Act No. 3133 as amended. No such bond is
required after the redemption period if the property is not
redeemed. Possession of the land then becomes an
absolute right of the purchaser as confirmed owner. 26
147
Therefore, prior physical delivery or possession is not legally required since
the execution of the Deed of Sale in deemed equivalent to delivery.

Finally, we hold that the respondent appellate court did not err in denying
petitioner's motion for reconsideration despite the fact that private
respondents failed to submit their comment to said motion as required by the
respondent appellate court from resolving petitioners' motion for
reconsideration without the comment of the private respondent which was
required merely to aid the court in the disposition of the motion. The courts
are as much interested as the parties in the early disposition of cases before
them. To require otherwise would unnecessarily clog the courts' dockets.

WHEREFORE, the petition is DENIED and the decision appealed from is

hereby AFFIRMED.

SO ORDERED.

Narvasa, C.J., Padilla and Regalado, JJ., concur.

Puno, J., took no part.

148
 defendant corporation by J. Amado Araneta, and asking that the corporation
be dissolved; that J. Amado Araneta be declared personally accountable for
the amounts of the unauthorized and fraudulent disbursements and
disposition of assets made by him, and that he be required to account for
said assets, and that pending trial and disposition of the case on its merits a
receiver be appointed to take possession of the books, records and assets of
the defendant corporation preparatory to its dissolution and liquidation and
distribution of the assets. Over the strong objection of the defendants, the
trial court presided by respondent Judge Jose Teodoro, granted the petition
for the appointment of a receiver and designated Mr. Alfredo Yulo as such
receiver with a bond of P50,000. Failing to secure a reconsideration of the
order appointing a receiver, the defendants in said case, Financing
Corporation of the Philippines and J. Amado Araneta, as petitioners, have
filed the present petition for certiorari with preliminary injunction to revoke
and set aside the order. Acting upon that part of the petition asking for a writ
G.R. No. L-4900 August 31, 1953 of preliminary injunction, a majority of the court granted the same upon the
filing of a bond by the petitioners in the sum of P50,000.
FINANCING CORPORATION OF THE PHILIPPINES and J. AMADO
ARANETA, petitioners, The main contention of the petitioners in opposing the appointment of a
vs. receiver in this case is that said appointment is merely an auxiliary remedy;
HON. JOSE TEODORO, Judge of the Court of First Instance of Negros that the principal remedy sought by the respondents in the action in Negros
Occidental, Branch II, and ENCARNACION LIZARES VDA. DE Occidental was the dissolution of the Financing Corporation of the
PANLILIO, respondents. Philippines; that according to the law a suit for the dissolution of a
corporation can be brought and maintained only by the State through its legal
Vicente Hilado for petitioners. counsel, and that respondents, much less the minority stockholders of said
Antonio Barredo for respondents. corporation, have no right or personality to maintain the action for dissolution,
and that inasmuch as said action cannot be maintained legally by the
respondents, then the auxiliary remedy for the appointment of a receiver has
MONTEMAYOR, J.:
no basis.

In civil case No. 1924 of the Court of First Instance of Negros Occidental,
True it is that the general rule is that the minority stockholders of a
Asuncion Lopez Vda. de Lizares, Encarnacion Lizares Vda. de Panlilio and
corporation cannot sue and demand its dissolution. However, there are cases
Efigenia Vda. de Paredes, in their own behalf and in behalf of the other
that hold that even minority stockholders may ask for dissolution, this, under
minority stockholders of the Financing Corporation of the Philippines, filed a
the theory that such minority members, if unable to obtain redress and
complaint against the said corporation and J. Amado Araneta, its president
protection of their rights within the corporation, must not and should not be
and general manager, claiming among other things alleged gross
left without redress and remedy. This was what probably prompted this Court
mismanagement and fraudulent conduct of the corporate affairs of the
to state in the case of Hall, et al. vs. Judge Piccio,* G.R. No. L-2598 (47 Off.

149
Gaz. No. 12 Supp., p. 200) that even the existence of a de jure corporation
may be terminated in a private suit for its dissolution by the stockholders
without the intervention of the State. It was therein further held that although
there might be some room for argument on the right of minority stockholders
to ask for dissolution,-that question does not affect the court's jurisdiction
over the case, and that the remedy by the party dissatisfied was to appeal
from the decision of the trial court. We repeat that although as a rule, minority
stockholders of a corporation may not ask for its dissolution in a private suit,
and that such action should be brought by the Government through its legal
officer in a quo warranto case, at their instance and request, there might be
exceptional cases wherein the intervention of the State, for one reason or
another, cannot be obtained, as when the State is not interested because the
complaint is strictly a matter between the stockholders and does not involve,
in the opinion of the legal officer of the Government, any of the acts or
omissions warranting quo warranto proceedings, in which minority
stockholders are entitled to have such dissolution. When such action or
private suit is brought by them, the trial court had jurisdiction and may or may
not grant the prayer, depending upon the facts and circumstances attending
it. The trial court's decision is of course subject to review by the appellate
tribunal. Having such jurisdiction, the appointment of a receiver pendente
lite is left to the sound discretion of the trial court. As was said in the case
of Angeles vs. Santos (64 Phil., 697), the action having been properly
brought and the trial court having entertained the same, it was within the
power of said court upon proper showing to appoint a receiverpendente
lite for the corporation; that although the appointment of a receiver upon
application of the minority stockholders is a power to be exercised with great
caution, nevertheless, it should be exercised necessary in order not to
entirely ignore and disregard the rights of said minority stockholders,
especially when said minority stockholders are unable to obtain redress and
protection of their rights within the corporation itself.
In that civil case No. 1924 of Negros Occidental court, allegations of
mismanagement and misconduct by its President and Manager were made,
specially in connection with the petition for the appointment of a receiver. in
order to have an idea of the seriousness of said allegations, we reproduce a
pertinent portion of the order of respondent Judge Teodoro dated June 23,
1951, subject of these certiorari proceedings:
Considering plaintiffs' complaint and verified motion for appointment
of a receiver together, as they have been treated jointly in the
opposition of the defendants, the grounds of the prayer for
receivership may be briefly stated to be: (1) imminent danger of
insolvency; (2) fraud and mismanagement, such as, particularly, (a)
wrongful and unauthorized diversion from corporate purposes and
use for personal benefit of defendant Araneta, for the benefit of the
corporations under his control and of which he is majority
stockholder and/or for the benefit of his relatives, personal friends
and the political organization to which he is affiliated of approximately
over one and a half million pesos of the funds of the defendant
corporation in the form of uncollected allowances and loans, either
without or with uncollected interest, and either unsecured or
insufficiently secured, and sometimes with a securities appearing in
favor of defendant Araneta as if the funds advanced or loaned were
his own; (b) unauthorized and profitless pledging of securities owned
by defendant corporation to secure obligations amounting to
P588,645.34 of another corporation controlled by defendant Araneta;
(c) unauthorized and profitless using of the name of the defendant
corporation in the shipping of sugar belonging to other corporations
controlled by defendant Araneta to the benefit of said corporations in
the amount of at least P104,343.36; (d) refusal by defendant Araneta
to endorse to the defendant corporation shares of stock and other
securities belonging to it but which are still in his name; (e) negligent
failure to endorse other shares of stock belonging to defendant
corporation but still in the names of the respective vendors; and (f)
illegal and unauthorized transfer and deposit in the United States of
America of 6,426,281 shares of the Atok-Big Wedge Mining
Company; (3) violations of the corporation law and the by-laws of the
corporation such as (a) refusal to allow minority stockholders to
examine the books and records of the corporation; (b) failure to call
and hold stockholders' and directors' meetings; (c) virtual disregard
and ignoring of the board of directors by defendant Araneta who has
been and is conducting the affairs of the corporation under his
absolute control and for his personal benefit and for the benefit of the
corporations controlled by him, to the prejudice and in disregard of
the rights of the plaintiffs and other minority stockholders; and (d)
150
 irregularity in the keeping and (e) errors and omissions in the books
and failure of the same to reflect the real and actual transactions of
the defendant corporations; (4) failure to achieve the fundamental
purpose of the corporation; (5) if administration, possession and
control of the affairs, books, etc. of defendant corporation are left in
the hands of the defendant Araneta and the present corporate
officials, under his power and influence, the remaining assets of the
corporation are in danger of being further dissipated, wasted or lost
and of becoming ultimately unavailable for distribution among its
stockholders; and (6) the best means to protect and preserve the
assets of defendant corporation is the appointment of a receiver.

In conclusion, we hold that the trial court through respondent Judge Teodoro
had jurisdiction and properly entertained the original case; that he also had
jurisdiction to appoint a receiver pendente lite, and considering the
allegations made in connection with the petition for the appointment of a
receiver, he neither exceeded his jurisdiction nor abused his discretion in
appointing a receiver. The petition for certiorari is hereby denied, with costs.
The writ of preliminary injunction heretofore issued is hereby ordered
dissolved.

Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Reyes, Jugo, Bautista Angelo, G.R. No. L-43350 December 23, 1937
and Labrador, JJ., concur.
CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,
vs.
TEODORO SANDIKO, defendant-appellee.

Arsenio P. Dizon for appellant.

Sumulong, Lavides and Sumulong for appellee.

LAUREL, J.:

This is an appeal from a judgment of the Court of First Instance of Manila

absolving the defendant from the plaintiff's complaint.

151
Manuel Tabora is the registered owner of four parcels of land situated in the
barrio of Linao, town of Aparri, Province of Cagayan, as evidenced by
transfer certificate of title No. 217 of the land records of Cagayan, a copy of
which is in evidence as Exhibit 1. To guarantee the payment of a loan in the
sum of P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the
Philippine National Bank a first mortgage on the four parcels of land above-
mentioned. A second mortgage in favor of the same bank was in April of
1930 executed by Tabora over the same lands to guarantee the payment of
another loan amounting to P7,000. A third mortgage on the same lands was
executed on April 16, 1930 in favor of Severina Buzon to whom Tabora was
indebted in the sum of P2,9000. These mortgages were registered and
annotations thereof appear at the back of transfer certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de
Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four
parcels of land owned by him was sold to the plaintiff company, said to under
process of incorporation, in consideration of one peso (P1) subject to the
mortgages in favor of the Philippine National Bank and Severina Buzon and,
to the condition that the certificate of title to said lands shall not be
transferred to the name of the plaintiff company until the latter has fully and
completely paid Tabora's indebtedness to the Philippine National Bank.
The plaintiff company filed its article incorporation with the Bureau of
Commerce and Industry on October 22, 1930 (Exhibit 2). A year later, on
October 28, 1931, the board of directors of said company adopted a
resolution (Exhibit G) authorizing its president, Jose Ventura, to sell the four
parcels of lands in question to Teodoro Sandiko for P42,000. Exhibits B, C
and D were thereafter made and executed. Exhibit B is a deed of sale
executed before a notary public by the terms of which the plaintiff sold ceded
and transferred to the defendant all its right, titles, and interest in and to the
four parcels of land described in transfer certificate in turn obligated himself
to shoulder the three mortgages hereinbefore referred to. Exhibit C is a
promisory note for P25,300. drawn by the defendant in favor of the plaintiff,
payable after one year from the date thereof. Exhibit D is a deed of mortgage
executed before a notary public in accordance with which the four parcels of
land were given a security for the payment of the promissory note, Exhibit C.
All these three instrument were dated February 15, 1932.
The defendant having failed to pay the sum stated in the promissory note,
plaintiff, on January 25, 1934, brought this action in the Court of First
Instance of Manila praying that judgment be rendered against the defendant
for the sum of P25,300, with interest at legal rate from the date of the filing of
the complaint, and the costs of the suits. After trial, the court below, on
December 18, 1934, rendered judgment absolving the defendant, with costs
against the plaintiff. Plaintiff presented a motion for new trial on January 14,
1935, which motion was denied by the trial court on January 19 of the same
year. After due exception and notice, plaintiff has appealed to this court and
makes an assignment of various errors.
In dismissing the complaint against the defendant, the court below, reached
the conclusion that Exhibit B is invalid because of vice in consent and
repugnancy to law. While we do not agree with this conclusion, we have
however voted to affirm the judgment appealed from the reasons which we
shall presently state.
The transfer made by Tabora to the Cagayan fishing Development Co., Inc.,
plaintiff herein, was affected on May 31, 1930 (Exhibit A) and the actual
incorporation of said company was affected later on October 22, 1930
(Exhibit 2). In other words, the transfer was made almost five months before
the incorporation of the company. Unquestionably, a duly organized
corporation has the power to purchase and hold such real property as the
purposes for which such corporation was formed may permit and for this
purpose may enter into such contracts as may be necessary (sec. 13, pars. 5
and 9, and sec. 14, Act No. 1459). But before a corporation may be said to
be lawfully organized, many things have to be done. Among other things, the
law requires the filing of articles of incorporation (secs. 6 et seq., Act. No.
1459). Although there is a presumption that all the requirements of law have
been complied with (sec. 334, par. 31 Code of Civil Procedure), in the case
before us it can not be denied that the plaintiff was not yet incorporated when
it entered into a contract of sale, Exhibit A. The contract itself referred to the
plaintiff as "una sociedad en vias de incorporacion." It was not even a de
facto corporation at the time. Not being in legal existence then, it did not
possess juridical capacity to enter into the contract.
152
 Corporations are creatures of the law, and can only come into
existence in the manner prescribed by law. As has already been
stated, general law authorizing the formation of corporations are
general offers to any persons who may bring themselves within their
provisions; and if conditions precedent are prescribed in the statute,
or certain acts are required to be done, they are terms of the offer,
and must be complied with substantially before legal corporate
existence can be acquired. (14 C. J., sec. 111, p. 118.)
That a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract
or transact any business, would seem to be self evident. . . . A
corporation, until organized, has no being, franchises or faculties.
Nor do those engaged in bringing it into being have any power to
bind it by contract, unless so authorized by the charter there is not a
corporation nor does it possess franchise or faculties for it or others
to exercise, until it acquires a complete existence. (Gent vs.
Manufacturers and Merchant's Mutual Insurance Company, 107 Ill.,
652, 658.)
Boiled down to its naked reality, the contract here (Exhibit A) was entered
into not between Manuel Tabora and a non-existent corporation but between
the Manuel Tabora as owner of the four parcels of lands on the one hand and
the same Manuel Tabora, his wife and others, as mere promoters of a
corporations on the other hand. For reasons that are self-evident, these
promoters could not have acted as agent for a projected corporation since
that which no legal existence could have no agent. A corporation, until
organized, has no life and therefore no faculties. It is, as it were, a child in
ventre sa mere. This is not saying that under no circumstances may the acts
of promoters of a corporation be ratified by the corporation if and when
subsequently organized. There are, of course, exceptions (Fletcher Cyc. of
Corps., permanent edition, 1931, vol. I, secs. 207 et seq.), but under the
peculiar facts and circumstances of the present case we decline to extend
the doctrine of ratification which would result in the commission of injustice or
fraud to the candid and unwary.(Massachusetts rule, Abbott vs. Hapgood,
150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193;
citing English cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223;
78 N. E., 128; Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass.,
171; 65 N. E., 54.) It should be observed that Manuel Tabora was the
registered owner of the four parcels of land, which he succeeded in
mortgaging to the Philippine National Bank so that he might have the
necessary funds with which to convert and develop them into fishery. He
appeared to have met with financial reverses. He formed a corporation
composed of himself, his wife, and a few others. From the articles of
incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital
stock subscribed, P45,000 was subscribed by Manuel Tabora himself and
P500 by his wife, Rufina Q. de Tabora; and out of the P43,300, amount paid
on subscription, P42,100 is made to appear as paid by Tabora and P200 by
his wife. Both Tabora and His wife were directors and the latter was treasurer
as well. In fact, to this day, the lands remain inscribed in Tabora's name. The
defendant always regarded Tabora as the owner of the lands. He dealt with
Tabora directly. Jose Ventura, president of the plaintiff corporation, intervened
only to sign the contract, Exhibit B, in behalf of the plaintiff. Even the
Philippine National Bank, mortgagee of the four parcels of land, always
treated Tabora as the owner of the same. (SeeExhibits E and F.) Two civil
suits (Nos. 1931 and 38641) were brought against Tabora in the Court of
First Instance of Manila and in both cases a writ of attachment against the
four parcels of land was issued. The Philippine National Bank threatened to
foreclose its mortgages. Tabora approached the defendant Sandiko and
succeeded in the making him sign Exhibits B, C, and D and in making him,
among other things, assume the payment of Tabora's indebtedness to the
Philippine National Bank. The promisory note, Exhibit C, was made payable
to the plaintiff company so that it may not attached by Tabora's creditors, two
of whom had obtained writs of attachment against the four parcels of land.
If the plaintiff corporation could not and did not acquire the four parcels of
land here involved, it follows that it did not possess any resultant right to
dispose of them by sale to the defendant, Teodoro Sandiko.
Some of the members of this court are also of the opinion that the transfer
from Manuel Tabora to the Cagayan Fishing Development Company, Inc.,
which transfer is evidenced by Exhibit A, was subject to a condition
precedent (condicion suspensiva), namely, the payment of the mortgage debt
of said Tabora to the Philippine National Bank, and that this condition not
153
having been complied with by the Cagayan Fishing Development Company, RIZAL LIGHT & ICE CO., INC., petitioner,
Inc., the transfer was ineffective. (Art. 1114, Civil Code; Wise & Co. vs. Kelly vs.
and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at THE PUBLIC SERVICE COMMISSION and MORONG ELECTRIC CO.,
the conclusion that the transfer by Manuel Tabora to the Cagayan Fishing INC., respondents.
Development Company, Inc. was null because at the time it was affected the
corporation was non-existent, we deem it unnecessary to discuss this Amado A. Amador, Jr. for petitioner.
point.lawphil.net Atilano C. Bautista and Pompeyo F. Olivas for respondents.

The decision of the lower court is accordingly affirmed, with costs against the
appellant. So Ordered.
ZALDIVAR, J.:
Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
These two cases, being interrelated, are decided together.

Case G.R. No. L-20993 is a petition of the Rizal Light & Ice Co., Inc. to
review and set aside the orders of respondent Public Service
Commission, 1 dated August 20, 1962, and February 15, 1963, in PSC Case
No. 39716, cancelling and revoking the certificate of public convenience and
necessity and forfeiting the franchise of said petitioner. In the same petition,
the petitioner prayed for the issuance of a writ of preliminary injunction ex
parte suspending the effectivity of said orders and/or enjoining respondents
Commission and/or Municipality of Morong, Rizal, from enforcing in any way
the cancellation and revocation of petitioner's franchise and certificate of
public convenience during the pendency of this appeal. By resolution of
March 12, 1963, this Court denied the petition for injunction, for lack of merit.

G.R. No. L-20993 September 28, 1968

Case G. R. L-21221 is likewise a petition of the Rizal Light & Ice Co., Inc. to
review and set aside the decision of the Commission dated March 13, 1963
RIZAL LIGHT & ICE CO., INC., petitioner, in PSC Case No. 62-5143 granting a certificate of public convenience and
vs. necessity to respondent Morong Electric Co., Inc. 2 to operate an electric light,
THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE heat and power service in the municipality of Morong, Rizal. In the petition
COMMISSION, respondents. Rizal Light & Ice Co., Inc. also prayed for the issuance of a writ of preliminary
injunction ex parte suspending the effectivity of said decision. Per resolution
---------------------------- of this Court, dated May 6, 1963, said petition for injunction was denied.

G.R. No. L-21221 September 28, 1968 The facts, as they appear in the records of both cases, are as follows:

154
Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with business
address at Morong, Rizal. On August 15, 1949, it was granted by the
Commission a certificate of public convenience and necessity for the
installation, operation and maintenance of an electric light, heat and power
service in the municipality of Morong, Rizal.
In an order dated December 19, 1956, the Commission required the
petitioner to appear before it on February 18, 1957 to show cause why it
should not be penalized for violation of the conditions of its certificate of
public convenience and the regulations of the Commission, and for failure to
comply with the directives to raise its service voltage and maintain them
within the limits prescribed in the Revised Order No. 1 of the Commission,
and to acquire and install a kilowattmeter to indcate the load in kilowatts at
any particular time of the generating unit. 3
For failure of the petitioner to appear at the hearing on February 18, 1957,
the Commission ordered the cancellation and revocation of petitioner's
certificate of public convenience and necessity and the forfeiture of its
franchise. Petitioner moved for reconsideration of said order on the ground
that its manager, Juan D. Francisco, was not aware of said hearing.
Respondent municipality opposed the motion alleging that petitioner has not
rendered efficient and satisfactory service and has not complied with the
requirements of the Commission for the improvement of its service. The
motion was set for hearing and Mr. Pedro S. Talavera, Chief, Industrial
Division of the Commission, was authorized to conduct the hearing for the
reception of the evidence of the parties. 4
Finding that the failure of the petitioner to appear at the hearing set for
February 18, 1957 the sole basis of the revocation of petitioner's
certificate was really due to the illness of its manager, Juan D. Francisco,
the Commission set aside its order of revocation. Respondent municipality
moved for reconsideration of this order of reinstatement of the certificate, but
the motion was denied.
In a petition dated June 25, 1958, filed in the same case, respondent
municipality formally asked the Commission to revoke petitioner's certificate
of public convenience and to forfeit its franchise on the ground, among other
things, that it failed to comply with the conditions of said certificate and
franchise. Said petition was set for hearing jointly with the order to show
cause. The hearings had been postponed several times.
Meanwhile, inspections had been made of petitioner's electric plant and
installations by the engineers of the Commission, as follows: April 15, 1958
by Engineer Antonio M. Alli; September 18, 1959, July 12-13, 1960, and June
21-24, 1961, by Engineer Meliton S. Martinez. The inspection on June 21-24,
1961 was made upon the request of the petitioner who manifested during the
hearing on December 15, 1960 that improvements have been made on its
service since the inspection on July 12-13, 1960, and that, on the basis of the
inspection report to be submitted, it would agree to the submission of the
case for decision without further hearing.
When the case was called for hearing on July 5, 1961, petitioner failed to
appear. Respondent municipality was then allowed to present its
documentary evidence, and thereafter the case was submitted for decision.
On July 7, 1961, petitioner filed a motion to reopen the case upon the ground
that it had not been furnished with a copy of the report of the June 21-24,
1961 inspection for it to reply as previously agreed. In an order dated August
25, 1961, petitioner was granted a period of ten (10) days within which to
submit its written reply to said inspection report, on condition that should it
fail to do so within the said period the case would be considered submitted
for decision. Petitioner failed to file the reply. In consonance with the order of
August 25, 1961, therefore, the Commission proceeded to decide the case.
On July 29, 1962 petitioner's electric plant was burned.
In its decision, dated August 20, 1962, the Commission, on the basis of the
inspection reports of its aforenamed engineers, found that the petitioner had
failed to comply with the directives contained in its letters dated May 21,
1954 and September 4, 1954, and had violated the conditions of its
certificate of public convenience as well as the rules and regulations of the
Commission. The Commission concluded that the petitioner "cannot render
the efficient, adequate and satisfactory electric service required by its
155
certificate and that it is against public interest to allow it to continue its
operation." Accordingly, it ordered the cancellation and revocation of
petitioner's certificate of public convenience and the forfeiture of its franchise.
On September 18, 1962, petitioner moved for reconsideration of the decision,
alleging that before its electric plant was burned on July 29, 1962, its service
was greatly improved and that it had still existing investment which the
Commission should protect. But eight days before said motion for
reconsideration was filed, or on September 10, 1962, Morong Electric, having
been granted a municipal franchise on May 6, 1962 by respondent
municipality to install, operate and maintain an electric heat, light and power
service in said municipality approved by the Provincial Board of Rizal on
August 31, 1962 filed with the Commission an application for a certificate
of public convenience and necessity for said service. Said application was
entitled "Morong Electric Co., Inc., Applicant", and docketed as Case No. 62-
5143.
Petitioner opposed in writing the application of Morong Electric, alleging
among other things, that it is a holder of a certificate of public convenience to
operate an electric light, heat and power service in the same municipality of
Morong, Rizal, and that the approval of said application would not promote
public convenience, but would only cause ruinous and wasteful competition.
Although the opposition is dated October 6, 1962, it was actually received by
the Commission on November 8, 1962, or twenty four days after the order of
general default was issued in open court when the application was first called
for hearing on October 15, 1962. On November 12, 1962, however, the
petitioner filed a motion to lift said order of default. But before said motion
could be resolved, petitioner filed another motion, dated January 4, 1963, this
time asking for the dismissal of the application upon the ground that applicant
Morong Electric had no legal personality when it filed its application on
September 10, 1962, because its certificate of incorporation was issued by
the Securities and Exchange Commission only on October 17, 1962. This
motion to dismiss was denied by the Commission in a formal order issued on
January 17, 1963 on the premise that applicant Morong Electric was a de
facto corporation. Consequently, the case was heard on the merits and both
parties presented their respective evidence. On the basis of the evidence
adduced, the Commission, in its decision dated March 13, 1963, found that
there was an absence of electric service in the municipality of Morong and
that applicant Morong Electric, a Filipino-owned corporation duly organized
and existing under the laws of the Philippines, has the financial capacity to
maintain said service. These circumstances, considered together with the
denial of the motion for reconsideration filed by petitioner in Case No. 39715
on February, 15, 1963, such that as far as the Commission was concerned
the certificate of the petitioner was already declared revoked and cancelled,
the Commission approved the application of Morong Electric and ordered the
issuance in its favor of the corresponding certificate of public convenience
and necessity.1awphl.nt
On March 8, 1963, petitioner filed with this Court a petition to review the
decision in Case No. 39715 (now G. R. No. L-20993). Then on April 26,
1963, petitioner also filed a petition to review the decision in Case No. 62-
5143 (now G. R. No. L-21221).
In questioning the decision of the Commission in Case No. 39715, petitioner
contends: (1) that the Commission acted without or in excess of its
jurisdiction when it delegated the hearing of the case and the reception of
evidence to Mr. Pedro S. Talavera who is not allowed by law to hear the
same; (2) that the cancellation of petitioner's certificate of public convenience
was unwarranted because no sufficient evidence was adduced against the
petitioner and that petitioner was not able to present evidence in its defense;
(3) that the Commission failed to give protection to petitioner's investment;
and (4) that the Commission erred in imposing the extreme penalty of
revocation of the certificate.
In questioning the decision in Case No. 62-5143, petitioner contends: (1) that
the Commission erred in denying petitioner's motion to dismiss and
proceeding with the hearing of the application of the Morong Electric; (2) that
the Commission erred in granting Morong Electric a certificate of public
convenience and necessity since it is not financially capable to render the
service; (3) that the Commission erred when it made findings of facts that are
not supported by the evidence adduced by the parties at the trial; and (4) that
the Commission erred when it did not give to petitioner protection to its
investment a reiteration of the third assignment of error in the other
case.1awphl.nt
156
We shall now discuss the appeals in these two cases separately.
G.R. No. L-20993
1. Under the first assignment of error, petitioner contends that while Mr.
Pedro S. Talavera, who conducted the hearings of the case below, is a
division chief, he is not a lawyer. As such, under Section 32 of
Commonwealth Act No. 146, as amended, the Commission should not have
delegated to him the authority to conduct the hearings for the reception of
evidence of the parties.
We find that, really, Mr. Talavera is not a lawyer. 5 Under the second
paragraph of Section 32 of Commonwealth Act No. 146, as amended, 6 the
Commission can only authorize a division chief to hear and investigate a
case filed before it if he is a lawyer. However, the petitioner is raising this
question for the first time in this appeal. The record discloses that petitioner
never made any objection to the authority of Mr. Talavera to hear the case
and to receive the evidence of the parties. On the contrary, we find that
petitioner had appeared and submitted evidence at the hearings conducted
by Mr. Talavera, particularly the hearings relative to the motion for
reconsideration of the order of February 18, 1957 cancelling and revoking its
certificate. We also find that, through counsel, petitioner had entered into
agreements with Mr. Talavera, as hearing officer, and the counsel for
respondent municipality, regarding procedure in order to abbreviate the
proceedings. 7 It is only after the decision in the case turned out to be adverse
to it that petitioner questioned the proceedings held before Mr. Talavera.
This Court in several cases has ruled that objection to the delegation of
authority to hear a case filed before the Commission and to receive the
evidence in connection therewith is a procedural, not a jurisdictional point,
and is waived by failure to interpose timely the objection and the case had
been decided by the Commission. 8 Since petitioner has never raised any
objection to the authority of Mr. Talavera before the Commission, it should be
deemed to have waived such procedural defect, and consonant with the
precedents on the matter, petitioner's claim that the Commission acted
without or in excess of jurisdiction in so authorizing Mr. Talavera should be
dismissed. 9
2. Anent the second assigned error, the gist of petitioner's contention is that
the evidence consisting of inspection reports upon which the
Commission based its decision is insufficient and untrustworthy in that (1) the
authors of said reports had not been put to test by way of cross-examination;
(2) the reports constitute only one side of the picture as petitioner was not
able to present evidence in its defense; (3) judicial notice was not taken of
the testimony of Mr. Harry B. Bernardino, former mayor of respondent
municipality, in PSC Case No. 625143 (the other case, G. R. No. L-21221) to
the effect that the petitioner had improved its service before its electric power
plant was burned on July 29, 1962 which testimony contradicts the
inspection reports; and (4) the Commission acted both as prosecutor and
judge passing judgment over the very same evidence presented by it as
prosecutor a situation "not conducive to the arrival at just and equitable
decisions."
Settled is the rule that in reviewing the decision of the Public Service
Commission this Court is not required to examine the proof de novo and
determine for itself whether or not the preponderance of evidence really
justifies the decision. The only function of this Court is to determine whether
or not there is evidence before the Commission upon which its decision
might reasonably be based. This Court will not substitute its discretion for
that of the Commission on questions of fact and will not interfere in the
latter's decision unless it clearly appears that there is no evidence to support
it. 10 Inasmuch as the only function of this Court in reviewing the decision of
the Commission is to determine whether there is sufficient evidence before
the Commission upon which its decision can reasonably be based, as it is
not required to examine the proof de novo, the evidence that should be made
the basis of this Court's determination should be only those presented in this
case before the Commission. What then was the evidence presented before
the Commission and made the basis of its decision subject of the present
appeal? As stated earlier, the Commission based its decision on the
inspection reports submitted by its engineers who conducted the inspection
of petitioner's electric service upon orders of the Commission. 11 Said
inspection reports specify in detail the deficiencies incurred, and violations
157
committed, by the petitioner resulting in the inadequacy of its service. We by us for the reason that he is a technical man and he knows well as he has
consider that said reports are sufficient to serve reasonably as bases of the done a good job and I think our proposition would expedite the matter. We
decision in question. It should be emphasized, in this connection that said sincerely believe that the inspection report will be the best evidence to decide
reports, are not mere documentary proofs presented for the consideration of this matter.
the Commission, but are the results of the Commission's own observations
and investigations which it can rightfully take into consideration, 12 particularly xxx xxx xxx
in this case where the petitioner had not presented any evidence in its
defense, and speaking of petitioner's failure to present evidence, as well as ATTY. LUQUE:
its failure to cross-examine the authors of the inspection reports, petitioner
should not complain because it had waived not only its right to cross-
... This is a very important matter and to show the good faith of respondent in
examine but also its right to present evidence. Quoted hereunder are the
this case we will not even cross-examine the engineer when he makes a new
pertinent portions of the transcripts of the proceedings where the petitioner,
report. We will agree to the findings and, your honor please, considering as
through counsel, manifested in clear language said waiver and its decision to
we have manifested before that Engineer Martinez is an experienced
abide by the last inspection report of Engineer Martinez:
engineer of this Commission and the points reported by Engineer Martinez
on the situation of the plant now will prevent the necessity of having a
Proceedings of December 15, 1960 hearing, of us bringing new evidence and complainant bringing new
evidence. ... .
COMMISSION:
xxx xxx xxx
It appears at the last hearing of this case on September 23, 1960, that an
engineer of this Commission has been ordered to make an inspection of all COMMISSION (to Atty. Luque):
electric services in the province of Rizal and on that date the engineer of this
Commission is still undertaking that inspection and it appears that the said
Q Does the Commission understand from the counsel for
engineer had actually made that inspection on July 12 and 13, 1960. The
applicant that if the motion is granted he will submit this order to
engineer has submitted his report on November 18, 1960 which is attached
show cause for decision without any further hearing and the decision
to the records of this case.
will be based on the report of the engineer of this Commission?

ATTY. LUQUE (Councel for Petitioner):

... (W)e respectfully state that while the report is, as I see it attached to the
records, clear and very thorough, it was made sometime July of this year and
I understand from the respondent that there is some improvement since this
report was made ... we respectfully request that an up-to-date inspection be
made ... . An inspector of this Commission can be sent to the plant and
considering that the engineer of this Commission, Engineer Meliton Martinez,
COMMISSION (to Atty. Luque):
is very acquainted to the points involved we pray that his report will be used
A We respectfully reply in this manner that we be allowed or
be given an opportunity just to read the report and 99%, we will
agree that the report will be the basis of that decision. We just want
to find out the contents of the report, however, we request that we be
furnished with a copy of the report before the hearing so that we will
just make a manifestation that we will agree.

158
 Q In order to prevent the delay of the disposition of this case
the Commission will allow counsel for the applicant to submit his
written reply to the report that the engineer of this Commission. Will
he submit this case without further hearing upon the receipt of that
written reply?
A Yes, your honor.
Proceedings of August 25, 1961
ATTY. LUQUE (Counsel for petitioner):
In order to avoid any delay in the consideration of this case we are
respectfully move (sic) that instead of our witnesses testifying under oath that
we will submit a written reply under oath together with the memorandum
within fifteen (15) days and we will furnish a copy and upon our submission
of said written reply under oath and memorandum we consider this case
submitted. This suggestion is to abbreviate the necessity of presenting
witnesses here which may prolong the resolution of this case.
ATTY. OLIVAS (Counsel for respondent municipality):
I object on the ground that there is no resolution by this Commission on the
action to reopen the case and second this case has been closed.
ATTY. LUQUE:
With regard to the testimony on the ground for opposition we respectfully
submit to this Commission our motion to submit a written reply together with
a memorandum. Also as stated to expedite the case and to avoid further
hearing we will just submit our written reply. According to our records we are
furnished with a copy of the report of July 17, 1961. We submit your honor.
xxx xxx xxx
COMMISSION:
To give applicant a chance to have a day in court the Commission grants the
request of applicant that it be given 10 days within which to submit a written
reply on the report of the engineer of the Commission who inspected the
electric service, in the municipality of Morong, Rizal, and after the submission
of the said written reply within 10 days from today this case will be
considered submitted for decision.
The above-quoted manifestation of counsel for the petitioner, specifically the
statement referring to the inspection report of Engineer Martinez as the "best
evidence to decide this matter," can serve as an argument against
petitioner's claim that the Commision should have taken into consideration
the testimony of Mr. Bernardino. But the primary reasons why the
Commission could not have taken judicial cognizance of said testimony are:
first, it is not a proper subject of judicial notice, as it is not a "known" fact
that is, well established and authoritatively settled, without qualification and
contention; 13 second, it was given in a subsequent and distinct case after the
petitioner's motion for reconsideration was heard by the Commission en
banc and submitted for decision, 14 and third, it was not brought to the
attention of the Commission in this case through an appropriate pleading. 15
Regarding the contention of petitioner that the Commission had acted both
as prosecutor and judge, it should be considered that there are two matters
that had to be decided in this case, namely, the order to show cause dated
December 19, 1956, and the petition or complaint by respondent municipality
dated June 25, 1958. Both matters were heard jointly, and the record shows
that respondent municipality had been allowed to present its evidence to
substantiate its complaint. It can not be said, therefore, that in this case the
Commission had acted as prosecutor and judge. But even assuming, for the
sake of argument, that there was a commingling of the prosecuting and
investigating functions, this exercise of dual function is authorized by Section
17(a) of Commonwealth Act No. 146, as amended, under which the
Commission has power "to investigate, upon its own initiative or upon
complaint in writing, any matter concerning any public service as regards
matters under its jurisdiction; to, require any public service to furnish safe,
adequate, and proper service as the public interest may require and warrant;
159
to enforce compliance with any standard, rule, regulation, order or other
requirement of this Act or of the Commission ... ." Thus, in the case
of Collector of Internal Revenue vs. Estate of F. P. Buan, L-11438, July 31,
1958, this Court held that the power of the Commission to cancel and revoke
a certificate of public convenience and necessity may be exercised by it even
without a formal charge filed by any interested party, with the only limitation
that the holder of the certificate should be given his day in court.
It may not be amiss to add that when prosecuting and investigating duties
are delegated by statute to an administrative body, as in the case of the
Public Service Commission, said body may take steps it believes appropriate
for the proper exercise of said duties, particularly in the manner of informing
itself whether there is probable violation of the law and/or its rules and
regulations. It may initiate an investigation, file a complaint, and then try the
charge as preferred. So long as the respondent is given a day in court, there
can be no denial of due process, and objections to said procedure cannot be
sustained.
3. In its third assignment of error, petitioner invokes the "protection-of-
investment rule" enunciated by this Court in Batangas Transportation Co. vs.
Orlanes 16 in this wise:
The Government having taken over the control and supervision of all
public utilities, so long as an operator under a prior license complies
with the terms and conditions of his license and reasonable rules and
regulations for its operation and meets the reasonable demands of
the public, it is the duty of the Commission to protect rather than to
destroy his investment by the granting of the second license to
another person for the same thing over the same route of travel. The
granting of such a license does not serve its convenience or promote
the interests of the public.
The above-quoted rule, however, is not absolute, for nobody has exclusive
right to secure a franchise or a certificate of public convenience. 17 Where, as
in the present case, it has been shown by ample evidence that the petitioner,
despite ample time and opportunity given to it by the Commission, had failed
to render adequate, sufficient and satisfactory service and had violated the
important conditions of its certificate as well as the directives and the rules
and regulations of the Commission, the rule cannot apply. To apply that rule
unqualifiedly is to encourage violation or disregard of the terms and
conditions of the certificate and the Commission's directives and regulations,
and would close the door to other applicants who could establish, operate
and provide adequate, efficient and satisfactory service for the benefit and
convenience of the inhabitants. It should be emphasized that the paramount
consideration should always be the public interest and public convenience.
The duty of the Commission to protect investment of a public utility operator
refers only to operators of good standing those who comply with the laws,
rules and regulations and not to operators who are unconcerned with the
public interest and whose investments have failed or deteriorated because of
their own fault. 18
4. The last assignment of error assails the propriety of the penalty imposed
by the Commission on the petitioner that is, the revocation of the
certificate and the forfeiture of the franchise. Petitioner contends that the
imposition of a fine would have been sufficient, as had been done by the
Commission in cases of a similar nature.
It should be observed that Section 16(n) of Commonwealth Act No. 146, as
amended, confers upon the Commission ample power and discretion to order
the cancellation and revocation of any certificate of public convenience
issued to an operator who has violated, or has willfully and contumaciously
refused to comply with, any order, rule or regulation of the Commission or
any provision of law. What matters is that there is evidence to support the
action of the Commission. In the instant case, as shown by the evidence, the
contumacious refusal of the petitioner since 1954 to comply with the
directives, rules and regulations of the Commission, its violation of the
conditions of its certificate and its incapability to comply with its commitment
as shown by its inadequate service, were the circumstances that warranted
the action of the Commission in not merely imposing a fine but in revoking
altogether petitioner's certificate. To allow petitioner to continue its operation
would be to sacrifice public interest and convenience in favor of private
interest.
160
 A grant of a certificate of public convenience confers no property
rights but is a mere license or privilege, and such privilege is forfeited
when the grantee fails to comply with his commitments behind which
lies the paramount interest of the public, for public necessity cannot
be made to wait, nor sacrificed for private convenience. (Collector of
Internal Revenue v. Estate of F. P. Buan, et al., L-11438 and
Santiago Sambrano, et al. v. PSC, et al., L-11439 & L-11542-46, July
31, 1958)
(T)he Public Service Commission, ... has the power to specify and
define the terms and conditions upon which the public utility shall be
operated, and to make reasonable rules and regulations for its
operation and the compensation which the utility shall receive for its
services to the public, and for any failure to comply with such rules
and regulations or the violation of any of the terms and conditions for
which the license was granted, the Commission has ample power to
enforce the provisions of the license or even to revoke it, for any
failure or neglect to comply with any of its terms and provisions.
(Batangas Trans. Co. v. Orlanes, 52 Phil. 455, 460; emphasis
supplied)
Presumably, the petitioner has in mind Section 21 of Commonwealth Act No.
146, as amended, which provides that a public utility operator violating or
failing to comply with the terms and conditions of any certificate, or any
orders, decisions or regulations of the Commission, shall be subject to a fine
and that the Commission is authorized and empowered to impose such fine,
after due notice and hearing. It should be noted, however, that the last
sentence of said section states that the remedy provided therein "shall not be
a bar to, or affect any other remedy provided in this Act but shall be
cumulative and additional to such remedy or remedies." In other words, the
imposition of a fine may only be one of the remedies which the Commission
may resort to, in its discretion. But that remedy is not exclusive of, or has
preference over, the other remedies. And this Court will not substitute its
discretion for that of the Commission, as long as there is evidence to support
the exercise of that discretion by the Commission.
G. R. No. L-21221
Coming now to the other case, let it be stated at the outset that before any
certificate may be granted, authorizing the operation of a public service, three
requisites must be complied with, namely: (1) the applicant must be a citizen
of the Philippines or of the United States, or a corporation or co-partnership,
association or joint-stock company constituted and organized under the laws
of the Philippines, sixty per centum at least of the stock or paid-up capital of
which belongs entirely to citizens of the Philippines or of the United
States; 19 (2) the applicant must be financially capable of undertaking the
proposed service and meeting the responsibilities incident to its
operation; 20 and (3) the applicant must prove that the operation of the public
service proposed and the authorization to do business will promote the public
interest in a proper and suitable manner. 21
As stated earlier, in the decision appealed from, the Commission found that
Morong Electric is a corporation duly organized and existing under the laws
of the Philippines, the stockholders of which are Filipino citizens, that it is
financially capable of operating an electric light, heat and power service, and
that at the time the decision was rendered there was absence of electric
service in Morong, Rizal. While the petitioner does not dispute the need of an
electric service in Morong, Rizal, 22 it claims, in effect, that Morong Electric
should not have been granted the certificate of public convenience and
necessity because (1) it did not have a corporate personality at the time it
was granted a franchise and when it applied for said certificate; (2) it is not
financially capable of undertaking an electric service, and (3) petitioner was
rendering efficient service before its electric plant was burned, and therefore,
being a prior operator its investment should be protected and no new party
should be granted a franchise and certificate of public convenience and
necessity to operate an electric service in the same locality.
1. The bulk of petitioner's arguments assailing the personality of Morong
Electric dwells on the proposition that since a franchise is a contract, 23 at
least two competent parties are necessary to the execution thereof, and
parties are not competent except when they are in being. Hence, it is
contended that until a corporation has come into being, in this jurisdiction, by
the issuance of a certificate of incorporation by the Securities and Exchange
Commission (SEC) it cannot enter into any contract as a corporation. The
certificate of incorporation of the Morong Electric was issued by the SEC on
161
October 17, 1962, so only from that date, not before, did it acquire juridical
personality and legal existence. Petitioner concludes that the franchise
granted to Morong Electric on May 6, 1962 when it was not yet in esse is null
and void and cannot be the subject of the Commission's consideration. On
the other hand, Morong Electric argues, and to which argument the
Commission agrees, that it was a de factocorporation at the time the
franchise was granted and, as such, it was not incapacitated to enter into any
contract or to apply for and accept a franchise. Not having been
incapacitated, Morong Electric maintains that the franchise granted to it is
valid and the approval or disapproval thereof can be properly determined by
the Commission.
Petitioner's contention that Morong Electric did not yet have a legal
personality on May 6, 1962 when a municipal franchise was granted to it is
correct. The juridical personality and legal existence of Morong Electric
began only on October 17, 1962 when its certificate of incorporation was
issued by the SEC. 24 Before that date, or pending the issuance of said
certificate of incorporation, the incorporators cannot be considered as de
facto corporation. 25 But the fact that Morong Electric had no corporate
existence on the day the franchise was granted in its name does not render
the franchise invalid, because later Morong Electric obtained its certificate of
incorporation and then accepted the franchise in accordance with the terms
and conditions thereof. This view is sustained by eminent American
authorities. Thus, McQuiuin says:
The fact that a company is not completely incorporated at the time
the grant is made to it by a municipality to use the streets does not,
in most jurisdictions, affect the validity of the grant. But such grant
cannot take effect until the corporation is organized. And in Illinois it
has been decided that the ordinance granting the franchise may be
presented before the corporation grantee is fully organized, where
the organization is completed before the passage and acceptance.
(McQuillin, Municipal Corporations, 3rd Ed., Vol. 12, Chap. 34, Sec.
34.21)
Fletcher says:
While a franchise cannot take effect until the grantee corporation is
organized, the franchise may, nevertheless, be applied for before the
company is fully organized.
A grant of a street franchise is valid although the corporation is not
created until afterwards. (Fletcher, Cyclopedia Corp. Permanent
Edition, Rev. Vol. 6-A, Sec. 2881)
And Thompson gives the reason for the rule:
(I)n the matter of the secondary franchise the authorities are
numerous in support of the proposition that an ordinance granting a
privilege to a corporation is not void because the beneficiary of the
ordinance is not fully organized at the time of the introduction of the
ordinance. It is enough that organization is complete prior to the
passage and acceptance of the ordinance. The reason is that a
privilege of this character is a mere license to the corporation until it
accepts the grant and complies with its terms and conditions.
(Thompson on Corporations, Vol. 4, 3rd Ed., Sec. 2929) 26
The incorporation of Morong Electric on October 17, 1962 and its acceptance
of the franchise as shown by its action in prosecuting the application filed
with the Commission for the approval of said franchise, not only perfected a
contract between the respondent municipality and Morong Electric but also
cured the deficiency pointed out by the petitioner in the application of Morong
EIectric. Thus, the Commission did not err in denying petitioner's motion to
dismiss said application and in proceeding to hear the same. The efficacy of
the franchise, however, arose only upon its approval by the Commission on
March 13, 1963. The reason is that
Under Act No. 667, as amended by Act No. 1022, a municipal council
has the power to grant electric franchises, subject to the approval of
the provincial board and the President. However, under Section
16(b) of Commonwealth Act No. 146, as amended, the Public
Service Commission is empowered "to approve, subject to
constitutional limitations any franchise or privilege granted under the
162
 provisions of Act No. 667, as amended by Act No. 1022, by any
political subdivision of the Philippines when, in the judgment of the
Commission, such franchise or privilege will properly conserve the
public interests and the Commission shall in so approving impose
such conditions as to construction, equipment, maintenance, service,
or operation as the public interests and convenience may reasonably
require, and to issue certificates of public convenience and necessity
when such is required or provided by any law or franchise." Thus, the
efficacy of a municipal electric franchise arises, therefore, only after
the approval of the Public Service Commission. (Almendras vs.
Ramos, 90 Phil. 231) .
The conclusion herein reached regarding the validity of the franchise granted
to Morong Electric is not incompatible with the holding of this Court
in Cagayan Fishing Development Co., Inc. vs. Teodoro Sandiko 27upon which
the petitioner leans heavily in support of its position. In said case this Court
held that a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or
transact any business. It should be pointed out, however, that this Court did
not say in that case that the rule is absolute or that under no circumstances
may the acts of promoters of a corporation be ratified or accepted by the
corporation if and when subsequently organized. Of course, there are
exceptions. It will be noted that American courts generally hold that a
contract made by the promoters of a corporation on its behalf may be
adopted, accepted or ratified by the corporation when organized. 28
2. The validity of the franchise and the corporate personality of Morong
Electric to accept the same having been shown, the next question to be
resolved is whether said company has the financial qualification to operate
an electric light, heat and power service. Petitioner challenges the financial
capability of Morong Electric, by pointing out the inconsistencies in the
testimony of Mr. Jose P. Ingal, president of said company, regarding its
assets and the amount of its initial investment for the electric plant. In this
connection it should be stated that on the basis of the evidence presented on
the matter, the Commission has found the Morong Electric to be "financially
qualified to install, maintain and operate the proposed electric light, heat and
power service." This is essentially a factual determination which, in a number
of cases, this Court has said it will not disturb unless patently unsupported by
evidence. An examination of the record of this case readily shows that the
testimony of Mr. Ingal and the documents he presented to establish the
financial capability of Morong Electric provide reasonable grounds for the
above finding of the Commission.
It is now a very well-settled rule in this jurisdiction that the findings
and conclusions of fact made by the Public Service Commission,
after weighing the evidence adduced by the parties in a public
service case, will not be disturbed by the Supreme Court unless
those findings and conclusions appear not to be reasonably
supported by evidence. (La Mallorca and Pampanga Bus Co. vs.
Mercado, L-19120, November 29, 1965)
For purposes of appeal, what is decisive is that said testimonial
evidence provides reasonable support for the Public Service
Commission's findings of financial capacity on the part of applicants,
rendering such findings beyond our power to disturb. (Del Pilar
Transit vs. Silva, L-21547, July 15, 1966)
It may be worthwhile to mention in this connection that per inspection report
dated January 20, 1964 29 of Mr. Meliton Martinez of the Commission, who
inspected the electric service of Morong on January 15-16, 1964, Morong
Electric "is serving electric service to the entire area covered by its approved
plan and has constructed its line in accordance with the plans and
specifications approved by the Commission." By reason thereof, it was
recommended that the requests of Morong Electric (1) for the withdrawal of
its deposit in the amount of P1,000.00 with the Treasurer of the Philippines,
and (2) for the approval of Resolution No. 160 of the Municipal Council of
Morong, Rizal, exempting the operator from making the additional P9,000.00
deposit mentioned in its petition, dated September 16, 1963, be granted. This
report removes any doubt as to the financial capability of Morong Electric to
operate and maintain an electric light, heat and power service.
3. With the financial qualification of Morong Electric beyond doubt, the
remaining question to be resolved is whether, or not, the findings of fact of
163
the Commission regarding petitioner's service are supported by evidence. It Co., Inc. vs. Mercado, L-19120, November 29, 1965 citing
is the contention of the petitioner that the Commission made some findings of Pangasinan Trans. Co., Inc. vs. Dela Cruz, 96 Phil. 278)
fact prejudicial to its position but which do not find support from the evidence
presented in this case. Specifically, petitioner refers to the statements or For that matter, petitioner's pretension that it has a prior right to the operation
findings that its service had "turned from bad to worse," that it miserably of an electric service in Morong, Rizal, is not tenable; and its plea for
failed to comply with the oft-repeated promises to bring about the needed protection of its investment, as in the previous case, cannot be entertained.
improvement, that its equipment is unserviceable, and that it has no longer
any plant site and, therefore, has discredited itself. Petitioner further states WHEREFORE, the two decisions of the Public Service Commission,
that such statements are not only devoid of evidentiary support but contrary appealed from, should be, as they are hereby affirmed, with costs in the two
to the testimony of its witness, Mr. Harry Bernardino, who testified that cases against petitioner Rizal Light & Ice Co., Inc. It is so ordered.
petitioner was rendering efficient and satisfactory service before its electric
plant was burned on July 29, 1962.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro,
Angeles and Fernando, JJ., concur.
On the face of the decision appealed from, it is obvious that the Commission
in describing the kind of service petitioner was rendering before its certificate
was ordered revoked and cancelled, took judicial notice of the records of the
previous case (PSC Case No. 39715) where the quality of petitioner's service
had been squarely put in issue. It will be noted that the findings of the
Commission were made notwithstanding the fact that the aforementioned
testimony of Mr. Bernardino had been emphasized and pointed out in
petitioner's Memorandum to the Commission. 30 The implication is simple:
that as between the testimony of Mr. Bernardino and the inspection reports of
the engineers of the Commission, which served as the basis of the
revocation order, the Commission gave credence to the latter. Naturally,
whatever conclusion or finding of fact that the Commission arrived at
regarding the quality of petitioner's service are not borne out by the evidence
presented in this case but by evidence in the previous case. 31 In this
connection, we repeat, the conclusion, arrived at by the Commission after
weighing the conflicting evidence in the two related cases, is a conclusion of
fact which this Court will not disturb.

And it has been held time and again that where the Commission has
reached a conclusion of fact after weighing the conflicting evidence,
that conclusion must be respected, and the Supreme Court will not
interfere unless it clearly appears that there is no evidence to support
the decision of the Commission. (La Mallorca and Pampanga Bus

164
165
 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 co-defendants 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.
G.R. No. L-48627

The only question we have to decide now is whether or not the petitioners
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners
themselves are also and personallyliable for such expenses and, if so, to
vs.
what extent.
THE HONORABLE COURT OF APPEALS and ALBERTO V.
ARELLANO, respondents.
The reasons for the said order are given by the respondent court in its
decision in this wise:

166
 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.
167
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.

168
G.R. No. L-5003 June 27, 1953

NAZARIO TRILLANA, administrator-appellee,

vs.
QUEZON COLLEGE, INC., claimant-appellant.

Singson, Barnes, Yap and Blanco for appellant.

Delgado, Flores & Macapagal for appellee.

PARAS, J.:

Damasa Crisostomo sent the following letter to the Board of Trustees of the
Quezon College:

June 1, 1948

The BOARD OF TRUSTEES

Quezon College
Manila

Gentlemen:

Please enter my subscription to dalawang daan (200) shares of your

capital stock with a par value of P100 each. Enclosed you will find
(Babayaran kong lahat pagkatapos na ako ay makapag-pahuli ng
isda) pesos as my initial payment and the balance payable in
accordance with law and the rules and regulations of the Quezon
College. I hereby agree to shoulder the expenses connected with
said shares of stock. I further submit myself to all lawful demands,
decisions or directives of the Board of Trustees of the Quezon
College and all its duly constituted officers or authorities (ang nasa
itaas ay binasa at ipinaliwanag sa akin sa wikang tagalog na aking
nalalaman).

169

Very respectfully,
(Sgd.) DAMASA CRISOSTOMO
Signature of subscriber
Nilagdaan sa aming harapan:
JOSE CRISOSTOMO
EDUARDO CRISOSTOMO
Damasa Crisostomo died on October 26, 1948. As no payment appears to
have been made on the subscription mentioned in the foregoing letter, the
Quezon College, Inc. presented a claim before the Court of First Instance of
Bulacan in her testate proceeding, for the collection of the sum of P20,000,
representing the value of the subscription to the capital stock of the Quezon
College, Inc. This claim was opposed by the administrator of the estate, and
the Court of First Instance of Bulacan, after hearing issued an order
dismissing the claim of the Quezon College, Inc. on the ground that the
subscription in question was neither registered in nor authorized by the
Securities and Exchange Commission. From this order the Quezon College,
Inc. has appealed.
It is not necessary for us to discuss at length appellant's various assignments
of error relating to the propriety of the ground relief upon by the trial court,
since, as pointed out in the brief for the administrator and appellee, there are
other decisive considerations which, though not touched by the lower court,
amply sustained the appealed order.
It appears that the application sent by Damasa Crisostomo to the Quezon
College, Inc. was written on a general form indicating that an applicant will
enclose an amount as initial payment and will pay the balance in accordance
with law and the regulations of the College. On the other hand, in the letter
actually sent by Damasa Crisostomo, the latter (who requested that her
subscription for 200 shares be entered) not only did not enclose any initial
payment but stated that "babayaran kong lahat pagkatapos na ako ay
makapagpahuli ng isda." There is nothing in the record to show that the
Quezon College, Inc. accepted the term of payment suggested by Damasa
Crisostomo, or that if there was any acceptance the same came to her
knowledge during her lifetime. As the application of Damasa Crisostomo is
obviously at variance with the terms evidenced in the form letter issued by
the Quezon College, Inc., there was absolute necessity on the part of the
College to express its agreement to Damasa's offer in order to bind the latter.
Conversely, said acceptance was essential, because it would be unfair to
immediately obligate the Quezon College, Inc. under Damasa's promise to
pay the price of the subscription after she had caused fish to be caught. In
other words, the relation between Damasa Crisostomo and the Quezon
College, Inc. had only thus reached the preliminary stage whereby the latter
offered its stock for subscription on the terms stated in the form letter, and
Damasa applied for subscription fixing her own plan of payment, a
relation, in the absence as in the present case of acceptance by the Quezon
College, Inc. of the counter offer of Damasa Crisostomo, that had not ripened
into an enforceable contract.
Indeed, the need for express acceptance on the part of the Quezon College,
Inc. becomes the more imperative, in view of the proposal of Damasa
Crisostomo to pay the value of the subscription after she has harvested fish,
a condition obviously dependent upon her sole will and, therefore, facultative
in nature, rendering the obligation void, under article 1115 of the old Civil
Code which provides as follows: "If the fulfillment of the condition should
depend upon the exclusive will of the debtor, the conditional obligation shall
be void. If it should depend upon chance, or upon the will of a third person,
the obligation shall produce all its effects in accordance with the provisions of
this code." It cannot be argued that the condition solely is void, because it
would have served to create the obligation to pay, unlike a case, exemplified
by Osmea vs. Rama (14 Phil., 99), wherein only the potestative condition
was held void because it referred merely to the fulfillment of an already
existing indebtedness.
In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this Court
already held that "a condition, facultative as to the debtor, is obnoxious to the
170
first sentence contained in article 1115 and renders the whole obligation
void."

Wherefore, the appealed order is affirmed, and it is so ordered with costs

against appellant.

Tuason, Padilla and Reyes, JJ., concur in the result.

171
172
G.R. Nos. L-48195 and 48196 May 1, 1942 Municipality of Silang, Province of Cavite, Philippine Islands, party of
the Second Part, hereinafter called the seller,
SOFRONIO T. BAYLA, ET AL., petitioners,
vs. WITNESSETH:
SILANG TRAFFIC CO., INC., respondent.
SILANG TRAFFIC CO., petitioner, vs. SOFRONIO BAYLA, ET That the subscriber promises to pay personally or by his duly
AL., respondents. authorized agent to the seller at the Municipality of Silang, Province
of Cavite, Philippine Islands, the sum of one thousand five hundred
E. A. Beltran for petitioners. pesos (P1,500), Philippine currency, as purchase price of FIFTEEN
Conrado V. Sanchez, Melchor C. Benitez, and Enrique M. Fernando for (15) shares of capital stock, said purchase price to be paid as
respondent. follows, to wit: five (5%) per cent upon the execution of the contract,
the receipt whereof is hereby acknowledged and confessed, and the
OZAETA, J.: remainder in installments of five per cent, payable within the first
month of each and every quarter thereafter, commencing on the 1st
Petitioners in G.R. No. 48195 instituted this action in the Court of First day of July, 1935, with interest on deferred payments at the rate of
Instance of Cavite against the respondent Silang Traffic Co., Inc. (cross- SIX (6%) per cent per annum until paid.
petitioner in G.R. No. 48196), to recover certain sums of money which they
had paid severally to the corporation on account of shares of stock they That the said subscriber further agrees that if he fails to pay any of
individually agreed to take and pay for under certain specified terms and said installment when due, or to perform any of the aforesaid
conditions, of which the following referring to the petitioner Josefa Naval, is conditions, or if said shares shall be attached or levied upon by
typical: creditors of the said subscriber, then the said shares are to revert to
the seller and the payments already made are to be forfeited in favor
AGREEMENT FOR INSTALLMENT SALE OF SHARES IN THE of said seller, and the latter may then take possession, without
"SILANG TRAFFIC COMPANY, INC.," resorting to court proceedings.

The said seller upon receiving full payment, at the time and manner
hereinbefore specified, agrees to execute and deliver to said
Silang, Cavite, P. I. subscriber, or to his heirs and assigns, the certificate of title of said
shares, free and clear of all encumbrances.

In testimony whereof, the parties have hereunto set their hands in

THIS AGREEMENT, made and entered into between Mrs. Josefa
the Municipality of Silang, Province of Cavite, Philippine Islands, this
Naval, of legal age, married and resident of the Municipality of
30th day of March, 1935.
Silang, Province of Cavite, Philippine Islands, party of the First Part,
hereinafter called the subscriber, and the "Silang Traffic Company,
Inc.," a corporation duly organized and existing by virtue of and
under the laws of the Philippine Islands, with its principal office in the

173
 (Sgd.) JOSEFA NAVAL Toledo................
SILANG TRAFFIC COMPANY, INC.
Subscriber

By (Sgd.) LINO GOMEZ Petitioners' action for the recovery of the sums above mentioned is based on
President. a resolution by the board of directors of the respondent corporation on
August 1, 1937, of the following tenor:

A mocion sel Sr. Marcos Caparas y secundado por el Sr. Alejandro

(Exhibit 1. Notarial acknowledgment omitted.)
The agreements signed by the other petitioners were of the same date
(March 30, 1935) and in identical terms as the foregoing except as to the
number of shares and the corresponding purchase price. The petitioners
agreed to purchase the following number of shares and, up to April 30, 1937,
had paid the following sums on account thereof:
Sofronio T. 8 shares P360
Bayla.......
Bayla, que para el bien de la corporacion y la pronta terminacion del
asunto civil No. 3125 titulado "Vicente F. Villanueva et al. vs. Lino
Gomez et al.," en el Juzgado de Primera Instancia de Cavite, donde
se gasto y se gastara no poca cantidad de la Corporacion, se
resolvio y se aprobo por la Junta Directiva los siguientes:
(a) Que se dejara sin efecto lo aprobado por la Junta Directiva el 3
de marzo, 1935, art. 11, sec. 162, sobre las cobranzas que se haran
por el Secretario Tesorero de la Corporacion a los accionistas que
habian tomado o suscrito nuevas acciones y que se permitia a estos
pagar 20% del valor de las acciones suscritas en un ao, con interes
de 6% y el pago o jornal que se hara por trimestre.

(b) Se dejara sin efecto, en vista de que aun no esta pagado todo el
valor de las 123 acciones, tomadas de las acciones no expedidas
Venancio 8 shares 375 (unissued stock) de la Corporacion y que fueron suscritas por los
Toledo........ siguienes:

Josefa 15 shares 675 Lino 10 Acciones

Naval.............. Gomez.....................

Paz 15 shares 675 Venancio 8 Acciones

174
Toledo............. Sofronio 8 Acciones
Bayla.................

Melchor P. 17 Acciones
Benitez........ Dionisio 3 Acciones
Dungca.............

Isaias 14 Acciones
y devolver a las personas arriba descritas toda la cantidad que estas habian
Videa.................
pagado por las 123 acciones.

(c) Que se dejara sin efecto lo aprobado por la Junta Directiva el 3

marzo, 1935, art. V. sec. 165, sobre el cambio o trueque de las 31
Esteban 10 Acciones
acciones del Treasury Stock, contra las 32 acciones del Sr.
Velasco............
Numeriano Aldaba, en la corporacion Northern Luzon Transportation
Co. y que se devuelva al Sr. Numeriano Aldaba las 32 acciones
mencionadas despues que el haya devuelto el certificado de las 31
acciones de la Silang Traffic Co., Inc.
Numeriano S. 15 Acciones
Aldaba.... (d) Permitir al Tesorero de la Corporacion para que devuelva a las
personas arriba indicadas, las cantidades pagadas por las 123
acciones. (Exhibit A-1.)

Inocencio 8 Acciones The respondent corporation set up the following defenses: (1) That the
Cruz................. above-quoted resolution is not applicable to the petitioners Sofronio T. Bayla,
Josefa Naval, and Paz Toledo because on the date thereof "their subscribed
shares of stock had already automatically reverted to the defendant, and the
installments paid by them had already been forfeited"; and (2) that said
Josefa 15 Acciones resolution of August 1, 1937, was revoked and cancelled by a subsequent
Naval .................. resolution of the board of directors of the defendant corporation dated August
22, 1937.

175
The trial court absolved the defendant from the complaint and declared
canceled (forfeited) in favor of the defendant the shares of stock in question.
It held that the resolution of August 1, 1937, was null and void, citing Velasco
vs. Poizat (37 Phil., 802), wherein this Court held that "a corporation has no
legal capacity to release an original subscriber to its capital stock from the
obligation to pay for shares; and any agreement to this effect is invalid"
Plaintiffs below appealed to the Court of Appeals, which modified of the trial
court as follows:
That part of the judgment dismissing plaintiff's complaint is affirmed,
but that part thereof declaring their subscription canceled is
reversed. Defendant is directed to grant plaintiffs 30 days after final
judgment within which to pay the arrears on their subscription.
Without pronouncement as to costs.
Both parties appealed to this Court by petition and cross-petition
for certiorari. Petitioners insist that they have the right to recover the amounts
involved under the resolution of August 1, 1937, while the respondent and
cross-petitioner on its part contends that said amounts have been
automatically forfeited and the shares of stock have reverted to the
corporation under the agreement hereinabove quoted.
The parties litigant, the trial court, and the Court of Appeals have interpreted
or considered the said agreement as a contract of subscription to the capital
stock of the respondent corporation. It should be noted, however, that said
agreement is entitled "Agreement for Installment Sale of Shares in the Silang
Traffic Company, Inc.,"; that while the purchaser is designated as
"subscriber," the corporation is described as "seller"; that the agreement was
entered into on March 30, 1935, long after the incorporation and organization
of the corporation, which took place in 1927; and that the price of the stock
was payable in quarterly installments spread over a period of five years. It
also appears that in civil case No. 3125 of the Court of First Instance of
Cavite mentioned in the resolution of August 1, 1937, the right of the
corporation to sell the shares of stock to the person named in said resolution
(including herein petitioners) was impugned by the plaintiffs in said case, who
claimed a preferred right to buy said shares.
Whether a particular contract is a subscription or a sale of stock is a matter of
construction and depends upon its terms and the intention of the parties (4
Fletcher, Cyclopedia of Corporation [permanent edition], 29, cited in Salmon,
Dexter & Co. vs. Unson (47 Phil. 649, 652). In the Unson case just cited, this
Court held that a subscription to stock in an existing corporation is, as
between the subscriber and the corporation, simply a contract of purchase
and sale.
It seems clear from the terms of the contracts in question that they are
contracts of sale and not of subscription. The lower courts erred in
overlooking the distinction between subscription and purchase "A
subscription, properly speaking, is the mutual agreement of the subscribers
to take and pay for the stock of a corporation, while a purchase is an
independent agreement between the individual and the corporation to buy
shares of stock from it at stipulated price." (18 C. J. S., 760.) In some
particulars the rules governing subscriptions and sales of shares are
different. For instance, the provisions of our Corporation Law regarding calls
for unpaid subscription and assessment of stock (sections 37-50) do not
apply to a purchase of stock. Likewise the rule that corporation has no legal
capacity to release an original subscriber to its capital stock from the
obligation to pay for his shares, is inapplicable to a contract of purchase of
shares.
The next question to determine is whether under the contract between the
parties the failure of the purchaser to pay any of the quarterly installments on
the purchase price automatically gave rise to the forfeiture of the amounts
already paid and the reversion of the shares to the corporation. The contract
provides for interest of the rate of six per centum per annum on deferred
payments. It is also provides that if the purchaser fails to pay any of said
installments when due, the said shares are to revert to the seller and the
payments already made are to be forfeited in favor of said seller. The
respondent corporation contends that when the petitioners failed to pay the
installment which fell due on or before July 31, 1937, forfeiture automatically
took place, that is to say, without the necessity of any demand from the
corporation, and that therefore the resolution of August 1, 1937, authorizing
the refund of the installments already paid was inapplicable to the petitioners,
who had already lost any and all rights under said contract. The contention
176
is, we think, untenable. The provision regarding interest on deferred Wherefore, the judgment of the court of appeals is hereby reversed and
payments would not have been inserted if it had been the intention of the another judgment will be entered against the defendant Silang Traffic Co.,
parties to provide for automatic forfeiture and cancelation of the contract. Inc., ordering it to pay to the plaintiffs Sofronio T. Bayla, Venancio Toledo,
Moreover, the contract did not expressly provide that the failure of the Josefa Naval, and Paz Toledo, the sums of P360, P375, P675, and P675,
purchaser to pay any installment would give rise to forfeiture and cancelation respectively, with legal interest on each of said sums from May 28, 1938, the
without the necessity of any demand from the seller; and under article 1100 date of the filing of the complaint, until the date of payment, and with costs in
of the Civil Code persons obliged to deliver or do something are not in default the three instances. So ordered.
until the moment the creditor demands of them judicially or extrajudicially the
fulfillment of their obligation, unless (1) the obligation or the law expressly Yulo, C.J., Moran, Paras and Bocobo, JJ., concur.
provides that demand shall not be necessary in order that default may arise,
(2) by reason of the nature and circumstances of the obligation it shall
appear that the designation of the time at which that thing was to be
delivered or the service rendered was the principal inducement to the
creation of the obligation.

Is the resolution of August 1, 1937, valid? The contract in question being one
of purchase and not subscription as we have heretofore pointed out, we see
no legal impediment to its rescission by agreement of the parties. According
to the resolution of August 1, 1937, the recission was made for the good of
the corporation and in order to terminate the then pending civil case involving
the validity of the sale of the shares in question among others. To that
rescission the herein petitioners apparently agreed, as shown by their
demand for the refund of the amounts they had paid as provided in said
resolution. It appears from the record that said civil case was subsequently
dismissed, and that the purchasers of shares of stock, other than the herein
petitioners, who were mentioned in said resolution were able to benefit by G.R. No. L-11528 March 15, 1918
said resolution. It would be an unjust discrimination to deny the same benefit
to the herein petitioners.
MIGUEL VELASCO, assignee of The Philippine Chemical Product Co.
(Ltd.), plaintiff-appellant,
We may add that there is no intimation in this case that the corporation was vs.
insolvent, or that the right of any creditor of the same was in any way JEAN M. POIZAT, defendant-appellee.
prejudiced by the rescission.
Vicente Rodriguez for appellant.
The attempted revocation of said rescission by the resolution of August 22, A. J. Burke for appellee.
1937, was invalid, it not having been agreed to by the petitioners.
STREET, J.:

177
From the amended complaint filed in this cause upon February 5, 1915, it
appears that the plaintiff, as assignee in insolvency of "The Philippine
Chemical Product Company" (Ltd.) is seeking to recover of the defendant,
Jean M. Poizat, the sum of P1,500, upon a subscription made by him to the
corporate stock of said company. It appears that the corporation in question
was originally organized by several residents of the city of Manila, where the
company had its principal place of business, with a capital of P50,000,
divided into 500 shares. The defendant subscribed for 20 shares of the stock
of the company, an paid in upon his subscription the sum of P500, the par
value of 5 shares . The action was brought to recover the amount subscribed
upon the remaining shares.
It appears that the defendant was a stock holder in the company from the
inception of the enterprise, and for sometime acted as its treasurer and
manager. While serving in this capacity he called in and collected all
subscriptions to the capital stock of the company, except the aforesaid 15
shares subscribed by himself and another 15 shares owned by Jose R.
Infante.
Upon July 13, 1914, a meeting of the board of directors of the company was
held at which a majority of the stock was presented. Up[on this occasion two
resolutions, important to be here noted, were adopted. The first was a
proposal that the directors, or shareholders, of the company should make
good by new subscriptions, in proportion to their respective holdings, 15
shares which had been surrendered by Infante. It seems that this
shareholder had already paid 25 per cent of his subscription upon 20 shares,
leaving 15 shares unpaid for, and an understanding had been reached by
him and the management by which he was to be released from the obligation
of his subscription, it being understood that what he had already paid should
not be refunded. Accordingly the directors present at this meeting subscribed
P1,200 toward taking up his shares, leaving a deficiency of P300 to be
recovered by voluntary subscriptions from stockholders not present at the
meeting.
The other proposition was o the effect that Juan [Jean] M. Poizat, who was
absent, should be required to pay the amount of his subscription upon the 15
shares for which he was still indebted to the company. The resolution further
provided that, in case he should refuse to make such payment, the
management of the corporation should be authorized to undertake judicial
proceedings against him. When notification of this resolution reached Poizat
through the mail it evoked from him a manifestation of surprise and pain,
which found expression in a letter written by him in reply, dated July 27,
1914, and addressed to Velasco, as treasurer and administrator. In this letter
Poizat states that he had been given to understand by some member of the
board of directors that he was to be relieved from his subscription upon the
terms conceded to Infante; and he added:
My desire to be relieved from the payment of the remaining 75 per
cent arises from the poor opinion which I entertain of the business
and the faint hope of ever recovering any money invested. In
consequence, I prefer to lose the whole of the 25 per cent I have
already paid rather than to continue investing more money in what I
consider to be ruinous proposition.
Within a short while the unfavorable opinion entertained by Poizat as to the
prospect of the company was found to be fully justified, as the company soon
went into voluntary insolvency, Velasco being named as the assignee. He
qualified at once by giving bond, and was duly inducted into the office of
assignee upon November 25, 1914, by virtue of a formal transfer executed
by the clerk in pursuance of section 32 of Act No. 1956.
The answer of the defendant consisted of a general denial and a so-called
special defense, consisting of a concatenation of statements more
appropriate for a demurrer than as material for a special defense. The
principal contention is that the call made by the board of directors of the
company on July 13, 1914 , was not made pursuant to the requirements of
sections 37 and 38 of the Corporation Law (Act No. 1459), and in particular
that the action was instituted before the expiration of the 30 days specified in
section 38.
At the hearing of the Court of First Instance, judgment was rendered in favor
of the defendant, and the complaint was dismissed. From this action the
plaintiff has appealed.
178
We think that Poizat is liable upon this subscription. A stock subscription is a
contract between the corporation on one side, and the subscriber on the
other, and courts will enforce it for or against either. It is a rule, accepted by
the Supreme Court of the United States, that a subscription for shares of
stock does not require an express promise to pay the amount subscribed, as
the law implies a promise to pay on the part of the subscriber. (7 Ruling Case
Law, sec. 191.) Section 36 of the Corporation Law clearly recognizes that a
stock subscription is subsisting liability from the time the subscription is
made, since it requires the subscriber to pay interest quarterly from that date
unless he is relieved from such liability by the by-laws of the corporation. The
subscriber is as much bound to pay the amount of the share subscribed by
him as he would be to pay any other debt, and the right of the company to
demand payment is no less incontestable.
The provisions of the Corporation Law (Act No. 1459) given recognition of
two remedies for the enforcement of stock subscriptions. The first and most
special remedy given by the statute consists in permitting the corporation to
put up the unpaid stock for sale and dispose of it for the account of the
delinquent subscriber. In this case the provisions of section 38 to 48,
inclusive , of the Corporation Law are applicable and must be followed. The
other remedy is by action in court, concerning which we find in section 49 the
following provision:
Nothing in this Act shall prevent the directors from collecting, by
action in any court of proper jurisdiction, the amount due on any
unpaid subscription, together with accrued interest and costs and
expenses incurred.
It is generally accepted doctrine that the statutory right to sell the subscriber's
stock is merely a remedy in addition to that which proceeds by action in
court; and it has been held that the ordinary legal remedy by action exists
even though no express mention thereof is made in the statute.
(Instone vs. Frankfort Bridge Co., 2 Bibb [Ky.], 576; 5 Am. Dec., 638.)
No attempt is made in the Corporation Law to define the precise conditions
under which an action may be maintained upon a stock subscription, as such
conditions should be determined with reference to the rules governing
contract liability in general; and where it appears as in this case that a
matured stock subscription is unpaid, none of the provisions contained in
section 38 to 48, inclusive, of Act No. 1459 can be permitted to obstruct or
impede the action to recover thereon. By virtue of the first subsection of
section 36 of the Insolvency Law (Act No. 1956) the assignee of the insolvent
corporation succeeds to all the corporate rights of action vested in the
corporation prior to its insolvency; and the assignee therefore has the same
freedom with respect to suing upon the stock subscription as the directors
themselves would have had under section 49 above cited.
But there is another reason why the present plaintiff must prevail in this case,
even supposing that the failure of the directors to comply with the
requirements of the provisions of sections 38 to 48, inclusive, of Act No. 1459
might have been an obstacle to a recovery by the corporation itself. That
reason is this: When insolvency supervenes upon a corporation and the court
assumes jurisdiction to wind up, all unpaid stock subscriptions become
payable on demand, and are at once recoverable in an action instituted by
the assignee or receiver appointed by the court. This rule apparently had
origin in a recognition of the principle that a court of equity, having jurisdiction
of the insolvency proceedings, could, if necessary, make the call itself, in its
capacity as successor to the powers exercised by the board of directors of
the defunct company. Later a further rule gained recognition to the effect that
the receiver or assignee, in an action instituted by proper authority, could
himself proceed to collect the subscription without the necessity of any prior
call whatever. This conclusion is well supported by reference to the following
authorities:
. . . a court of equity may enforce payment of the stock subscriptions,
although there have been no calls for them by the company.
(Hatch vs. Dana, 101 U. S., 205.)
It is again insisted that the plaintiffs cannot recover because the suit
was not preceded by a call or assessment against no right of action
accrues. In a suit by a solvent going corporation to collect a
subscription, and in certain suits provided by the statute this would
be true; but it is now quite well settled that when the corporation
179
 becomes insolvent, with proceedings instituted by creditors to wind
up and distribute its assets, no call or assessment is necessary
before the institution of suits to collect unpaid balances on
subscription. (Ross-Meehan Shoe F. Co. vs. Southern Malleable Iron
Co., 72 Fed., 957, 960; see also Henry vs. Vermillion etc. R. R. Co.,
17 Ohio, 187, and Thompson on Corporations 2d ed., vol. 3, sec.
2697.)
It evidently cannot be permitted that a subscriber should escape from his
lawful obligation by reason of the failure of the officers of the corporation to
perform their duty in making a call; and when the original model of making
the call becomes impracticable, the obligation must be treated as due upon
demand. If the corporation must be treated still an active entity, and this
action should be dismissed for irregularity in the making of the call, other
steps could be taken by the board to cure the defect and another action
could be brought; but where the company is being wound up, no such
procedure would be practicable. The better doctrine is that when insolvency
supervenes all unpaid subscriptions become at once due and enforceable.
The printed bill of exceptions in this cause does not contain the original
complaint, nor does it state who was plaintiff therein or the date when the
action was instituted. It may, however, be gathered from the papers
transmitted to this court that the action was originally instituted in the name of
the Philippine Chemical Product Co. (Ltd.), prior to its insolvency, and that
later the assignee was substituted as plaintiff and then filed the amended
complaint, with the permission of the court. Now, if we concede that no right
of action existed when the original complaint was filed, a right of action
certainly existed when the assignee filed his amended complaint; and as the
bill of exceptions fails to show that any exception was taken to the action of
the court in allowing the amended complaint to be filed, no objection would
be here entertained on the ground that the action was prematurely brought.
The circumstance that the board of directors in their meeting of July 13,
1914, resolved to release Infante from his obligation upon a subscription for
15 shares is no wise prejudicial to the right of the corporation or its assignee
to recover from Poizat upon a subscription made by him. In releasing Infante
the board transcended its powers, and he no doubt still remained liable on
such of his shares as were not taken up and paid for by other persons.
The general doctrine is that the corporation has no legal capacity to
release an original subscriber to its capital stock from the obligation
of paying for his shares, in whole or in part, . . . (10 Cyc., 450.)
The suggestion contained in Poizat's letter of July 27, 1914, to the effect that
he understood that he was to be relieved upon the same terms as Infante is,
for the same reason, of no merit as matter of defense, even if an agreement
to that effect had been duly proved.
From what has been said it is manifest that the defendant is liable for P1,500,
the amount of his subscription upon the unpaid shares. Under section 36 of
the Corporation Law he is also liable for interest at the lawful rate from the
date of his subscription, unless relieved from this liability by the by-laws of
the company. These by-laws have not been introduced in evidence and there
is no proof showing the exact date upon which the subscription was made,
though it is alleged in the original complaint that the company was organized
upon March 23, 1914. This allegation is not admitted in the agreed statement
of facts. The defendant, however, inferentially admits in his letter of July 27,
1914, that his subscription had been made prior to July 13, 1914. It resulted
that in our opinion he should be held liable for interest from that date.
The judgment of the lower court is therefore reversed, and judgment will be
rendered in favor of the plaintiff and against the defendant for the sum of one
thousand five hundred pesos (P1,500), with interest from July 13, 1014, and
costs of both instances. So ordered.
Arellano, C.J., Torres, Johnson, Carson, Araullo, Malcolm, Avancea and
Fisher, JJ., concur.
180
G.R. Nos. L-24177-85 June 29, 1968

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.

181
BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA
MADRE LUMBER CO., INC., NASIPIT LUMBER CO., INC.,
WOODWORKS, INC., GONZALO PUYAT, TOMAS B. MORATO, FINDLAY
MILLAR LUMBER CO., INC., ET AL., INSULAR LUMBER CO., ANAKAN
LUMBER CO., AND CANTILAN LUMBER CO., INC., defendants-appellees.
Tomas Besa, Simplicio N. Angeles and Jose B. Galang for plaintiff-appellee.
Bausa, Ampil and Suarez for defendant-appellant Woodworks, Inc.
Pacifico de Ocampo for defendant-appellant Anakan Lumber Co.
Ross, Selph, Salcedo, Del Rosario, Bito and Misa for defendant-appellant
Insular Lumber Co.
Garin, Boquiren and Tamesis for defendant-appellant Nasipit Lumber Co.,
Inc.
Feria, Manglapus and Associates for defendant-appellant Gonzalo Puyat.
Sycip, Salazar and Associates for defendant-appellant Cantilan Lumber Co.,
Inc.
Ozaeta, Gibbs and Ozaeta for defendant-appellant Findlay Millar Lumber
Co., Inc.
Dominador Alafriz for defendant-appellant Bitulok Sawmill, Inc.
De la Costa and De la Costa for defendant-appellant Tomas B. Morato.
FERNANDO, J.:
In the face of a statutory norm, which, as interpreted in a uniform line of
decisions by this Court, speaks unequivocally and is free from doubt, the
lower court with full recognition that the case for the plaintiff creditor,
Philippine National Bank, "is meritorious strictly from the legal
standpoint" 1 but apparently unable to "close its eyes to the equity of the
case" 2 dismissed nine (9) cases filed by it, seeking "to recover from the
defendant lumber producers [Bitulok Sawmill, Inc.; Dingalan Lumber Co.,
Inc., Sierra Madre Lumber Co., Inc.; Nasipit Lumber Co., Inc.; Woodworks,
Inc.; Gonzalo Puyat; Tomas B. Morato; Findlay Millar Lumber Co., Inc.;
Insular Lumber Co., Inc.; Anakan Lumber Co., Inc.; and Cantilan Lumber Co.,
Inc.] the balance of their stock subscriptions to the Philippine Lumber
Distributing Agency, Inc." 3 In essence then, the crucial question posed by this
appeal from such a decision of the lower court is adherence to the rule of
law. Otherwise stated, would non-compliance with a plain statutory
command, considering the persuasiveness of the plea that defendants-
appellees would "not have subscribed to [the] capital stock" of the Philippine
Lumber Distributing Agency "were it not for the assurance of the [then]
President of the Republic of the Philippines that the Government would back
[it] up by investing P9.00 for every peso" 4 subscribed, a condition which was
not fulfilled, such commitment not having been complied with, be justified?
The answer must be in the negative.
It cannot be otherwise even if an element of unfairness and injustice could be
predicated, as the lower court, in a rather sympathetic mood, did find in the
plaintiff bank, as creditor, compelling defendant lumber producers under the
above circumstances to pay the balance of their subscriptions. For a plain
and statutory command, if applicable, must be respected. The rule of law
cannot be satisfied with anything less. The appeal must be sustained.
In these various suits decided jointly, the Philippine National Bank, as
creditor, and therefore the real party in interest, was allowed by the lower
court to substitute the receiver of the Philippine Lumber Distributing Agency
in these respective actions for the recovery from defendant lumber producers
the balance of their stock subscriptions. The amount sought to be collected
from defendants-appellees Bitulok Sawmill, Inc., Dingalan Lumber Co., Inc.,
and Sierra Madre Lumber Co., Inc., is P5,000.00, defendants-appellees
having made a partial payment of P15,000.00 of their total subscription worth
P20,000.00; from defendant-appellee Nasipit Lumber Co., Inc., the sum of
P10,000.00, defendant-appellee having made a partial payment of
P10,000.00 of its total subscription worth P20,000.00; from defendant-
appellee Woodworks, Inc., the sum of P10,886.00, defendant-appellee
having made a partial payment of P9,114.00 of its total subscription worth
P20,000.00; from defendant-appellee Gonzalo Puyat the sum of P10,000.00,
defendant-appellee having made a partial payment of P10,000.00 of his total
subscription worth P20,000.00; from defendant-appellee Tomas Morato the
sum of P10,000.00, defendant-appellee having made a partial payment of
P10,000.00 of his total subscription worth P20,000.00; from defendant-
appellee Findlay Millar Lumber Co., Inc., the sum of P10,000.00, defendant-
appellee having made a partial payment of P10,000.00 of its total
subscription worth P20,000.00; from defendant-appellee Insular Lumber Co.,
Inc., the sum of P5,000.00, defendant-appellee having made a partial
182
payment of P15,000.00 of its total subscription worth P20,000.00; from
defendant-appellee Anakan Lumber Co., Inc., the sum of P15,000.00,
defendant-appellee having made a partial payment of P5,000.00 of its total
subscription worth P20,000.00; and from defendant-appellee Cantilan
Lumber Co., Inc., the sum of P7,500.00, defendant-appellee having made a
partial payment of P2,500.00 of its total subscription worth P10,000.00, plus
interest at the legal rate from the filing of the suits and the costs of the suits
in all the nine (9) cases.
The Philippine Lumber Distributing Agency, Inc., according to the lower court,
"was organized sometime in the early part of 1947 upon the initiative and
insistence of the late President Manuel Roxas of the Republic of the
Philippines who for the purpose, had called several conferences between
him and the subscribers and organizers of the Philippine Lumber Distributing
Agency, Inc." 5 The purpose was praiseworthy, to insure a steady supply of
lumber, which could be sold at reasonable prices to enable the war sufferers
to rehabilitate their devastated homes. The decision continues: "He
convinced the lumber producers to form a lumber cooperative and to pool
their sources together in order to wrest, particularly, the retail trade from
aliens who were acting as middlemen in the distribution of lumber. At the
beginning, the lumber producers were reluctant to organize the cooperative
agency as they believed that it would not be easy to eliminate from the retail
trade the alien middlemen who had been in this business from time
immemorial, but because the late President Roxas made it clear that such a
cooperative agency would not be successful without a substantial working
capital which the lumber producers could not entirely shoulder, and as an
inducement he promised and agreed to finance the agency by making the
Government invest P9.00 by way of counterpart for every peso that the
members would invest therein,...." 6
This was the assurance relied upon according to the decision, which stated
that the amount thus contributed by such lumber producers was not enough
for the operation of its business especially having in mind the primary
purpose of putting an end to alien domination in the retail trade of lumber
products. Nor was there any appropriation by the legislature of the
counterpart fund to be put up by the Government, namely, P9.00 for every
peso invested by defendant lumber producers. Accordingly, "the late
President Roxas instructed the Hon. Emilio Abello, then Executive Secretary
and Chairman of the Board of Directors of the Philippine National Bank, for
the latter to grant said agency an overdraft in the original sum of
P250,000.00 which was later increased to P350,000.00, which was approved
by said Board of Directors of the Philippine National Bank on July 28, 1947,
payable on or before April 30, 1958, with interest at the rate of 6% per
annum, and secured by the chattel mortgages on the stock of lumber of said
agency." 7 The Philippine Government did not invest the P9.00 for every peso
coming from defendant lumber producers. The loan extended to the
Philippine Lumber Distributing Agency by the Philippine National Bank was
not paid. Hence, these suits.
For the lower court, the above facts sufficed for their dismissal. To its mind "it
is grossly unfair and unjust for the plaintiff bank now to compel the lumber
producers to pay the balance of their subscriptions .... Indeed, when the late
President Roxas made representations to the plaintiff bank, thru the Hon.
Emilio Abello, who was then the Executive Secretary and Chairman of its
Board of Directors, to grant said overdraft to the agency, it was the only way
by which President Roxas could make good his commitment that the
Government would invest in said agency to the extent already mentioned
because, according to said late President Roxas, the legislature had not
appropriated any amount for such counterpart. Consequently, viewing from
all considerations of equity in the case, the Court finds that plaintiff bank
should not collect any more from the defendants the balance of their
subscriptions to the capital stock of the Philippine Lumber Distributing
Agency, Inc." 8
Even with the case for defendant lumber producers being put forth in its
strongest possible light in the appealed decision, the plaintiff creditor, the
Philippine National Bank, should have been the prevailing party. On the law
as it stands, the judgment reached by the lower court cannot be sustained.
The appeal, as earlier made clear, possesses merit.
In Philippine Trust Co. v. Rivera, 9 citing the leading case of Velasco v.
Poizat, 10 this Court held: "It is established doctrine that subscriptions to the
capital of a corporation constitute a fund to which creditors have a right to
look for satisfaction of their claims and that the assignee in insolvency can
183
maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debt.... A corporation has no power to release
an original subscriber to its capital stock from the obligation of paying for his
shares, without a valuable consideration for such release; and as against
creditors a reduction of the capital stock can take place only in the manner
and under the conditions prescribed by the statute or the charter or the
articles of incorporation. Moreover, strict compliance with the statutory
regulations is necessary...." The Poizat doctrine found acceptance in later
cases. 11One of the latest cases, Lingayen Gulf Electric Power v.
Baltazar, 12 Speaks to this effect: "In the case of Velasco v. Poizat, 13 the
corporation involved was insolvent, in which case all unpaid stock
subscriptions become payable on demand and are immediately recoverable
in an action instituted by the assignee."
It would be unwarranted to ascribe to the late President Roxas the view that
the payment of the stock subscriptions, as thus required by law, could be
condoned in the event that the counterpart fund to be invested by the
Government would not be available. Even if such were the case, however,
and such a promise were in fact made, to further the laudable purpose to
which the proposed corporation would be devoted and the possibility that the
lumber producers would lose money in the process, still the plain and specific
wording of the applicable legal provision as interpreted by this Court must be
controlling. It is a well-settled principle that with all the vast powers lodged in
the Executive, he is still devoid of the prerogative of suspending the
operation of any statute or any of its terms.
What it decrees must be followed; what it commands must be obeyed. It
must be respected, the wishes of the President, to the contrary
notwithstanding, even if impelled by the most worthy of motives and the most
persuasive equitable considerations. To repeat, such is not the case here.
For at no time did President Roxas ever give defendant lumber producers to
understand that the failure of the Government for any reason to put up the
counterpart fund could terminate their statutory liability.
Such is not the law. Unfortunately, the lower court was of a different mind.
That is not to pay homage to the rule of law. Its decision then, one it is to be
repeated influenced by what it considered to be the "equity of the case", is
not legally impeccable.
WHEREFORE, the decision of the lower court is reversed and the cases
remanded to the lower court for judgment according to law, with full
consideration of the legal defenses raised by defendants-appellees, Bitulok
Sawmill, Inc.; Dingalan Lumber Co., Inc.; Sierra Madre Lumber Co., Inc.;
Nasipit Lumber Co., Inc.; Woodworks, Inc.; Gonzalo Puyat; Tomas B. Morato;
Findlay Millar Lumber Co., Inc.; Anakan Lumber Co., Inc.; and Cantilan
Lumber Co., Inc. No pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez and
Angeles, JJ., concur.
Castro, J., took no part.

The emphatic and categorical language of an American decision cited by the

late Justice Laurel, in People v. Vera, 14 comes to mind: "By the twentieth
article of the declaration of rights in the constitution of this commonwealth, it
is declared that the power of suspending the laws, or the execution of the
laws, ought never to be exercised but by the legislature, or by authority
derived from it, to be exercised in such particular cases only as the
legislature shall expressly provide for...." Nor could it be otherwise
considering that the Constitution specifically enjoins the President to see to it
that all laws be faithfully executed. 15 There may be a discretion as to what a
particular legal provision requires; there can be none whatsoever as to the
enforcement and application thereof once its meaning has been ascertained.

184
185

G.R. No. L-30646 January 30, 1929
THE GOVERNMENT OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE MANILA RAILROAD COMPANY and JOSE PAEZ as Manager of said
Company, respondents.
Attorney-General Jaranilla for petitioner.
Jose Abreu for respondents.
JOHNSON, J.:
This is a petition in the Supreme Court of the extraordinary legal writ
of mandamus presented by the Government of the Philippine Islands,
praying that the writ be issued to compel the Manila Railroad Company and
Jose Paez, as its manager, to provide and equip the telegraph poles of said
company between the municipality of Paniqui, Province of Tarlac, and the
Municipality of San Fernando, Province of La Union, with crosspieces for six
telegraph wires belonging to the Government, which, it is alleged, are
necessary for public service between said municipalities.
The only question raised by the petition is whether the dependant company
is required to provide and equip its telegraph poles with crosspieces to carry
six telegraph wires of the Government, or whether it is only required to
furnish poles with crosspieces sufficient to carry four wires only.
It is admitted that the present poles and crosspieces between said
municipalities are sufficient to carry four telegraph wires and that they do now
carry four telegraph wires, by virtue of an agreement between the
respondents and the Bureau of the Posts of the Philippine Government. It is
admitted that the poles and not sufficient to carry six telegraph wires.
The petitioner relies upon the provisions of section 84 of act No. 1459. Act
No. 1459 is the General Corporation Law and was adopted by the United
States Philippine Commission on March 1, 1906. (Vol. 5, Pub. Laws, pp. 224-
268.) Section 84 of the said Act provides:
The railroad corporation shall establish along the whole length of the
road a telegraph line for the use of the railroad. The posts of this line
may be used for Government wires and shall be of sufficient length
and strength and equipped with sufficient crosspiece to carry the
number of wires which the Government may consider necessary for
the public service. The establishment, protection, and maintenance
of the wires and stations necessary for the public service shall be at
the cost of the Government. (Vol. 5, P. L., p. 247.)
The plaintiff contends that under said section 84 the defendant company is
required to erect and maintain posts for its telegraph wires, of sufficient
length and strength, and equipped with sufficient crosspieces to carry the
number of wires which the Government may consider necessary for the
public service, and that six wires are now necessary for the public service.
The respondents answered by a general and special defense. In their special
defense they contend that section 84 of Act No. 1459 has been repealed by
section 1, paragraph 8 of Act No. 1510 of the United States Philippine
Commission (vol. 5, P. L., pp. 350-358), and that under the provisions of said
Act No. 1510 the Government is entitled to place on the poles of the
company four wires only. Act No. 1510 is the charter of the Manila Railroad
186
Company. It was adopted by the United States Philippine Commission on
July 7, 1906. Section 1, paragraph 8, of said Act No. 1510 provides:
8. The grantee (the Manila Railroad Company) shall have the right to
construct and operate telegraph, telephone, and electrical
transmission lines over said railways for the use of the railways and
their business, and also, with the approval of the Secretary of War,
for public service and commercial purposes but these latter
privileges shall be subject to the following provisions:
In the construction of telegraph or telephone lines along the right of
way the grantee (the Manila Railroad Company) shall erect and
maintain poles with sufficient space thereon to permit the Philippine
Government, at the expense of said Government, to place, operate,
and maintain four wires for telegraph, telephone, and electrical
transmission for any Government purposes between the termini of
the lines of railways main or branch; and the Philippine Government
reserves to itself the right to construct, maintain, and operate
telegraph, telephone, or electrical transmission lines over the right of
way of said railways for commercial military, or government
purposes, without unreasonably interfering with the construction,
maintenance, and operation by the grantee of its railways, telegraph,
telephone, and electrical transmission lines.
To answer the question above stated, it becomes necessary to determine
whether section 84 of Act No. 1459 is applicable to the Manila Railroad
Company, or whether the manila Railroad Company is governed by section
1, paragraph 8, of Act No. 1510. As has been said, Act No. 1459 is a general
law applicable to corporations generally, while Act No. 1510 is the charter of
the Manila Railroad Company and constitute a contract between it and the
Government.
Inasmuch as Act No. 1510 is the charter of Manila Railroad Company and
constitute a contract between it and the Governmemnt, it would seem that
the company is governd by its contract and not by the provisions of any
general law upon questions covered by said contract. From a reading of the
said charter or contract it would be seen that there is no indication that the
Government intended to impose upon said company any other conditions as
obligations not expressly found in said charter or contract. If that is true, then
certainly the Government cannot impose upon said company any conditions
or obligations found in any general law, which does not expressly modify said
contract.
Section 84 of the Corporation Law (Act No. 1459) was intended to apply to all
railways in the Philippine Islands which did not have a special charter
contract. Act No. 1510 applies only to the Manila Railroad Company, one of
the respondents, and being a special charter of said company, its adoption
had the effect of superseding the provisions of the general Corporation Law
which are applicable to railraods in general. The special charter (Act No.
1510) had the effect of superseding the general Corporation Law upon all
matters covered by said special charter. Said Act, inasmuch as it contained a
special provision relating to the erection of telegraph and telephone poles,
and the number of wires which the Government might place thereon,
superseded the general law upon that question.
Act No. 1510 is a special charter of the respondent company. It constitutes a
contract between the respondent company and the state; and the state and
the grantee of a charter are equally bound by its provisions. For the state to
impose an obligation or a duty upon the respondent company, which is not
expressly provided for in the charter (Act No. 1510), would amount to a
violation of said contract between the state and the respondent company.
The provisions of Act No. 1459 relating to the number of wires which the
Government may place upon the poles of the company are different and
more enerous than the provisions of the charter upon the same question.
Therefore, to allow the plaintiff to require of the respondent company a
compliance with said section 84 of Act No. 1459, would be to require of the
respondent company and the performance of an obligation which is not
imposed upon it by its charter. The charter of a corporation is a contract
between three parties: (a) it is a contract between the state and the
corporation to which the charter is granted; (b) it is a contact between the
stockholders and the state and (c) it is also a contract between the
corporation and its stockholders. (Cook on Corporations, vol. 2, sec. 494 and
cases cited.)
187
The question is not whether Act No. 1510 repealed Act No. 1459; but
whether, after the adoption of Act No. 1510, the respondents are obliged to
comply with the special provision above mentioned, contained in Act No.
1459. We must answer that question in the native. Both laws are still in force,
unless otherwise repealed. Act No. 1510 is applicable to respondents upon
the question before us, while Act No. 1459 is not applicable.

The petitioner, in view of all the foregoing facts and the law applicable
thereto, has not shown itself entitled to the remedy prayed for. The prayer of
the petition must, therefore, be denied. And without any finding as to costs, it
is so ordered.

Street, Malcolm, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ.,

concur.

188

G.R. No. 96674 June 26, 1992
RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS
and FRANCISCO TRIAS, petitioners,
vs.
COURT OF APPEALS*, SECURITIES AND EXCHANGE COMMISSION,
MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES,
FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO ,
SR.,respondents.
PARAS, J.:
The basic controversy in this case is whether or not the respondent court
erred in sustaining the Securities and Exchange Commission when it
compelled by Mandamus the Rural Bank of Salinas to register in its stock
and transfer book the transfer of 473 shares of stock to private respondents.
Petitioners maintain that the Petition for Mandamus should have been denied
upon the following grounds.
(1) Mandamus cannot be a remedy cognizable by the Securities and
Exchange Commission when the purpose is to register certificates of stock in
the names of claimants who are not yet stockholders of a corporation:
(2) There exist valid reasons for refusing to register the transfer of the subject
of stock, namely:
(a) a pending controversy over the ownership of the
certificates of stock with the Regional Trial Court;
(b) claims that the Deeds of Assignment covering the subject
certificates of stock were fictitious and antedated; and
(c) claims on a resultant possible deprivation of inheritance
share in relation with a conflicting claim over the subject
certificates of stock.
The facts are not disputed.
On June 10, 1979, Clemente G. Guerrero, President of the Rural Bank of
Salinas, Inc., executed a Special Power of Attorney in favor of his wife,
private respondent Melania Guerrero, giving and granting the latter full power
and authority to sell or otherwise dispose of and/or mortgage 473 shares of
stock of the Bank registered in his name (represented by the Bank's stock
certificates nos. 26, 49 and 65), to execute the proper documents therefor,
and to receive and sign receipts for the dispositions.
On February 27, 1980, and pursuant to said Special Power of Attorney,
private respondent Melania Guerrero, as Attorney-in-Fact, executed a Deed
of Assignment for 472 shares out of the 473 shares, in favor of private
respondents Luz Andico (457 shares), Wilhelmina Rosales (10 shares) and
Francisco Guerrero, Jr. (5 shares).
Almost four months later, or two (2) days before the death of Clemente
Guerrero on June 24, 1980, private respondent Melania Guerrero, pursuant
to the same Special Power of Attorney, executed a Deed of Assignmentfor
the remaining one (1) share of stock in favor of private respondent Francisco
Guerrero, Sr.
189
Subsequently, private respondent Melania Guerrero presented to petitioner
Rural Bank of Salinas the two (2) Deeds of Assignment for registration with a
request for the transfer in the Bank's stock and transfer book of the 473
shares of stock so assigned, the cancellation of stock certificates in the name
of Clemente G. Guerrero, and the issuance of new stock certificates covering
the transferred shares of stocks in the name of the new owners thereof.
However, petitioner Bank denied the request of respondent Melania
Guerrero.
On December 5, 1980, private respondent Melania Guerrero filed with the
Securities and Exchange Commission" (SEC) an action
for mandamus against petitioners Rural Bank of Salinas, its President and
Corporate Secretary. The case was docketed as SEC Case No. 1979.
Petitioners filed their Answer with counterclaim on December 19, 1980
alleging the upon the death of Clemente G. Guerrero, his 473 shares of stock
became the property of his estate, and his property and that of his widow
should first be settled and liquidated in accordance with law before any
distribution can be effected so that petitioners may not be a party to any
scheme to evade payment of estate or inheritance tax and in order to avoid
liability to any third persons or creditors of the late Clemente G. Guerrero.
On January 29, 1981, a motion for intervention was filed by Maripol
Guerrero, a legally adopted daughter of the late Clemente G. Guerrero and
private respondent Melania Guerrero, who stated therein that on November
26, 1980 (almost two weeks before the filing of the petition for Mandamus) a
Petition for the administration of the estate of the late Clemente G. Guerrero
had been filed with the Regional Trial Court, Pasig, Branch XI, docketed as
Special Proceedings No. 9400. Maripol Guerrero further claimed that the
Deeds of Assignment for the subject shares of stock are fictitious and
antedated; that said conveyances are donations since the considerations
therefor are below the book value of the shares, the assignees/private
respondents being close relatives of private respondent Melania Guerrero;
and that the transfer of the shares in question to assignees/private
respondents, other than private respondent Melania Guerrero, would deprive
her (Maripol Guerrero) of her rightful share in the inheritance. The SEC
hearing officer denied the Motion for Intervention for lack of merit. On appeal,
the SEC En Banc affirmed the decision of the hearing officer.
Intervenor Guerrero filed a complaint before the then Court of First Instance
of Rizal, Quezon City Branch, against private respondents for the annulment
of the Deeds of Assignment, docketed as Civil Case No. Q-32050.
Petitioners, on the other hand, filed a Motion to Dismiss and/or to Suspend
Hearing of SEC Case No. 1979 until after the question of whether the subject
Deeds of Assignment are fictitious, void or simulated is resolved in Civil Case
No. Q-32050. The SEC Hearing Officer denied said motion.
On December 10, 1984, the SEC Hearing Officer rendered a Decision
granting the writ of Mandamus prayed for by the private respondents and
directing petitioners to cancel stock certificates nos. 26, 49 and 65 of the
Bank, all in the name of Clemente G. Guerrero, and to issue new certificates
in the names of private respondents, except Melania Guerrero. The
dispositive, portion of the decision reads:
WHEREFORE, judgment is hereby rendered in favor of the
petitioners and against the respondents, directing the latter,
particularly the corporate secretary of respondent Rural
Bank of Salinas, Inc., to register in the latter's Stock and
Transfer Book the transfer of 473 shares of stock of
respondent Bank and to cancel Stock Certificates Nos. 26,
45 and 65 and issue new Stock Certificates covering the
transferred shares in favor of petitioners, as follows:
1. Luz Andico 457 shares
2. Wilhelmina Rosales 10 shares
3. Francisco Guerrero, Jr. 5 shares
4. Francisco Guerrero, Sr. 1 share
190
 and to pay to the above-named petitioners, the dividends for
said shares corresponding to the years 1981, 1982, 1983
and 1984 without interest.
No pronouncement as to costs.
SO ORDERED. (p. 88, Rollo)
On appeal, the SEC En Banc affirmed the decision of the Hearing Officer.
Petitioner filed a petition for review with the Court of Appeals but said Court
likewise affirmed the decision of the SEC.
We rule in favor of the respondents.
Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive
jurisdiction to hear and decide cases involving intracorporate controversies.
An intracorporate controversy has been defined as one which arises between
a stockholder and the corporation. There is no distinction, qualification, nor
any exception whatsoever (Rivera vs. Florendo, 144 SCRA 643 [1986]). The
case at bar involves shares of stock, their registration, cancellation and
issuances thereof by petitioner Rural Bank of Salinas. It is therefore within
the power of respondent SEC to adjudicate.
Respondent SEC correctly ruled in favor of the registering of the shares of
stock in question in private respondent's names. Such ruling finds support
under Section 63 of the Corporation Code, to wit:
Sec. 63. . . . Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or
other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the
corporation . . .
In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court
interpreted Sec. 63 in his wise:
Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the
Corporation Code]) contemplates no restriction as to whom
the stocks may be transferred. It does not suggest that any
discrimination may be created by the corporation in favor of,
or against a certain purchaser. The owner of shares, as
owner of personal property, is at liberty, under said section to
dispose them in favor of whomever he pleases, without
limitation in this respect, than the general provisions of
law. . . .
The only limitation imposed by Section 63 of the Corporation Code is
when the corporation holds any unpaid claim against the shares
intended to be transferred, which is absent here.
A corporation, either by its board, its by-laws, or the act of its officers, cannot
create restrictions in stock transfers, because:
. . . Restrictions in the traffic of stock must have their source
in legislative enactment, as the corporation itself cannot
create such impediment. By-laws are intended merely for the
protection of the corporation, and prescribe regulation, not
restriction; they are always subject to the charter of the
corporation. The corporation, in the absence of such power,
cannot ordinarily inquire into or pass upon the legality of the
transactions by which its stock passes from one person to
another, nor can it question the consideration upon which a
sale is based. . . . (Tomson on Corporation Sec.
4137, citedin Fleisher vs. Nolasco, Supra).
The right of a transferee/assignee to have stocks transferred to his name is
an inherent right flowing from his ownership of the stocks. Thus:
191
 Whenever a corporation refuses to transfer and register
stock in cases like the present, mandamuswill lie to compel
the officers of the corporation to transfer said stock in the
books of the corporation" (26, Cyc. 347, Hyer vs. Bryan, 19
Phil. 138; Fleisher vs. Botica Nolasco, 47 Phil. 583, 594).

The corporation's obligation to register is ministerial.

In transferring stock, the secretary of a corporation acts in

purely ministerial capacity, and does not try to decide the
question of ownership. (Fletcher, Sec. 5528, page 434).

The duty of the corporation to transfer is a ministerial one

and if it refuses to make such transaction without good
cause, it may be compelled to do so by mandamus. (See.
5518, 12 Fletcher 394)

For the petitioner Rural Bank of Salinas to refuse registration of the

transferred shares in its stock and transfer book, which duty is ministerial on
its part, is to render nugatory and ineffectual the spirit and intent of Section
63 of the Corporation Code. Thus, respondent Court of Appeals did not err in
upholding the Decision of respondent SEC affirming the Decision of its
Hearing Officer directing the registration of the 473 shares in the stock and
transfer book in the names of private respondents. At all events, the
registration is without prejudice to the proceedings in court to determine the
validity of the Deeds of Assignment of the shares of stock in
question.WHEREFORE, the petition is DISMISSED for lack of merit. SO
ORDERED.

192
G.R. No. 41570 September 6, 1934

RED LINE TRANSPORTATION CO., petitioner-appellant,

vs.
RURAL TRANSIT CO., LTD., respondent-appellee.

L. D. Lockwood for appellant.

Ohnick and Opisso for appellee.

BUTTE, J.:

193
This case is before us on a petition for review of an order of the Public
Service Commission entered December 21, 1932, granting to the Rural
Transit Company, Ltd., a certificate of public convenience to operate a
transportation service between Ilagan in the Province of Isabela and
Tuguegarao in the Province of Cagayan, and additional trips in its existing
express service between Manila Tuguegarao.
On June 4, 1932, the Rural Transit Company, Ltd., a Philippine corporation,
filed with the Public Company Service Commission an application in which it
is stated in substance that it is the holder of a certificate or public
convenience to operate a passenger bus service between Manila and
Tuguegarao; that it is the only operator of direct service between said points
and the present authorized schedule of only one trip daily is not sufficient;
that it will be also to the public convenience to grant the applicant a certificate
for a new service between Tuguegarao and Ilagan.
On July 22, 1932, the appellant, Red Line Transportation Company, filed an
opposition to the said application alleging in substance that as to the service
between Tuguegarao and Ilagan, the oppositor already holds a certificate of
public convenience and is rendering adequate and satisfactory service; that
the granting of the application of the Rural Transit Company, Ltd., would not
serve public convenience but would constitute a ruinous competition for the
oppositor over said route.
After testimony was taken, the commission, on December 21, 1932,
approved the application of the Rural Transit Company, Ltd., and ordered
that the certificate of public convenience applied for be "issued to the
applicant Rural Transit Company, Ltd.," with the condition, among others, that
"all the other terms and conditions of the various certificates of public
convenience of the herein applicant and herein incorporated are made a part
hereof."
On January 14, 1933, the oppositor Red Line Transportation Company filed a
motion for rehearing and reconsideration in which it called the commission's
attention to the fact that there was pending in the Court of First Instance of
Manila case N. 42343, an application for the voluntary dissolution of the
corporation, Rural Transit Company, Ltd. Said motion for reconsideration was
set down for hearing on March 24, 1933. On March 23, 1933, the Rural
Transit Company, Ltd., the applicant, filed a motion for postponement. This
motion was verified by M. Olsen who swears "that he was the secretary of
the Rural Transit Company, Ltd., in the above entitled case." Upon the
hearing of the motion for reconsideration, the commission admitted without
objection the following documents filed in said case No. 42343 in the Court of
First Instance of Manila for the dissolution of the Rural Transit Company, Ltd.
the petition for dissolution dated July 6, 1932, the decision of the said Court
of First Instance of Manila, dated February 28, 1933, decreeing the
dissolution of the Rural Transit Company, Ltd.
At the trial of this case before the Public Service Commission an issue was
raised as to who was the real party in interest making the application,
whether the Rural Transit Company, Ltd., as appeared on the face of the
application, or the Bachrach Motor Company, Inc., using name of the Rural
Transit Company, Ltd., as a trade name. The evidence given by the
applicant's secretary, Olsen, is certainly very dubious and confusing, as may
be seen from the following:
Q. Will you please answer the question whether it is the
Bachrach Motor Company operating under the trade name of the
Rural Transit Company, Limited, or whether it is the Rural Transit
Company, Limited in its own name this application was filed?
A. The Bachrach Motor Company is the principal stockholder.
Q. Please answer the question.
ESPELETA. Objecion porque la pregunta ya ha sido contestada.
JUEZ. Puede contestar.
A. I do not know what the legal construction or relationship
existing between the two.
194
JUDGE. I do not know what is in your mind by not telling the real
applicant in this case?
A. It is the Rural Transit Company, Ltd.
JUDGE. As an entity by itself and not by the Bachrach Motor
Company?
A. I do not know. I have not given that phase of the matter
much thought, as in previous occassion had not necessitated.
JUDGE. In filing this application, you filed it for the operator on that
line? Is it not!
A. Yes, sir.
JUDGE. Who is that operator?
A. The Rural Transit Company, Ltd.
JUDGE. By itself, or as a commercial name of the Bachrach Motor
Company?
A. I cannot say.
ESPELETA. The Rural Transit Company, Ltd., is a corporation duly
established in accordance with the laws of the Philippine Islands.
JUDGE. According to the records of this commission the Bachrach
Motor Company is the owner of the certificates and the Rural Transit
Company, Ltd., is operating without any certificate.
JUDGE. If you filed this application for the Rural Transit Company,
Ltd., and afterwards it is found out that the Rural Transit Company,
Ltd., is not an operator, everything will be turned down.
JUDGE. My question was, when you filed this application you
evidently made it for the operator?
A. Yes, sir.
JUDGE. Who was that operator you had in mind?
A. According to the status of the ownership of the certificates
of the former Rural Transit Company, the operator was the operator
authorized in case No. 23217 to whom all of the assets of the former
Rural Transit Company were sold.
JUDGE. Bachrach Motor Company?
A. All actions have been prosecuted in the name of the Rural
Transit Company, Ltd.
JUDGE. You mean the Bachrach Motor Company, Inc., doing
business under the name of the Rural Transit Company, Ltd.?
A. Yes, sir.
LOCKWOOD. I move that this case be dismissed, your Honor, on
the ground that this application was made in the name of one party
but the real owner is another party.
ESPELETA. We object to that petition.
JUDGE. I will have that in mind when I decide the case. If I agree
with you everything would be finished.
The Bachrach Motor Company, Inc., entered no appearance and ostensibly
took no part in the hearing of the application of the Rural Transit Company,
Ltd. It may be a matter of some surprise that the commission did not on its
own motion order the amendment of the application by substituting the
195
Bachrach Motor Company, Inc., as the applicant. However, the hearing
proceeded on the application as filed and the decision of December 2, 1932,
was rendered in favor of the Rural Transit Company, Ltd., and the certificate
ordered to be issued in its name, in the face of the evidence that the said
corporation was not the real party in interest. In its said decision, the
commission undertook to meet the objection by referring to its resolution of
November 26, 1932, entered in another case. This resolution in case No.
23217 concludes as follows:
The order of the commission of November 26, 1932, authorizing the
Bachrach Motor Co., Incorporated, to assume the name of the Rural Transit
Co., Ltd. likewise in corporated, as its trade name being void, and accepting
the order of December 21, 1932, at its face as granting a certificate of public
convenience to the applicant Rural Transit Co., Ltd., the said order last
mentioned is set aside and vacated on the ground that the Rural Transit
Company, Ltd., is not the real party in interest and its application was
fictitious.

Premises considered we hereby authorize the Bachrach Motor Co.,
Inc., to continue using the name of "Rural Transit Co., Ltd.," as its
trade name in all the applications, motions or other petitions to be
filed in this commission in connection with said business and that this
authority is given retroactive effect as of the date, of filing of the
application in this case, to wit, April 29, 1930.
In view of the dissolution of the Rural Transit Company, Ltd. by judicial
decree of February 28, 1933, we do not see how we can assess costs
against said respondent, Rural Transit Company, Ltd.
Malcolm, Villa-Real, Imperial and Goddard, JJ., concur.

We know of no law that empowers the Public Service Commission or any

court in this jurisdiction to authorize one corporation to assume the name of
another corporation as a trade name. Both the Rural Transit Company, Ltd.,
and the Bachrach Motor Co., Inc., are Philippine corporations and the very
law of their creation and continued existence requires each to adopt and
certify a distinctive name. The incorporators "constitute a body politic and
corporate under the name stated in the certificate." (Section 11, Act No.
1459, as amended.) A corporation has the power "of succession by its
corporate name." (Section 13, ibid.) The name of a corporation is therefore
essential to its existence. It cannot change its name except in the manner
provided by the statute. By that name alone is it authorized to transact
business. The law gives a corporation no express or implied authority to
assume another name that is unappropriated: still less that of another
corporation, which is expressly set apart for it and protected by the law. If any
corporation could assume at pleasure as an unregistered trade name the
name of another corporation, this practice would result in confusion and open
the door to frauds and evasions and difficulties of administration and
supervision. The policy of the law expressed in our corporation statute and
the Code of Commerce is clearly against such a practice. (Cf. Scarsdale
Pub. Co. Colonial Press vs. Carter, 116 New York Supplement, 731; Svenska
Nat. F. i. C. vs. Swedish Nat. Assn., 205 Illinois [Appellate Courts], 428, 434.)

196
197
G.R. No. L-26370 July 31, 1970

PHILIPPINE FIRST INSURANCE COMPANY, INC., plaintiff-appellant,

vs.
MARIA CARMEN HARTIGAN, CGH, and O. ENGKEE, defendants-
appellees.

198
Bausa, Ampil & Suarez for plaintiff-appellant.
Nicasio E. Martin for defendants-appellees.
BARREDO, J.:
Appeal from the decision dated 6 October 1962 of the Court of First Instance
of Manila dismissing the action in its Civil Case No. 48925 brought by
the herein plaintiff-appellant Philippine First Insurance Co., Inc. to the Court
of Appeals which could, upon finding that the said appeal raises purely
questions of law, declared itself without jurisdiction to entertain the same and,
in its resolution dated 15 July 1966, certified the records thereof to this Court
for proper determination.
The antecedent facts are set forth in the pertinent portions of the resolution of
the Court of Appeals referred to as follows:
According to the complaint, plaintiff was originally organized
as an insurance corporation under the name of 'The Yek
Tong Lin Fire and Marine Insurance Co., Ltd.' The articles of
incorporation originally presented before the Security and
Exchange Commissioner and acknowledged before Notary
Public Mr. E. D. Ignacio on June 1, 1953 state that the name
of the corporation was 'The Yek Tong Lin Fire and Marine
Insurance Co., Ltd.' On May 26, 1961 the articles of
incorporation were amended pursuant to a certificate of the
Board of Directors dated March 8, 1961 changing the name
of the corporation to 'Philippine First Insurance Co., Inc.'.
The complaint alleges that the plaintiff Philippine First
Insurance Co., Inc., doing business under the name of 'The
Yek Tong Lin Fire and Marine Insurance Co., Lt.' signed as
co-maker together with defendant Maria Carmen Hartigan,
CGH, a promissory note for P5,000.00 in favor of the China
Banking Corporation payable within 30 days after the date of
the promissory note with the usual banking interest; that the
plaintiff agreed to act as such co-maker of the promissory
note upon the application of the defendant Maria Carmen
Hartigan, CGH, who together with Antonio F. Chua and
Chang Ka Fu, signed an indemnity agreement in favor of the
plaintiff, undertaking jointly and severally, to pay the plaintiff
damages, losses or expenses of whatever kind or nature,
including attorney's fees and legal costs, which the plaintiff
may sustain as a result of the execution by the plaintiff and
co-maker of Maria Carmen Hartigan, CGH, of the promissory
note above-referred to; that as a result of the execution of
the promissory note by the plaintiff and Maria Carmen
Hartigan, CGH, the China Banking Corporation delivered to
the defendant Maria Carmen Hartigan, CGH, the sum of
P5,000.00 which said defendant failed to pay in full, such
that on August 31, 1961 the same was. renewed and as of
November 27, 1961 there was due on account of the
promissory note the sum of P4,559.50 including interest. The
complaint ends with a prayer for judgment against the
defendants, jointly and severally, for the sum of P4,559.50
with interest at the rate of 12% per annum from November
23, 1961 plus P911.90 by way of attorney's fees and costs.
Although O. Engkee was made as party defendant in the
caption of the complaint, his name is not mentioned in the
body of said complaint. However, his name Appears in the
Annex A attached to the complaint which is the counter
indemnity agreement supposed to have been signed
according to the complaint by Maria Carmen Hartigan, CGH,
Antonio F. Chua and Chang Ka Fu.
In their answer the defendants deny the allegation that the
plaintiff formerly conducted business under the name and
style of 'The Yek Tong Lin Fire and Marine Insurance Co.,
Ltd.' They admit the execution of the indemnity agreement
but they claim that they signed said agreement in favor of
199
 the Yek Tong Lin Fire and Marine Insurance Co., Ltd.' and
not in favor of the plaintiff. They likewise admit that they
failed to pay the promissory note when it fell due but they
allege that since their obligation with the China Banking
Corporation based on the promissory note still subsists, the
surety who co-signed the promissory note is not entitled to
collect the value thereof from the defendants otherwise they
will be liable for double amount of their obligation, there
being no allegation that the surety has paid the obligation to
the creditor.
By way of special defense, defendants claim that there is no
privity of contract between the plaintiff and the defendants
and consequently, the plaintiff has no cause of action against
them, considering that the complaint does not allege that the
plaintiff and the 'Yek Tong Lin Fire and Marine Insurance Co.,
Ltd.' are one and the same or that the plaintiff has acquired
the rights of the latter. The parties after the admission of
Exhibit A which is the amended articles of incorporation and
Exhibit 1 which is a demand letter dated August 16, 1962
signed by the manager of the loans and discount department
of the China Banking Corporation showing that the
promissory note up to said date in the sum of P4,500.00 was
still unpaid, submitted the case for decision based on the
pleadings.
Under date of 6 October 1962, the Court of First Instance of Manila rendered
the decision appealed. It dismissed the action with costs against the plaintiff
Philippine First Insurance Co., Inc., reasoning as follows:
... With these undisputed facts in mind, the parties correctly
concluded that the issues for resolution by this Court are as
follows:
(a) Whether or not the plaintiff is the real party in interest that
may validly sue on the indemnity agreement signed by the
defendants and the Yek Tong Lin Fire & Marine Insurance
Co., Ltd. (Annex A to plaintiff's complaint ); and
(b) Whether or not a suit for indemnity or reimbursement
may under said indemnity agreement prosper without plaintiff
having yet paid the amount due under said promissory note.
In the first place, the change of name of the Yek Tong Lin
Fire & Marine Insurance Co., Ltd. to the Philippines First
Insurance Co., Inc. is of dubious validity. Such change of
name in effect dissolved the original corporation by a
process of dissolution not authorized by our corporation law
(see Secs. 62 and 67, inclusive, of our Corporation Law).
Moreover, said change of name, amounting to a dissolution
of the Yek Tong Lin Fire & Marine Insurance Co., Ltd., does
not appear to have been effected with the written note or
assent of stockholders representing at least two-thirds of the
subscribed capital stock of the corporation, a voting
proportion required not only for the dissolution of a
corporation but also for any amendment of its articles of
incorporation (Secs. 18 and 62, Corporation Law).
Furthermore, such change of corporate name appears to be
against public policy and may be effected only by express
authority of law (Red Line Transportation Co. v. Rural Transit
Co., Ltd., 60 Phil. 549, 555; Cincinnati Cooperage Co., Ltd.
vs. Vate, 26 SW 538, 539; Pilsen Brewing Co. vs. Wallace,
125 NE 714), but there is nothing in our corporation law
authorizing the change of corporate name in this jurisdiction.
In the second place, assuming that the change of name of
the Yek Tong Lin Fire & Marine Insurance Co. Ltd., to
Philippines pine First Insurance Co., Inc., as accomplished
on March 8, 1961, is valid, that would mean that the original
corporation, the Yek Tong Lin Fire & Marine Insurance Co.,
Ltd., became dissolved and of no further existence since
March 8, 1961, so that on May 15, 1961, the date the
indemnity agreement, Annex A, was executed, said original
200
corporation bad no more power to enter into any agreement
with the defendants, and the agreement entered into by it
was ineffective for lack of capacity of said dissolved
corporation to enter into said agreement. At any rate, even if
we hold that said change of name is valid, the fact remains
that there is no evidence showing that the new entity, the
Philippine First Insurance Co., Inc. has with the consent of
the original parties, assumed the obligations or was
assigned the rights of action in the original corporation, the
Yek Tong Lin Fire & Marine Insurance Co., Ltd. In other
words, there is no evidence of conventional subrogation of
the Plaintiffs in the rights of the Yek Tong Lin Fire & Marine
Insurance Co., Ltd. under said indemnity agreement (Arts.
1300, 1301, New Civil Code). without such subrogation
assignment of rights, the herein plaintiff has no cause of
action against the defendants, and is, therefore, not the right
party in interest as plaintiff.
Last, but not least, assuming that the said change of name
was legal and operated to dissolve the original corporation,
the dissolved corporation, must pursuant to Sec. 77 of our
corporation law, be deemed as continuing as a body
corporate for three (3) years from March 8, 1961 for the
purpose of prosecuting and defending suits. It is, therefore,
the Yek Tong Lin Fire & Marine Insurance Co., Ltd. that is the
proper party to sue the defendants under said indemnity
agreement up to March 8, 1964.
Having arrived at the foregoing conclusions, this Court need
not squarely pass upon issue (b) formulated above.
WHEREFORE, plaintiff's action is hereby dismissed, with
costs against the plaintiff.
In due time, the Philippine First Insurance Company, Inc. moved for
reconsideration of the decision aforesaid, but said motion was denied on
December 3, 1962 in an order worded thus:
The motion for reconsideration, dated November 8, 1962,
raises no new issue that we failed to consider in rendering
our decision of October 6, 1962. However, it gives us an
opportunity to amplify our decision as regards the question
of change of name of a corporation in this jurisdiction.
We find nothing in our Corporation Law authorizing a change
of name of a corporation organized pursuant to its
provisions. Sec. 18 of the Corporation Law authorizes, in our
opinion, amendment to the Articles of Incorporation of a
corporation only as to matters other than its corporate name.
Once a corporation is organized in this jurisdiction by the
execution and registration of its Articles of Incorporation, it
shall continue to exist under its corporate name for the
lifetime of its corporate existence fixed in its Articles of
Incorporation, unless sooner legally dissolved (Sec. 11,
Corp. Law). Significantly, change of name is not one of the
methods of dissolution of corporations expressly authorized
by our Corporation Law. Also significant is the fact that the
power to change its corporate name is not one of the general
powers conferred on corporations in this jurisdiction (Sec.
13, Corp. Law). The enumeration of corporate powers made
in our Corporation Law implies the exclusion of all others
(Thomas v. West Jersey R. Co., 101 U.S. 71, 25 L. ed. 950).
It is obvious, in this connection, that change of name is not
one of the powers necessary to the exercise of the powers
conferred on corporations by said Sec. 13 (see Sec. 14,
Corp. Law).
To rule that Sec. 18 of our Corporation Law authorizes the
change of name of a corporation by amendment of its
Articles of Incorporation is to indulge in judicial legislation.
We have examined the cases cited in Volume 13 of
201
American Jurisprudence in support of the proposition that
the general power to alter or amend the charter of a
corporation necessarily includes the power to alter the name
of a corporation, and find no justification for said conclusion
arrived at by the editors of American Jurisprudence. On the
contrary, the annotations in favor of plaintiff's view appear to
have been based on decisions in cases where the statute
itself expressly authorizes change of corporate name by
amendment of its Articles of Incorporation. The correct rule in
harmony with the provisions of our Corporation Law is well
expressed in an English case as follows:
After a company has been completely
register without defect or omission, so as to
be incorporated by the name set forth in the
deed of settlement, such incorporated
company has not the power to change its
name ... Although the King by his
prerogative might incorporate by a new
name, and the newly named corporation
might retain former rights, and sometimes its
former name also, ... it never appears to be
such an act as the corporation could do by
itself, but required the same power as
created the corporation. (Reg. v. Registrar of
Joint Stock Cos 10 Q.B. 839, 59 E.C.L.
839).
The contrary view appears to represent the minority doctrine,
judging from the annotations on decided cases on the
matter.
The movant invokes as persuasive precedent the action of
the Securities Commissioner in tacitly approving the
Amended, Articles of Incorporation on May 26, 1961. We
regret that we cannot in good conscience lend approval to
this action of the Securities and Exchange Commissioner.
We find no justification, legal, moral, or practical, for
adhering to the view taken by the Securities and Exchange
Commissioner that the name of a corporation in the
Philippines may be changed by mere amendment of its
Articles of Incorporation as to its corporate name. A change
of corporate name would serve no useful purpose, but on the
contrary would most probably cause confusion. Only a
dubious purpose could inspire a change of a corporate.
name which, unlike a natural person's name, was chosen by
the incorporators themselves; and our Courts should not
lend their assistance to the accomplishment of dubious
purposes.
WHEREFORE, we hereby deny plaintiff's motion for
reconsideration, dated November 8, 1962, for lack of merit.
In this appeal appellant contends that
I
THE TRIAL COURT ERRED IN HOLDING THAT IN THIS
JURISDICTION, THERE IS NOTHING IN OUR
CORPORATION LAW AUTHORIZING THE CHANGE OF
CORPORATE NAME;
II
THE TRIAL COURT ERRED IN DECLARING THAT A
CHANGE OF CORPORATE NAME APPEARS TO BE
AGAINST PUBLIC POLICY;
III
THE TRIAL COURT ERRED IN HOLDING THAT A CHANGE
OF CORPORATE NAME HAS THE LEGAL EFFECT OF
DISSOLVING THE ORIGINAL CORPORATION:
202
 IV
THE TRIAL COURT ERRED IN HOLDING THAT THE
CHANGE OF NAME OF THE YEK TONG LIN FIRE &
MARINE INSURANCE CO., LTD. IS OF DUBIOUS
VALIDITY;
V corporation Provided, however, That if such amendment to
THE TRIAL COURT ERRED IN HOLDING THAT THE
APPELLANT HEREIN IS NOT THE RIGHT PARTY
INTEREST TO SUE DEFENDANTS-APPELLEES;
IV
THE TRIAL COURT FINALLY ERRED IN DISMISSING THE
COMPLAINT.
Appellant's Position is correct; all the above assignments of error are well
taken. The whole case, however, revolves around only one question. May a
Philippine corporation change its name and still retain its original personality
and individuality as such?
The answer is not difficult to find. True, under Section 6 of the Corporation
Law, the first thing required to be stated in the Articles of Incorporation of any
corn corporation is its name, but it is only one among many matters equally if
not more important, that must be stated therein. Thus, it is also required, for
example, to state the number and names of and residences of the
incorporators and the residence or location of the principal office of the
corporation, its term of existence, the amount of its capital stock and the
number of shares into which it is divided, etc., etc.
On the other hand, Section 18 explicitly permits the articles of incorporation
to be amended thus:
Sec. 18. Any corporation may for legitimate corporate
purpose or purposes, amend its articles of incorporation by a
majority vote of its board of directors or trustees and the vote
or written assent of two-thirds of its members, if it be a
nonstock corporation or, if it be a stock corporation, by the
vote or written assent of the stockholders representing at
least two-thirds of the subscribed capital stock of the
the articles of incorporation should consist in extending the
corporate existence or in any change in the rights of holders
of shares of any class, or would authorize shares with
preferences in any respect superior to those of outstanding
shares of any class, or would restrict the rights of any
stockholder, then any stockholder who did not vote for such
corporate action may, within forty days after the date upon
which such action was authorized, object thereto in writing
and demand Payment for his shares. If, after such a demand
by a stockholder, the corporation and the stockholder cannot
agree upon the value of his share or shares at the time such
corporate action was authorized, such values all be
ascertained by three disinterested persons, one of whom
shall be named by the stockholder, another by the
corporation, and the third by the two thus chosen. The
findings of the appraisers shall be final, and if their award is
not paid by the corporation within thirty days after it is made,
it may be recovered in an action by the stockholder against
the corporation. Upon payment by the corporation to the
stockholder of the agreed or awarded price of his share or
shares, the stockholder shall forthwith transfer and assign
the share or shares held by him as directed by the
corporation: Provided, however, That their own shares of
stock purchased or otherwise acquired by banks, trust
companies, and insurance companies, should be disposed
of within six months after acquiring title thereto.
Unless and until such amendment to the articles of
incorporation shall have been abandoned or the action
203
rescinded, the stockholder making such demand in writing
shall cease to be a stockholder and shall have no rights with
respect to such shares, except the right to receive payment
therefor as aforesaid.
A stockholder shall not be entitled to payment for his shares
under the provisions of this section unless the value of the
corporate assets which would remain after such payment
would be at least equal to the aggregate amount of its debts
and liabilities and the aggregate par value and/or issued
value of the remaining subscribed capital stock.
A copy of the articles of incorporation as amended, duly
certified to be correct by the president and the secretary of
the corporation and a majority of the board of directors or
trustees, shall be filed with the Securities and Exchange
Commissioner, who shall attach the same to the original
articles of incorporation, on file in his office. From the time of
filing such copy of the amended articles of incorporation, the
corporation shall have the same powers and it and the
members and stockholders thereof shall thereafter be
subject to the same liabilities as if such amendment had
been embraced in the original articles of
incorporation: Provided, however, That should the
amendment consist in extending the corporate life, the
extension shall not exceed 50 years in any one
instance. Provided, further, That the original articles and
amended articles together shall contain all provisions
required by law to be set out in the articles of
incorporation: And provided, further, That nothing in this
section shall be construed to authorize any corporation to
increase or diminish its capital stock or so as to effect any
rights or actions which accrued to others between the time of
filing the original articles of incorporation and the filing of the
amended articles.
The Securities and, Exchange Commissioner shall be entitled to collect and
receive the sum of ten pesos for filing said copy of the amended articles of
incorporation. Provided, however, That when the amendment consists in
extending the term of corporate existence, the Securities and Exchange
Commissioner shall be entitled to collect and receive for the filing of its
amended articles of incorporation the same fees collectible under existing
law for the filing of articles of incorporation. The Securities & Exchange
Commissioner shall not hereafter file any amendment to the articles of
incorporation of any bank, banking institution, or building and loan
association unless accompanied by a certificate of the Monetary Board (of
the Central Bank) to the effect that such amendment is in accordance with
law. (As further amended by Act No. 3610, Sec. 2 and Sec. 9. R.A. No. 337
and R.A. No. 3531.)
It can be gleaned at once that this section does not only authorize
corporations to amend their charter; it also lays down the procedure for such
amendment; and, what is more relevant to the present discussion, it contains
provisos restricting the power to amend when it comes to the term of their
existence and the increase or decrease of the capital stock. There is no
prohibition therein against the change of name. The inference is clear that
such a change is allowed, for if the legislature had intended to enjoin
corporations from changing names, it would have expressly stated so in this
section or in any other provision of the law.
No doubt, "(the) name (of a corporation) is peculiarly important as necessary
to the very existence of a corporation. The general rule as to corporations is
that each corporation shall have a name by which it is to sue and be sued
and do all legal acts. The name of a corporation in this respect designates
the corporation in the same manner as the name of an individual designates
the person." 1 Since an individual has the right to change his name under
certain conditions, there is no compelling reason why a corporation may not
enjoy the same right. There is nothing sacrosanct in a name when it comes
to artificial beings. The sentimental considerations which individuals attach to
their names are not present in corporations and partnerships. Of course, as
in the case of an individual, such change may not be made exclusively. by
the corporation's own act. It has to follow the procedure prescribed by law for
204
the purpose; and this is what is important and indispensably prescribed
strict adherence to such procedure.
Local well known corporation law commentators are unanimous in the view
that a corporation may change its name by merely amending its charter in
the manner prescribed by law. 2 American authorities which have persuasive
force here in this regard because our corporation law is of American origin,
the same being a sort of codification of American corporate law, 3 are of the
same opinion.
A general power to alter or amend the charter of a
corporation necessarily includes the power to alter the name
of the corporation. Ft. Pitt Bldg., etc., Assoc. v. Model Plan
Bldg., etc., Assoc., 159 Pa. St. 308, 28 Atl. 215; In re Fidelity
Mut. Aid Assoc., 12 W.N.C. (Pa.) 271; Excelsior Oil Co., 3
Pa. Co. Ct. 184; Wetherill Steel Casting Co., 5 Pa. Co. Ct.
337.
xxx xxx xxx
Under the General Laws of Rhode Island, c 176, sec. 7,
relating to an increase of the capital stock of a corporation, it
is provided that 'such agreement may be amended in any
other particular, excepting as provided in the following
section', which relates to a decrease of the capital stock This
section has been held to authorize a change in the name of
a corporation. Armington v. Palmer, 21 R.I. 109, 42 Atl. 308,
43, L.R.A. 95, 79 Am. St. Rep. 786. (Vol. 19, American and
English Annotated Cases, p. 1239.)
Fletcher, a standard authority on American an corporation law also says:
Statutes are to be found in the various jurisdictions dealing
with the matter of change in corporate names. Such statutes
have been subjected to judicial construction and have, in the
main, been upheld as constitutional. In direct terms or by
necessary implication, they authorize corporations new
names and prescribe the mode of procedure for that
purpose. The same steps must be taken under some
statutes to effect a change in a corporate name, as when
any other amendment of the corporate charter is sought ....
When the general law thus deals with the subject, a
corporation can change its name only in the manner
provided. (6 Fletcher, Cyclopedia of the Law of Private
Corporations, 1968 Revised Volume, pp. 212-213.)
(Emphasis supplied)
The learned trial judge held that the above-quoted proposition are not
supported by the weight of authority because they are based on decisions in
cases where the statutes expressly authorize change of corporate name by
amendment of the articles of incorporation. We have carefully examined
these authorities and We are satisfied of their relevance. Even Lord Denman
who has been quoted by His Honor from In Reg. v. Registrar of Joint Stock
Cos. 10, Q.B., 59 E.C.L. maintains merely that the change of its name never
appears to be such an act as the corporation could do for itself, but
required ;the same Power as created a corporation." What seems to have
been overlooked, therefore, is that the procedure prescribes by Section 18 of
our Corporation Law for the amendment of corporate charters is practically
identical with that for the incorporation itself of a corporation.
In the appealed order of dismissal, the trial court, made the observation that,
according to this Court in Red Line Transportation Co. v. Rural Transit Co.,
Ltd., 60 Phil, 549, 555, change of name of a corporation is against public
policy. We must clarify that such is not the import of Our said decision. What
this Court held in that case is simply that:
We know of no law that empowers the Public Service
Commission or any court in this jurisdiction to authorize one
corporation to assume the name of another corporation as a
trade name. Both the Rural Transit Company, Ltd., and the
Bachrach Motor Co., Inc., are Philippine corporations and
the very law of their creation and continued existence
requires each to adopt and certify a distinctive name. The
205
 incorporators 'constitute a body politic and corporate under
the name stated in the certificate.' (Section 11, Act No. 1459,
as amended.) A corporation has the power 'of succession by
its corporate name.' (Section 13, ibid.) The name of a
corporation is therefore essential to its existence. It cannot
change its name except in the manner provided by the
statute. By that name alone is it authorized to transact
business. The law gives a corporation no express or implied
authority to assume another name that is unappropriated;
still less that of another corporation, which is expressly set
apart for it and protected by the law. If any corporation could
assume at pleasure as an unregistered trade name the
name of another corporation, this practice would result in
confusion and open the door to frauds and evasions and
difficulties of administration and supervision. The policy of
the law as expressed our corporation statute and the Code
of Commerce is clearly against such a practice. (Cf.
Scarsdale Pub. Co. Colonial Press vs. Carter, 116 New
York Supplement, 731; Svenska Nat. F. i. C. vs. Swedish
Nat. Assn., 205 Illinois [Appellate Courts], 428, 434.)
In other words, what We have held to be contrary to public policy is the use
by one corporation of the name of another corporation as its trade name. We
are certain no one will disagree that such an act can only "result in confusion
and open the door to frauds and evasions and difficulties of administration
and supervision." Surely, the Red Line case was not one of change of name.
Neither can We share the posture of His Honor that the change of name of a
corporation results in its dissolution. There is unanimity of authorities to the
contrary.
An authorized change in the name of a corporation has no
more effect upon its identity as a corporation than a change
of name of a natural person has upon his identity. It does not
affect the rights of the corporation or lessen or add to its
obligations. After a corporation has effected a change in its
name it should sue and be sued in its new name .... (13 Am.
Jur. 276-277, citing cases.)
A mere change in the name of a corporation, either by the
legislature or by the corporators or stockholders under
legislative authority, does not, generally speaking, affect the
identity of the corporation, nor in any way affect the rights,
privileges, or obligations previously acquired or incurred by
it. Indeed, it has been said that a change of name by a
corporation has no more effect upon the identity of the
corporation than a change of name by a natural person has
upon the identity of such person. The corporation, upon such
change in its name, is in no sense a new corporation, nor the
successor of the original one, but remains and continues to
be the original corporation. It is the same corporation with a
different name, and its character is in no respect changed. ...
(6 Fletcher, Cyclopedia of the Law of Private Corporations,
224-225, citing cases.)
The change in the name of a corporation has no more effect
upon its identity as a corporation than a change of name of a
natural person has upon his identity. It does not affect the
rights of the corporation, or lessen or add to its obligations.
England. Doe v. Norton, 11 M. & W. 913, 7 Jur. 751, 12 L.
J. Exch. 418.
United States. Metropolitan Nat. Bank v. Claggett, 141
U.S. 520, 12 S. Ct. 60, 35 U.S. (L. ed.) 841.
Alabama. Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591,
17 So. 670; North Birmingham Lumber Co. v. Sims, 157 Ala.
595, 48 So. 84.
Connecticut. Trinity Church v. Hall, 22 Com. 125.
206
Illinois. Mt. Palatine Academy v. Kleinschnitz 28 III,
133; St. Louis etc. R. Co. v. Miller, 43 Ill. 199; Reading v.
Wedder, 66 III. 80.
Indiana. Rosenthal v. Madison etc., Plank Road Co., 10
Ind. 358.
Kentucky. Cahill v. Bigger, 8 B. Mon. 211; Wilhite v.
Convent of Good Shepherd, 177 Ky. 251, 78 S. W. 138.
Maryland. Phinney v. Sheppard & Enoch Pratt Hospital,
88 Md. 633, 42 Atl. 58, writ of error dismissed, 177 U.S. 170,
20 S. Ct. 573, 44 U.S. (L. ed.) 720.
Missouri. Dean v. La Motte Lead Co., 59 Mo. 523.
Nebraska. Carlon v. City Sav. Bank, 82 Neb. 582, 188 N.
W. 334. New York First Soc of M.E. Church v. Brownell, 5
Hun 464.
Pennsylvania. Com. v. Pittsburgh, 41 Pa. St. 278.
South Carolina. South Carolina Mut Ins. Co. v. Price 67
S.C. 207, 45 S.E. 173.
Virginia. Wilson v. Chesapeake etc., R. Co., 21 Gratt
654; Wright-Caesar Tobacco Co. v. Hoen,105 Va. 327, 54
S.E. 309.
Washington. King v. Ilwaco R. etc., Co., 1 Wash. 127. 23
Pac. 924.
Wisconsin. Racine Country Bank v. Ayers, 12 Wis. 512.
The fact that the corporation by its old name makes a format
transfer of its property to the corporation by its new name
does not of itself show that the change in name has affected
a change in the identity of the corporation. Palfrey v.
Association for Relief, etc., 110 La. 452, 34 So. 600. The fact
that a corporation organized as a state bank afterwards
becomes a national bank by complying with the provisions of
the National Banking Act, and changes its name accordingly,
has no effect on its right to sue upon obligations or liabilities
incurred to it by its former name. Michigan Ins. Bank v.
Eldred 143 U.S. 293, 12 S. Ct. 450, 36 U.S. (L. ed.) 162.
A deed of land to a church by a particular name has been
held not to be affected by the fact that the church afterwards
took a different name. Cahill v. Bigger, 8 B. Mon (ky) 211.
A change in the name of a corporation is not a divestiture of
title or such a change as requires a regular transfer of title to
property, whether real or personal, from the corporation
under one name to the same corporation under another
name. McCloskey v. Doherty, 97 Ky. 300, 30 S. W. 649. (19
American and English Annotated Cases 1242-1243.)
As was very aptly said in Pacific Bank v. De Ro 37 Cal. 538,
"The changing of the name of a corporation is no more the
creation of a corporation than the changing of the name of a
natural person is the begetting of a natural person. The act,
in both cases, would seem to be what the language which
we use to designate it imports a change of name, and not
a change of being.
Having arrived at the above conclusion, We have agree with appellant's pose
that the lower court also erred in holding that it is not the right party in interest
to sue defendants-appellees. 4 As correctly pointed out by appellant, the
approval by the stockholders of the amendment of its articles of incorporation
changing the name "The Yek Tong Lin Fire & Marine Insurance Co., Ltd." to
207
"Philippine First Insurance Co., Inc." on March 8, 1961, did not automatically
change the name of said corporation on that date. To be effective, Section 18
of the Corporation Law, earlier quoted, requires that "a copy of the articles of
incorporation as amended, duly certified to be correct by the president and
the secretary of the corporation and a majority of the board of directors or
trustees, shall be filed with the Securities & Exchange Commissioner", and it
is only from the time of such filing, that "the corporation shall have the same
powers and it and the members and stockholders thereof shall thereafter be
subject to the same liabilities as if such amendment had been embraced in
the original articles of incorporation." It goes without saying then that
appellant rightly acted in its old name when on May 15, 1961, it entered into
the indemnity agreement, Annex A, with the defendant-appellees; for only
after the filing of the amended articles of incorporation with the Securities &
Exchange Commission on May 26, 1961, did appellant legally acquire its
new name; and it was perfectly right for it to file the present case In that new
name on December 6, 1961. Such is, but the logical effect of the change of
name of the corporation upon its actions.
Actions brought by a corporation after it has changed its
name should be brought under the new name although for
the enforcement of rights existing at the time the change was
made. Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17 So.
670: Newlan v. Lombard University, 62 III. 195; Thomas v.
Visitor of Frederick County School, 7 Gill & J (Md.)
388; Delaware, etc., R. Co. v. Trick, 23 N. J. L.
321; Northumberland Country Bank v. Eyer, 60 Pa. St.
436; Wilson v. Chesapeake etc., R. Co., 21 Gratt (Va.) 654.
The change in the name of the corporation does not affect its
right to bring an action on a note given to the corporation
under its former name. Cumberland College v. Ish, 22. Cal.
641; Northwestern College v. Schwagler, 37 Ia. 577. (19
American and English Annotated Cases 1243.)
In consequence, We hold that the lower court erred in dismissing appellant's
complaint. We take this opportunity, however, to express the Court's feeling
that it is apparent that appellee's position is more technical than otherwise.
Nowhere in the record is it seriously pretended that the indebtedness sued
upon has already been paid. If appellees entertained any fear that they might
again be made liable to Yek Tong Lin Fire & Marine Insurance Co. Ltd., or to
someone else in its behalf, a cursory examination of the records of the
Securities & Exchange Commission would have sufficed to clear up the fact
that Yek Tong Lin had just changed its name but it had not ceased to be their
creditor. Everyone should realize that when the time of the courts is utilized
for cases which do not involve substantial questions and the claim of one of
the parties, therein is based on pure technicality that can at most delay only
the ultimate outcome necessarily adverse to such party because it has no
real cause on the merits, grave injustice is committed to numberless litigants
whose meritorious cases cannot be given all the needed time by the courts.
We address this appeal once more to all members of the bar, in particular,
since it is their bounden duty to the profession and to our country and people
at large to help ease as fast as possible the clogged dockets of the courts.
Let us not wait until the people resort to other means to secure speedy, just
and inexpensive determination of their cases.
WHEREFORE, judgment of the lower court is reversed, and this case is
remanded to the trial court for further proceedings consistent herewith With
costs against appellees.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro,
Fernando, Teehankee and Villamor, JJ., concur.
208
G.R. No. L-28351 July 28, 1977

UNIVERSAL MILLS CORPORATION, petitioner,

vs.
UNIVERSAL TEXTILE MILLS, INC., respondent.

Emigdio G. Tanjuatco for petitioner.

Picazo, Santayana, Reyes, Tayao & Alfonso for respondent.

BARREDO, J.:

Appeal from the order of the Securities and Exchange Commission in S.E.C.
Case No. 1079, entitled In the Matter of the Universal Textile Mills, Inc. vs.
Universal Mills Corporation, a petition to have appellant change its corporate
name on the ground that such name is "confusingly and deceptively similar"
to that of appellee, which petition the Commission granted.

209
According to the order, "the Universal Textile Mills, Inc. was organ on
December 29, 1953, as a textile manufacturing firm for which it was issued a
certificate of registration on January 8, 1954. The Universal Mills
Corporation, on the other hand, was registered in this Commission on
October 27, 1954, under its original name, Universal Hosiery Mills
Corporation, having as its primary purpose the "manufacture and production
of hosieries and wearing apparel of all kinds." On May 24, 1963, it filed an
amendment to its articles of incorporation changing its name to Universal
Mills Corporation, its present name, for which this Commission issued the
certificate of approval on June 10, 1963.
The immediate cause of this present complaint, however, was the occurrence
of a fire which gutted respondent's spinning mills in Pasig, Rizal. Petitioner
alleged that as a result of this fire and because of the similarity of
respondent's name to that of herein complainant, the news items appearing
in the various metropolitan newspapers carrying reports on the fire created
uncertainty and confusion among its bankers, friends, stockholders and
customers prompting petitioner to make announcements, clarifying the real
Identity of the corporation whose property was burned. Petitioner presented
documentary and testimonial evidence in support of this allegation.
On the other hand, respondent's position is that the names
of the two corporations are not similar and even if there be
some similarity, it is not confusing or deceptive; that the only
reason that respondent changed its name was because it
expanded its business to include the manufacture of fabrics
of all kinds; and that the word 'textile' in petitioner's name is
dominant and prominent enough to distinguish the two. It
further argues that petitioner failed to present evidence of
confusion or deception in the ordinary course of business;
that the only supposed confusion proved by complainant
arose out of an extraordinary occurrence a disastrous fire.
(pp. 16-&17, Record.)
Upon these premises, the Commission held:
From the facts proved and the jurisprudence on the matter, it
appears necessary under the circumstances to enjoin the
respondent Universal Mills Corporation from further using its
present corporate name. Judging from what has already
happened, confusion is not only apparent, but possible. It
does not matter that the instance of confusion between the
two corporate names was occasioned only by a fire or an
extraordinary occurrence. It is precisely the duty of this
Commission to prevent such confusion at all times and
under all circumstances not only for the purpose of
protecting the corporations involved but more so for the
protection of the public.
In today's modern business life where people go by
tradenames and corporate images, the corporate name
becomes the more important. This Commission cannot close
its eyes to the fact that usually it is the sound of all the other
words composing the names of business corporations that
sticks to the mind of those who deal with them. The word
"textile" in Universal Textile Mills, Inc.' can not possibly
assure the exclusion of all other entities with similar names
from the mind of the public especially so, if the business they
are engaged in are the same, like in the instant case.
This Commission further takes cognizance of the fact that
when respondent filed the amendment changing its name to
Universal Mills Corporation, it correspondingly filed a written
undertaking dated June 5, 1963 and signed by its President,
Mr. Mariano Cokiat, promising to change its name in the
event that there is another person, firm or entity who has
obtained a prior right to the use of such name or one similar
to it. That promise is still binding upon the corporation and its
responsible officers. (pp. 17-18, Record.)
It is obvious that the matter at issue is within the competence of the
Securities and Exchange Commission to resolve in the first instance in the
exercise of the jurisdiction it used to possess under Commonwealth Act 287
210
as amended by Republic Act 1055 to administer the application and WHEREFORE, with the reservation already mentioned, the appealed
enforcement of all laws affecting domestic corporations and associations, decision is affirmed. Costs against petitioners.
reserving to the courts only conflicts of judicial nature, and, of course, the
Supreme Court's authority to review the Commissions actuations in Fernando (Chairman), Antonio, Aquino, Concepcion Jr. and Santos, JJ.,
appropriate instances involving possible denial of due process and grave concur.
abuse of discretion. Thus, in the case at bar, there being no claim of denial of
any constitutional right, all that We are called upon to determine is whether or
not the order of the Commission enjoining petitioner to its corporate name
constitutes, in the light of the circumstances found by the Commission, a
grave abuse of discretion.

We believe it is not. Indeed, it cannot be said that the impugned order is

arbitrary and capricious. Clearly, it has rational basis. The corporate names in
question are not Identical, but they are indisputably so similar that even
under the test of "reasonable care and observation as the public generally
are capable of using and may be expected to exercise" invoked by appellant,
We are apprehensive confusion will usually arise, considering that under the
second amendment of its articles of incorporation on August 14, 1964,
appellant included among its primary purposes the "manufacturing, dyeing,
finishing and selling of fabrics of all kinds" in which respondent had been
engaged for more than a decade ahead of petitioner. Factually, the
Commission found existence of such confusion, and there is evidence to
support its conclusion. Since respondent is not claiming damages in this
proceeding, it is, of course, immaterial whether or not appellant has acted in
good faith, but We cannot perceive why of all names, it had to choose a
name already being used by another firm engaged in practically the same
business for more than a decade enjoying well earned patronage and
goodwill, when there are so many other appropriate names it could possibly
adopt without arousing any suspicion as to its motive and, more importantly,
any degree of confusion in the mind of the public which could mislead even
its own customers, existing or prospective. Premises considered, there is no
warrant for our interference.

As this is purely a case of injunction, and considering the time that has
elapsed since the facts complained of took place, this decision should not be
deemed as foreclosing any further remedy which appellee may have for the
protection of its interests.

211
G.R. No. L-15429 December 1, 1919

UY SIULIONG, MARIANO LIMJAP, GACU UNG JIENG, EDILBERTO

CALIXTO and UY CHO YEE, petitioners,
vs.
THE DIRECTOR OF COMMERCE AND INDUSTRY, respondent.

Kincaid and Perkins for petitioners.

Attorney-General Paredes for respondent.

JOHNSON, J.:

212
The purpose of this action is to obtain the writ of mandamus to require the
respondent to file and register, upon the payment of the lawful fee, articles of
incorporation, and to issue to the petitioners as the incorporators of a certain
corporation to be known as "Siuliong y Compaia, Inc.," a certificate under
the seal of the office of said respondent, certifying that the articles of
incorporation have been duly filed and registered in his office in accordance
with the law.
To the petition the respondent demurred and the cause was finally submitted
upon the petition and demurrer.
The important facts necessary for the solution of the question presented,
which are found in the petition, may be stated as follows:
1. That prior to the presentation of the petition the petitioners had been
associated together as partners, which partnership was known as "mercantil
regular colectiva, under the style and firm name of "Siuliong y Cia.;"
2. That the petitioners herein, who had theretofore been members of said
partnership of "Siuliong y Cia.," desired to dissolve said partnership and to
form a corporation composed of the same persons as incorporators, to be
known as "Siulong y Compaia, Incorporada;"
3. That the purpose of said corporation, "Siuliong y Cia., Inc.," is (a) to
acquire the business of the partnership theretofore known as Siuliong & Co.,
and (b) to continue said business with some of its objects or purposes;
4. That an examination of the articles of incorporation of the said "Siuliong y
Compaia, Incorporada" (Exhibit A) shows that it is to be organized for the
following purposes:
(a) The purchase and sale, importation and exportation, of the products of
the country as well as of foreign countries;
(b) To discount promissory notes, bills of exchange, and other negotiable
instruments;
(c) The purchase and sale of bills of exchange, bonds, stocks, or
"participaciones de sociedades mercantiles e industriales [joint account of
mercantile and industrial associations]," and of all classes of mercantile
documents; "comisiones [commissions];" "consignaciones [consignments];"
(d) To act as agents for life, marine and fire insurance
companies; lawphi1.net
(e) To purchase and sell boats of all classes "y fletamento de los mismos
[and charterage of same];" and
(f) To purchase and sell industrial and mercantile establishments.
While the articles of incorporation of "Siuliong y Cia., Inc." states that its
purpose is to acquire and continue the business, with some of its objects or
purposes, of Siuliong & Co., it will be found upon an examination of the
purposes enumerated in the proposed articles of incorporation of "Siuliong y
Cia., Inc.," that some of the purposes of the original partnership of "Siuliong y
Cia." have been omitted. For example, the articles of partnership of "Siuliong
y Cia." gave said company the authority to purchase and sell all classes "de
fincas rusticas y urbanas [of rural and city real estate]" as well as the right to
act as agents for the establishment of any other business which it might
esteem convenient for the interests of "la compaia [the company]." (Exhibit
C).
The respondent in his argument in support of the demurrer contends (a) that
the proposed articles of incorporation presented for file and registry permitted
the petitioners to engage in a business which had for its end more than one
purpose; (b) that it permitted the petitioners to engage in the banking
business, and (c) to deal in real estate, in violation of the Act of Congress of
July 1, 1902.
The petitioners, in reply to said argument of the respondent, while insisting
that said proposed articles of incorporation do not permit it to enter into the
banking business nor to engage in the purchase and sale of real estate in
violation of said Act of Congress, expressly renounced in open court their
213
right to engage in such business under their articles of incorporation, even
though said articles might be interpreted in a way to authorize them to so to
do. That renouncement on the part of the petitioners eliminates from the
purposes of said proposed corporation (of "Siuliong y Cia., Inc.") any right to
engage in the banking business as such, or in the purchase and sale of real
estate.
We come now to the consideration of the principal question raised by the
respondent, to wit: that the proposed articles of incorporation of "Siuliong y
Cia., Inc.," permits it to engage in a business with more than one purpose.
If upon an examination of the articles of incorporation we find that its purpose
is to engage in a business with but one principal purpose, then that
contention of the respondent will have been answered and it will be
unnecessary to discuss at length the question whether or not a corporation
organized for commercial purposes in the Philippine Islands can be
organized for more than one purpose.
The attorney for the respondent, at the time of the argument, admitted in
open court that corporations in the Philippine Islands might be organized for
both the "importation and exportation" of merchandise and that there might
be no relation between the kind of merchandise imported with the class of
merchandise exported.
Referring again to be proposed articles of incorporation, a copy of which is
united with the original petition and marked Exhibit A, it will be seen that the
only purpose of said corporation are those enumerated in subparagraphs (a),
(b), (c), (d), (e) and ( f ) of paragraph 4 above. While said articles of
incorporation are somewhat loosely drawn, it is clear from a reading of the
same that the principal purpose of said corporation is to engage in
a mercantile business, with the power to do and perform the particular acts
enumerated in said subparagraphs above referred to.
Without discussing or deciding at this time whether a corporation organized
under the laws of the Philippine Islands may be organized for more than one
purpose, we are of the opinion and so decide that a corporation may be
organized under the laws of the Philippine Islands for mercantile purposes,
and to engage in such incidental business as may be
necessary and advisable to give effect to, and aid in, the successful
operation and conduct of the principal business.1awphi1.net
In the present case we are fully persuaded that all of the power and authority
included in the articles of incorporation of "Siuliong y Cia., Inc.," enumerated
above in paragraph 4 (Exhibit A) are only incidental to the principal
purpose of said proposed incorporation, to wit: "mercantile business." The
purchase and sale, importation and exportation of the products of the
country, as well as of foreign countries, might make it necessary to purchase
and discount promissory notes, bills of exchange, bonds, negotiable
instruments, stock, and interest in other mercantile and industrial
associations. It might also become important and advisable for the
successful operation of the corporation to act as agent for insurance
companies as well as to buy, sell and equip boats and to buy and sell other
establishments, and industrial and mercantile businesses.
While we have arrived at the conclusion that the proposed articles of
incorporation do not authorize the petitioners to engage in a business with
more than one purpose, we do not mean to be understood as having decided
that corporations under the laws of the Philippine Islands may not engage in
a business with more than one purpose. Such an interpretation might work a
great injustice to corporations organized under the Philippine laws. Such an
interpretation would give foreign corporations, which are permitted to be
registered under the laws here and which may be organized for more than
one purpose, a great advantage over domestic corporations. We do not
believe that it was the intention of the legislature to give foreign corporations
such an advantage over domestic corporations.
Considering the particular purposes and objects of the proposed articles of
incorporation which are specially enumerated above, we are of the opinion
that it contains nothing which violates in the slightest degree any of the
provisions of the laws of the Philippine Islands, and the petitioners are,
therefore, entitled to have such articles of
incorporation filed and registered as prayed for by them and to have issued
to them a certificate under the seal of the office of the respondent, setting
214
forth that such articles of incorporation have been duly filed in his office.
(Sec. 11, Act No. 1459.)

Therefore, the petition prayed for is hereby granted, and without any finding
as to costs, it is so ordered.

Arellano, C.J., Torres and Avancea, JJ., concur.

G.R. No. L-22238 February 18, 1967

215
CLAVECILLIA RADIO SYSTEM, petitioner-appellant,
vs.
HON. AGUSTIN ANTILLON, as City Judge of the Municipal Court of
Cagayan de Oro City
and NEW CAGAYAN GROCERY, respondents-appellees.
B. C. Padua for petitioner and appellant.
Pablo S. Reyes for respondents and appellees.
REGALA, J.:
This is an appeal from an order of the Court of First Instance of Misamis
Oriental dismissing the petition of the Clavecilla Radio System to prohibit the
City Judge of Cagayan de Oro from taking cognizance of Civil Case No.
1048 for damages.
It appears that on June 22, 1963, the New Cagayan Grocery filed a
complaint against the Clavecilla Radio System alleging, in effect, that on
March 12, 1963, the following message, addressed to the former, was filed at
the latter's Bacolod Branch Office for transmittal thru its branch office at
Cagayan de Oro:
NECAGRO CAGAYAN DE ORO (CLAVECILLA)
REURTEL WASHED NOT AVAILABLE REFINED TWENTY FIFTY IF
AGREEABLE SHALL SHIP LATER REPLY POHANG
The Cagayan de Oro branch office having received the said
message omitted, in delivering the same to the New Cagayan
Grocery, the word "NOT" between the words "WASHED" and
"AVAILABLE," thus changing entirely the contents and purport of the
same and causing the said addressee to suffer damages. After
service of summons, the Clavecilla Radio System filed a motion to
dismiss the complaint on the grounds that it states no cause of action
and that the venue is improperly laid. The New Cagayan Grocery
interposed an opposition to which the Clavecilla Radio System filed
its rejoinder. Thereafter, the City Judge, on September 18, 1963,
denied the motion to dismiss for lack of merit and set the case for
hearing.1wph1.t
Hence, the Clavecilla Radio System filed a petition for prohibition with
preliminary injunction with the Court of First Instance praying that the City
Judge, Honorable Agustin Antillon, be enjoined from further proceeding with
the case on the ground of improper venue. The respondents filed a motion to
dismiss the petition but this was opposed by the petitioner. Later, the motion
was submitted for resolution on the pleadings.
In dismissing the case, the lower court held that the Clavecilla Radio System
may be sued either in Manila where it has its principal office or in Cagayan
de Oro City where it may be served, as in fact it was served, with summons
through the Manager of its branch office in said city. In other words, the court
upheld the authority of the city court to take cognizance of the
case.1wph1.t
In appealing, the Clavecilla Radio System contends that the suit against it
should be filed in Manila where it holds its principal office.
It is clear that the case for damages filed with the city court is based upon tort
and not upon a written contract. Section 1 of Rule 4 of the New Rules of
Court, governing venue of actions in inferior courts, provides in its paragraph
(b) (3) that when "the action is not upon a written contract, then in the
municipality where the defendant or any of the defendants resides or may be
served with summons." (Emphasis supplied)
Settled is the principle in corporation law that the residence of a corporation
is the place where its principal office is established. Since it is not disputed
that the Clavecilla Radio System has its principal office in Manila, it follows
that the suit against it may properly be filed in the City of Manila.
The appellee maintain, however, that with the filing of the action in Cagayan
de Oro City, venue was properly laid on the principle that the appellant may
also be served with summons in that city where it maintains a branch office.
216
This Court has already held in the case of Cohen vs. Benguet Commercial
Co., Ltd., 34 Phil. 526; that the term "may be served with summons" does not
apply when the defendant resides in the Philippines for, in such case, he may
be sued only in the municipality of his residence, regardless of the place
where he may be found and served with summons. As any other corporation,
the Clavecilla Radio System maintains a residence which is Manila in this
case, and a person can have only one residence at a time (See Alcantara vs.
Secretary of the Interior, 61 Phil. 459; Evangelists vs. Santos, 86 Phil. 387).
The fact that it maintains branch offices in some parts of the country does not
mean that it can be sued in any of these places. To allow an action to be
instituted in any place where a corporate entity has its branch offices would
create confusion and work untold inconvenience to the corporation.

It is important to remember, as was stated by this Court in Evangelista vs.

Santos, et al., supra, that the laying of the venue of an action is not left to
plaintiff's caprice because the matter is regulated by the Rules of Court.
Applying the provision of the Rules of Court, the venue in this case was
improperly laid.

The order appealed from is therefore reversed, but without prejudice to the
filing of the action in Which the venue shall be laid properly. With costs
against the respondents-appellees.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar,

Sanchez and Castro, JJ., concur.

217
218
G.R. No. L-23606 July 29, 1968

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY,

INC., petitioner,
vs.
SECURITIES & EXCHANGE COMMISSION, respondent.

Gamboa and Gamboa for petitioner.

Office of the Solicitor General for respondent.

SANCHEZ, J.:

To the question May a corporation extend its life by amendment of its

articles of incorporation effected during the three-year statutory period for
liquidation when its original term of existence had already expired? the
answer of the Securities and Exchange Commissioner was in the negative.
Offshoot is this appeal.

That problem emerged out of the following controlling facts:

Petitioner Alhambra Cigar and Cigarette Manufacturing Company, Inc.

(hereinafter referred to simply as Alhambra) was duly incorporated under
Philippine laws on January 15, 1912. By its corporate articles it was to exist
for fifty (50) years from incorporation. Its term of existence expired on
January 15, 1962. On that date, it ceased transacting business, entered into
a state of liquidation.

Thereafter, a new corporation. Alhambra Industries, Inc. was formed to

carry on the business of Alhambra.

On May 1, 1962, Alhambra's stockholders, by resolution named Angel S.

Gamboa trustee to take charge of its liquidation.

219
On June 20, 1963 within Alhambra's three-year statutory period for
liquidation - Republic Act 3531 was enacted into law. It amended Section 18
of the Corporation Law; it empowered domestic private corporations to
extend their corporate life beyond the period fixed by the articles of
incorporation for a term not to exceed fifty years in any one instance.
Previous to Republic Act 3531, the maximum non-extendible term of such
corporations was fifty years.
On July 15, 1963, at a special meeting, Alhambra's board of directors
resolved to amend paragraph "Fourth" of its articles of incorporation to
extend its corporate life for an additional fifty years, or a total of 100 years
from its incorporation.
On August 26, 1963, Alhambra's stockholders, representing more than two-
thirds of its subscribed capital stock, voted to approve the foregoing
resolution. The "Fourth" paragraph of Alhambra's articles of incorporation
was thus altered to read:
FOURTH. That the term for which said corporation is to exist is fifty
(50) years from and after the date of incorporation, and for an
additional period of fifty (50) years thereafter.
On October 28, 1963, Alhambra's articles of incorporation as so amended
certified correct by its president and secretary and a majority of its board of
directors, were filed with respondent Securities and Exchange Commission
(SEC).
On November 18, 1963, SEC, however, returned said amended articles of
incorporation to Alhambra's counsel with the ruling that Republic Act 3531
"which took effect only on June 20, 1963, cannot be availed of by the said
corporation, for the reason that its term of existence had already expired
when the said law took effect in short, said law has no retroactive effect."
On December 3, 1963, Alhambra's counsel sought reconsideration of SEC's
ruling aforesaid, refiled the amended articles of incorporation.
On September 8, 1964, SEC, after a conference hearing, issued an order
denying the reconsideration sought.
Alhambra now invokes the jurisdiction of this Court to overturn the conclusion
below.1
1. Alhambra relies on Republic Act 3531, which amended Section 18 of the
Corporation Law. Well it is to take note of the old and the new statutes as
they are framed. Section 18, prior to and after its modification by Republic
Act 3531, covers the subject of amendment of the articles of incorporation of
private corporations. A provision thereof which remains unaltered is that a
corporation may amend its articles of incorporation "by a majority vote of its
board of directors or trustees and ... by the vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital
stock ... "
But prior to amendment by Republic Act 3531, an explicit prohibition existed
in Section 18, thus:
... Provided, however, That the life of said corporation shall not be
extended by said amendment beyond the time fixed in the original
articles: ...
This was displaced by Republic Act 3531 which enfranchises all private
corporations to extend their corporate existence. Thus incorporated into the
structure of Section 18 are the following:
... Provided, however, That should the amendment consist in
extending the corporate life, the extension shall not exceed fifty
years in any one instance: Provided, further, That the original
articles, and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation: ...
As we look in retrospect at the facts, we find these: From July 15 to October
28, 1963, when Alhambra made its attempt to extend its corporate existence,
its original term of fifty years had already expired (January 15, 1962); it was
220
in the midst of the three-year grace period statutorily fixed in Section 77 of
the Corporation Law, thus: .
SEC. 77. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three years after
the time when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established. 2
Plain from the language of the provision is its meaning: continuance of a
"dissolved" corporation as a body corporate for three years has for its
purpose the final closure of its affairs, and no other; the corporation is
specifically enjoined from "continuing the business for which it was
established". The liquidation of the corporation's affairs set forth in Section 77
became necessary precisely because its life had ended. For this reason
alone, the corporate existence and juridical personality of that corporation to
do business may no longer be extended.
Worth bearing in mind, at this juncture, is the basic development of
corporation law.
The common law rule, at the beginning, was rigid and inflexible in that upon
its dissolution, a corporation became legally dead for all purposes. Statutory
authorizations had to be provided for its continuance after dissolution "for
limited and specified purposes incident to complete liquidation of its
affairs".3 Thus, the moment a corporation's right to exist as an "artificial
person" ceases, its corporate powers are terminated "just as the powers of a
natural person to take part in mundane affairs cease to exist upon his
death".4 There is nothing left but to conduct, as it were, the settlement of the
estate of a deceased juridical person.
2. Republic Act 3531, amending Section 18 of the Corporation Law, is silent,
it is true, as to when such act of extension may be made. But even with a
superficial knowledge of corporate principles, it does not take much effort to
reach a correct conclusion. For, implicit in Section 77 heretofore quoted is
that the privilege given to prolong corporate life under the amendment must
be exercised before the expiry of the term fixed in the articles of
incorporation.
Silence of the law on the matter is not hard to understand. Specificity is not
really necessary. The authority to prolong corporate life was inserted by
Republic Act 3531 into a section of the law that deals with the power of a
corporation to amend its articles of incorporation. (For, the manner of
prolongation is through an amendment of the articles.) And it should be
clearly evident that under Section 77 no corporation in a state of liquidation
can act in any way, much less amend its articles, "for the purpose of
continuing the business for which it was established".
All these dilute Alhambra's position that it could revivify its corporate life
simply because when it attempted to do so, Alhambra was still in the process
of liquidation. It is surely impermissible for us to stretch the law that merely
empowers a corporation to act in liquidation to inject therein the power to
extend its corporate existence.
3. Not that we are alone in this view. Fletcher has written: "Since the privilege
of extension is purely statutory, all of the statutory conditions precedent must
be complied with in order that the extension may be effectuated. And,
generally these conditions must be complied with, and the steps necessary
to effect the extension must be taken, during the life of the corporation, and
before the expiration of the term of existence as original fixed by its charter
or the general law, since, as a rule, the corporation is ipso facto dissolved as
soon as that time expires. So where the extension is by amendment of the
articles of incorporation, the amendment must be adopted before that time.
And, similarly, the filing and recording of a certificate of extension after that
time cannot relate back to the date of the passage of a resolution by the
stockholders in favor of the extension so as to save the life of the
corporation. The contrary is true, however, and the doctrine of relation will
apply, where the delay is due to the neglect of the officer with whom the
221
certificate is required to be filed, or to a wrongful refusal on his part to receive
it. And statutes in some states specifically provide that a renewal may be had
within a specified time before or after the time fixed for the termination of the
corporate existence".5
The logic of this position is well expressed in a foursquare case decided by
the Court of Appeals of Kentucky.6There, pronouncement was made as
follows:
... But section 561 (section 2147) provides that, when any
corporation expires by the terms of its articles of incorporation, it may
be thereafter continued to act for the purpose of closing up its
business, but for no other purpose. The corporate life of the Home
Building Association expired on May 3, 1905. After that date, by the
mandate of the statute, it could continue to act for the purpose of
closing up its business, but for no other purpose. The proposed
amendment was not made until January 16, 1908, or nearly three
years after the corporation expired by the terms of the articles of
incorporation. When the corporate life of the corporation was ended,
there was nothing to extend. Here it was proposed nearly three years
after the corporate life of the association had expired to revivify the
dead body, and to make that relate back some two years and eight
months. In other words, the association for two years and eight
months had only existed for the purpose of winding up its business,
and, after this length of time, it was proposed to revivify it and make
it a live corporation for the two years and eight months daring which
it had not been such.
The law gives a certain length of time for the filing of records in this
court, and provides that the time may be extended by the court, but
under this provision it has uniformly been held that when the time
was expired, there is nothing to extend, and that the appeal must be
dismissed... So, when the articles of a corporation have expired, it is
too late to adopt an amendment extending the life of a corporation;
for, the corporation having expired, this is in effect to create a new
corporation ..."7
True it is, that the Alabama Supreme Court has stated in one case. 8 that a
corporation empowered by statute to renew its corporate existence may do
so even after the expiration of its corporate life, provided renewal is taken
advantage of within the extended statutory period for purposes of liquidation.
That ruling, however, is inherently weak as persuasive authority for the
situation at bar for at least two reasons: First. That case was a suit for
mandamus to compel a former corporate officer to turn over books and
records that came into his possession and control by virtue of his office. It
was there held that such officer was obliged to surrender his books and
records even if the corporation had already expired. The holding on the
continued existence of the corporation was a mere dictum. Second.
Alabama's law is different. Corporations in that state were authorized not only
to extend but also to renew their corporate existence.That very case defined
the word "renew" as follows; "To make new again; to restore to freshness; to
make new spiritually; to regenerate; to begin again; to recommence; to
resume; to restore to existence, to revive; to re-establish; to recreate; to
replace; to grant or obtain an extension of Webster's New International Dict.;
34 Cyc. 1330; Carter v. Brooklyn Life Ins. Co., 110 N.Y. 15, 21, 22, 17 N.E.
396; 54 C.J. 379. Sec".9
On this point, we again draw from Fletcher: "There is a broad distinction
between the extension of a charter and the grant of a new one. To renew a
charter is to revive a charter which has expired, or, in other words, "to give a
new existence to one which has been forfeited, or which has lost its vitality by
lapse of time". To "extend" a charter is "to increase the time for the existence
of one which would otherwise reach its limit at an earlier period". 10Nowhere in
our statute Section 18, Corporation Law, as amended by Republic Act
3531 do we find the word "renew" in reference to the authority given to
corporations to protract their lives. Our law limits itself to extensionof
corporate existence. And, as so understood, extension may be
made only before the term provided in the corporate charter expires.
Alhambra draws attention to another case 11 which declares that until the end
of the extended period for liquidation, a dissolved corporation "does not
become an extinguished entity". But this statement was obviously lifted out of
context. That case dissected the question whether or not suits can be
commenced by or against a corporation within its liquidation period. Which
222
was answered in the affirmative. For, the corporation still exists for the
settlement of its affairs.
People, ex rel. vs. Green,12 also invoked by Alhambra, is as unavailing.
There, although the corporation amended its articles to extend its existence
at a time when it had no legal authority yet, it adopted the amended articles
later on when it had the power to extend its life and during its original term
when it could amend its articles.
The foregoing notwithstanding, Alhambra falls back on the contention that its
case is arguably within the purview of the law. It says that before cessation of
its corporate life, it could not have extended the same, for the simple reason
that Republic Act 3531 had not then become law. It must be remembered
that Republic Act 3531 took effect on June 20, 1963, while the original term
of Alhambra's existence expired before that date on January 15, 1962.
The mischief that flows from this theory is at once apparent. It would certainly
open the gates for all defunct corporations whose charters have expired
even long before Republic Act 3531 came into being to resuscitate their
corporate existence.
4. Alhambra brings into argument Republic Act 1932, which amends Section
196 of the Insurance Act, now reading as follows: 1wph1.t at another statute to disentangle doubts. It is an elementary rule in legal
SEC. 196. Any provision of law to the contrary notwithstanding, every
domestic life insurance corporation, formed for a limited period under
the provisions of its articles of incorporation, may extend its
corporate existence for a period not exceeding fifty years in any one
instance by amendment to its articles of incorporation on or before
the expiration of the term so fixed in said articles ...
To be observed is that the foregoing statute unlike Republic Act 3531
expressly authorizes domestic insurance corporations to extend their
corporate existence "on or before the expiration of the term" fixed in their
articles of incorporation. Republic Act 1932 was approved on June 22, 1957,
long before the passage of Republic Act 3531 in 1963. Congress, Alhambra
points out, must have been aware of Republic Act 1932 when it passed
Republic Act 3531. Since the phrase "on or before", etc., was omitted in
Republic Act 3531, which contains no similar limitation, it follows, according
to Alhambra, that it is not necessary to extend corporate existence on or
before the expiration of its original term.
That Republic Act 3531 stands mute as to when extention of corporate
existence may be made, assumes no relevance. We have already said, in
the face of a familiar precept, that a defunct corporation is bereft of any legal
faculty not otherwise expressly sanctioned by law.
Illuminating here is the explanatory note of H.B. 1774, later Republic Act
3531 now in dispute. Its first paragraph states that "Republic Act No. 1932
allows the automatic extension of the corporate existence of domestic life
insurance corporations upon amendment of their articles of incorporation on
or before the expiration of the terms fixed by said articles". The succeeding
lines are decisive: "This is a good law, a sane and sound one. There appears
to be no valid reason why it should not be made to apply to other private
corporations.13
The situation here presented is not one where the law under consideration is
ambiguous, where courts have to put in harness extrinsic aids such as a look
hermeneutics that where the terms of the law are clear, no statutory
construction may be permitted. Upon the basic conceptual scheme under
which corporations operate, and with Section 77 of the Corporation Law
particularly in mind, we find no vagueness in Section 18, as amended by
Republic Act 3531. As we view it, by directing attention to Republic Act 1932,
Alhambra would seek to create obscurity in the law; and, with that, ask of us
a ruling that such obscurity be explained. This, we dare say, cannot be done.
The pari materia rule of statutory construction, in fact, commands that
statutes must be harmonized with each other. 14 So harmonizing, the
conclusion is clear that Section 18 of the Corporation Law, as amended by
Republic Act 3531 in reference to extensions of corporate existence, is to be
read in the same light as Republic Act 1932. Which means that domestic
corporations in general, as with domestic insurance companies, can extend
223
corporate existence only on or before the expiration of the term fixed in their
charters.

5. Alhambra pleads for munificence in interpretation, one which brushes

technicalities aside. Bases for this posture are that Republic Act 3531 is a
remedial statute, and that extension of corporate life is beneficial to the
economy.

Alhambra's stance does not induce assent. Expansive construction is

possible only when there is something to expand. At the time of the passage
of Republic Act 3531, Alhambra's corporate life had already expired. It had
overstepped the limits of its limited existence. No life there is to prolong.

Besides, a new corporation Alhambra Industries, Inc., with but slight

change in stockholdings15 has already been established. Its purpose is to
carry on, and it actually does carry on, 16 the business of the dissolved entity.
The beneficial-effects argument is off the mark.

The way the whole case shapes up then, the only possible drawbacks of
Alhambra might be that, instead of the new corporation (Alhambra Industries,
Inc.) being written off, the old one (Alhambra Cigar & Cigarette
Manufacturing Company, Inc.) has to be wound up; and that the old
corporate name cannot be retained fully in its exact form. 17 What is important
though is that the word Alhambra, the name that counts [it has goodwill],
remains.

FOR THE REASONS GIVEN, the ruling of the Securities and Exchange
Commission of November 18, 1963, and its order of September 8, 1964, both
here under review, are hereby affirmed.

Costs against petitioner Alhambra Cigar & Cigarette Manufacturing

Company, Inc. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Angeles

and Fernando, JJ., concur.

224
 years. In 1906, the governing Philippine Commission enacted Act 1459,
commonly known as the Corporation Law, establishing in the islands the
American type of juridical entities known as corporation, to take effect on
April 1, 1906. Of its enactment, this Court said in its decision in Harden vs.
Benguet Consolidated Mining Co., 58 Phil., 141, at pp. 145-146, and
147:chanroblesvirtuallawlibrary

When the Philippine Islands passed to the sovereignty of the United States,
the attention of the Philippine Commission was early drawn to the fact there
is no entity in Spanish law exactly corresponding to the motion of the
corporation in English and American law; chan roblesvirtualawlibraryand in
the Philippine Bill, approved July 1, 1906, the Congress of the United States
inserted certain provisions, under the head of Franchises, which were
[G.R. No. L-7231. March 28, 1956.] intended to control the lawmaking power in the Philippine Islands in the
matter of granting of franchises, privileges and concessions. These
BENGUET CONSOLIDATED MINING CO., Petitioner, vs. MARIANO provisions are found in sections 74 and 75 of the Act. The provisions of
PINEDA, in his capacity as Securities and Exchange section 74 have been superseded by section 28 of the Act of Congress of
Commissioner, Respondent. CONSOLIDATED MINES, INC., Intervenor. August 29, 1916, but in section 75 there is a provision referring to mining
corporations, which still remains the law, as amended. This provision, in its
original form, reads as follows:chanroblesvirtuallawlibrary cralaw it shall be
unlawful for any member of a corporation engaged in agriculture or mining
DECISION and for any corporation organized for any purpose except irrigation to be in
any wise interested in any other corporation engaged in agriculture or in
mining.
REYES, J. B. L., J.:

Under the guidance of this and certain other provisions thus enacted by
Appeal under Rule 43 from a decision of the Securities and Exchange
Congress, the Philippine Commission entered upon the enactment of a
Commissioner, denying the right of a sociedad anonima to extend its
general law authorizing the creation of corporations in the Philippine Islands.
corporate existence by amendment of its original articles of association, or
This rather elaborate piece of legislation is embodied in what is called our
alternatively, to reform and continue existing under the Corporation Law (Act
Corporation Law (Act No. 1459 of the Philippine Commission). The evident
1459) beyond the original period.
purpose of the commission was to introduce the American corporation into
the Philippine Islands as the standard commercial entity and to hasten the
The Petitioner, the Benguet Consolidated Mining Co. (hereafter termed day when the sociedad anonima of the Spanish law would be obsolete. That
Benguet for short), was organized on June 24,1903, as a sociedad statute is a sort of codification of American corporate law.
anonima regulated by Articles 151 et seq., of the Spanish Code of
Commerce of 1886, then in force in the Philippines. The articles of
As it was the intention of our lawmakers to stimulate the introduction of the
association expressly provided that it was organized for a term of fifty (50)
American corporation into the Philippine law in the place of the sociedad

225
anonima, it was necessary to make certain adjustment resulting from the
continued co-existence, for a time, of the two forms of commercial entities.
Accordingly, in section 75 of the Corporation Law, a provision is found
making the sociedad anonima subject to the provisions of the Corporation
Law so far as such provisions may be applicable and giving to the
sociedades anonimas previously created in the Islands the option to continue
business as such or to reform and organize under the provisions of the
Corporation Law. Again, in section 191 of the Corporation Law, the Code of
Commerce is repealed in so far as it relates to sociedades anonimas. The
purpose of the commission in repealing this part of the Code of Commerce
was to compel commercial entities thereafter organized to incorporate under
the Corporation Law, unless they should prefer to adopt some form or other
of the partnership. To this provision was added another to the effect that
existing sociedades anonimas, which elected to continue their business as
such, instead of reforming and reorganizing under the Corporation Law,
should continue to be governed by the laws that were in force prior to the
passage of this Act in relation to their organization and method of transacting
business and to the rights of members thereof as between themselves, but
their relations to the public and public officials shall be governed by the
provisions of this Act.
Specifically, the two sections of Act No. 1459 referring to sociedades
anonimas then already existing, provide as
follows:chanroblesvirtuallawlibrary
SEC. 75. Any corporation or a sociedad anonima formed, organized, and
existing under the laws of the Philippines on the date of the passage of this
Act, shall be subject to the provisions hereof so far as such provisions may
be applicable and shall be entitled at its option either to continue business as
such corporation or to reform and organize under and by virtue of the
provisions of this Act, transferring all corporate interests to the new
corporation which, if a stock corporation, is authorized to issue its shares of
stock at par to the stockholders or members of the old corporation according
to their interests.
SEC. 191. The Code of Commerce, in so far as it relates to corporation or
sociedades anonimas, and all other Acts or parts of Acts in conflict or
inconsistent with this Act, are hereby repealed with the exception of Act
Numbered fifty-two, entitled An Act providing for examinations of banking
institutions in the Philippines, and for reports by their officers, as amended,
and Act Numbered Six hundred sixty-seven, entitled An Act prescribing the
method of applying to governments of municipalities, except the city of
Manila and of provinces for franchises to contract and operate street railway,
electric light and power and telephone lines, the conditions upon which the
same may be granted, certain powers of the grantee of said franchises, and
of grantees of similar franchises under special Act of the Commission, and
for other purposes. Provided, however, That nothing in this Act contained
shall be deemed to repeal the existing law relating to those classes of
associations which are termed sociedades colectivas, and sociedades de
cuentas en participacion, as to which association the existing law shall be
deemed to be still in force; chan roblesvirtualawlibraryAnd provided, further,
That existing corporations or sociedades anonimas, lawfully organized as
such, which elect to continue their business as such sociedades anonimas
instead of reforming and reorganizing under and by virtue of the provisions of
this Act, shall continue to be governed by the laws that were in force prior to
the passage of this Act in relation to their organization and method of
transacting business and to the rights of members thereof as between
themselves, but their relations to the public and public officials shall be
governed by the provisions of this Act.
As the expiration of its original 50 year term of existence approached, the
Board of Directors of Benguet adopted in 1946 a resolution to extend its life
for another 50 years from July 3, 1946 and submitted it for registration to
the Respondent Securities and Exchange Commissioner. Upon advice of the
Secretary of Justice (Op. No. 45, Ser. 1917) that such extension was
contrary to law, the registration was denied. The matter was dropped,
allegedly because the stockholders of Benguet did not approve of the
Directors action.
Some six years later in 1953, the shareholders of Benguet adopted a
resolution empowering the Director to effectuate the extension of the
Companys business life for not less than 20 and not more than 50 years,
and this by either (1) an amendment to the Articles of Association or Charter
of this Company or (2) by reforming and reorganizing the Company as a
226
Philippine Corporation, or (3) by both or (4) by any other means.
Accordingly, the Board of Directors on May 27, 1953, adopted a resolution to
the following effect
Be It
Resolved, that the Company be reformed, reorganized and organized under
the provisions of section 75 and other provisions of the Philippine
Corporation Law as a Philippine corporation with a corporate life and
corporate powers as set forth in the Articles of Incorporation attached hereto
as Schedule I and made a part hereof by this reference; chan
roblesvirtualawlibraryand
Be It
FURTHER RESOLVED, that any five or more of the following shareholders
of the Company be and they hereby are authorized as instructed to act for
and in behalf of the share holders of the Company and of the Company as
Incorporators in the reformation, reorganization and organization of the
Company under and in accordance with the provisions aforesaid of said
Philippine Corporation Law, and in such capacity, they are hereby authorized
and instructed to execute the aforesaid Articles of Incorporation attached to
these Minutes as Schedule I hereof, with such amendments, deletion and
additions thereto as any five or more of those so acting shall deem
necessary, proper, advisable or convenient to effect prompt registration of
said Articles under Philippine Law; chan roblesvirtualawlibraryand five or
more of said Incorporators are hereby further authorized and directed to do
all things necessary, proper, advisable or convenient to effect such
registration.
In pursuance of such resolution, Benguet submitted in June, 1953, to the
Securities and Exchange Commissioner, for alternative registration, two
documents:chanroblesvirtuallawlibrary (1) Certification as to the Modification
of (the articles of association of) the Benguet Consolidated Mining Company,
extending the term of its existence to another fifty years from June 15,
1953; chan roblesvirtualawlibraryand (2) articles of incorporation, covering its
reformation or reorganization as a corporation in accordance with section 75
of the Philippine Corporation Law.
Relying mainly upon the adverse opinion of the Secretary of Justice (Op. No.
180, s. 1953), the Securities and Exchange Commissioner denied the
registration and ruled:chanroblesvirtuallawlibrary
(1) That the Benguet, as sociedad anonima, had no right to extend the
original term of corporate existence stated in its Articles of Association, by
subsequent amendment thereof adopted after enactment of the Corporation
Law (Act No. 1459); chan roblesvirtualawlibraryand
(2) That Benguet, by its conduct, had chosen to continue as sociedad
anonima, under section 75 of Act No. 1459, and could no longer exercise the
option to reform into a corporation, specially since it would indirectly produce
the effect of extending its life.
This ruling is the subject of the present appeal.
Petitioner Benguet contends:chanroblesvirtuallawlibrary
(1) That the proviso of section 18 of the Corporation Law to the effect
that the life of said corporation shall not be extended by amendment beyond
the time fixed in the original articles.
does not apply to sociedades anonimas already in existence at the passage
of the law, like Petitioner herein;
(2) That to apply the said restriction imposed by section 18 of the
Corporation Law to sociedades anonimas already functioning when the said
law was enacted would be in violation of constitutional inhibitions;
(3) That even assuming that said restriction was applicable to it, Benguet
could still exercise the option of reforming and reorganizing under section 75
227
of the Corporation Law, thereby prolonging its corporate existence, since the
law is silent as to the time when such option may be exercised or availed of.
The first issue arises because the Code of Commerce of 1886 under which
Benguet was organized, contains no prohibition (to extend the period of
corporate existence), equivalent to that set forth in section 18 of the
Corporation Law. Neither does it expressly authorize the extension. But the
text of Article 223, reading:chanroblesvirtuallawlibrary
ART. 223. After the termination of the period for which commercial
associations are constituted, it shall not be understood as extended by the
implied or presumed will of the members; chan roblesvirtualawlibraryand if
the members desire to continue in association, they shall draw up new
articles, subject to all the formalities prescribed for their creation as provided
in Article 119. (Code of Commerce.)
would seem to imply that the period of existence of the sociedad anonimas
(or of any other commercial association for that matter) may be extended if
the partners or members so agree before the expiration of the original period.
While the Code of Commerce, in so far as sociedades anonimas are
concerned, was repealed by Act No 1459, Benguet claims that article 223 is
still operative in its favor under the last proviso of section 191 of the
Corporation law (ante, p. 4 to the effect that existing sociedades anonimas
would continue to be governed by the law in force before Act 1459,
in relation to their organization and method of transacting business and to
the rights of members among themselves, but their relations to the public and
public officials shall be governed by the provisions of this Act.
Benguet contends that the period of corporate life relates to its organization
and the rights of its members inter se, and not to its relations to the public or
public officials.
We find this contention untenable.
The term of existence of association (partnership or sociedad anonima) is
coterminous with their possession of an independent legal personality,
distinct from that of their component members. When the period expires, the
sociedad anonima loses the power to deal and enter into further legal
relations with other persons; chan roblesvirtualawlibraryit is no longer
possible for it to acquire new rights or incur new obligations, have only as
may be required by the process of liquidating and winding up its affairs. By
the same token, its officers and agents can no longer represent it after the
expiration of the life term prescribed, save for settling its business.
Necessarily, therefore, third persons or strangers have an interest in knowing
the duration of the juridical personality of the sociedad anonima, since the
latter cannot be dealt with after that period; chan
roblesvirtualawlibrarywherefore its prolongation or cessation is a matter
directly involving the companys relations to the public at large.
On the importance of the term of existence set in the articles of association of
commercial companies under the Spanish Code of Commerce, D. Lorenzo
Benito y Endar, professor of mercantile law in the Universidad Central de
Madrid, has this to say:chanroblesvirtuallawlibrary
La duracion de la Sociedad. La necesidad de consignar este requisito en
el contrato social tiene un valor analogo al que dijimos tenia el mismo al
tratar de las compaias colectivas, aun cuando respecto de las anonimas no
haya de tenerse en cuenta para nada lo que dijimos entonces acerca de la
trascendencia que ello tiene para los socios; chan
roblesvirtualawlibraryporque no existiendo en las anonimas la serie de
responsibilidades de caracter personal que afectan a los socios colectivos,
es claro que la duracion de la sociedad importa conocerla a los socios y los
terceros, porque ella marca al limite natural del desenvolvimiento de la
empresa constituida y el comienzo de la liquidacion de la sociedad. (3
Benito, Derecho Mercantil, 292-293.)
Interesa, pues, la fijacion de la vida de la compaia, desenvolviendose con
normalidad y regularidad, tanto a los asociados como a los terceros. A
aquellos, porque su libertad economica, en cierto modo limitada por la
existencia del contrato de compaia, se recobra despues de realizada, mas
o menos cumplidamente, la finalidad comun perseguida; chan
228
roblesvirtualawlibraryy a los terceros, porque les advierte el momento en
que, extinguida la compaia, no cabe y a la creacion con ella de nuevas
relaciones juridicas, de que nazcan reciprocamente derechos y obligaciones,
sino solo la liquidacion de los negocios hasta entonces convenidos, sin otra
excepcion que la que luego mas adelante habremos de sealar. (3 Benito,
Derecho Mercantil, p. 245.)
The State and its officers also have an obvious interest in the term of life of
associations, since the conferment of juridical capacity upon them during
such period is a privilege that is derived from statute. It is obvious that no
agreement between associates can result in giving rise to a new and distinct
personality, possessing independent rights and obligations, unless the law
itself shall decree such result. And the State is naturally interested that this
privilege be enjoyed only under the conditions and not beyond the period that
it sees fit to grant; chan roblesvirtualawlibraryand, particularly, that it be not
abused in fraud and to the detriment of other parties; chan
roblesvirtualawlibraryand for this reason it has been ruled that the limitation
(of corporate existence) to a definite period is an exercise of control in the
interest of the public (Smith vs. Eastwood Wire Manufacturing Co., 43 Atl.
568).
We cannot assent to the thesis of Benguet that its period of corporate
existence has relation to its organization. The latter term is defined in
Websters International Dictionary as:chanroblesvirtuallawlibrary
The executive structure of a business; chan roblesvirtualawlibrarythe
personnel of management, with its several duties and places in
administration; chan roblesvirtualawlibrarythe various persons who conduct a
business, considered as a unit.
The legal definitions of the term organization are concordant with that given
above:chanroblesvirtuallawlibrary
Organize or organization, as used in reference to corporations, has a well-
understood meaning, which is the election of officers, providing for the
subscription and payment of the capital stock, the adoption of by-laws, and
such other steps as are necessary to endow the legal entity with the capacity
to transact the legitimate business for which it was created. Waltson vs.
Oliver, 30 P. 172, 173, 49 Kan. 107, 33 Am. St. Rep. 355; chan
roblesvirtualawlibraryTopeka Bridge Co. vs. Cummings, 3 Kan. 55, 77; chan
roblesvirtualawlibraryHunt vs. Kansas & M. Bridge Co., 11 Kan. 412,
439; chan roblesvirtualawlibraryAspen Water & Light Co., vs. City of Aspen,
37 P. 728, 730, 6 Colo. App. 12; chan roblesvirtualawlibraryNemaha Coal &
Mining Co., vs. Settle 38 P. 483, 484, 54 Kan. 424.
Under a statute providing that, until articles of incorporation should be
recorded, the corporation should transact no business except its own
organization, it is held that the term organization means simply the process
of forming and arranging into suitable disposition the parties who are to act
together in, and defining the objects of, the compound body, and that this
process, even when complete in all its parts, does not confer a franchise
either valid or defective, but, on the contrary, it is only the act of the
individuals, and something else must be done to secure the corporate
franchise. Abbott vs. Omaha Smelting & Refining Co. 4 Neb. 416, 421. (30
Words and Phrases, p. 282.)
It is apparent from the foregoing definitions that the term organization
relates merely to the systematization and orderly arrangement of the internal
and managerial affairs and organs of the Petitioner Benguet, and has nothing
to do with the prorogation of its corporate life.
From the double fact that the duration of its corporate life (and juridical
personality) has evident connection with the Petitioners relations to the
public, and that it bears none to the Petitioners organization and method of
transacting business, we derive the conclusion that the prohibition contained
in section 18 of the Corporation Law (Act No. 1459) against extension of
corporate life by amendment of the original articles was designed and
intended to apply to compaias anonimas that, like Petitioner Benguet,
were already existing at the passage of said law. This conclusion is
reinforced by the avowed policy of the law to hasten the day when
compaias anonimas would be extinct, and replace them with the American
type of corporation (Harden vs. Benguet Consolidated Mining Co., supra), for
the indefinite prorogation of the corporation life of sociedades anonimas
229
would maintain the unnecessary duality of organizational types instead of
reducing them to a single one; chan roblesvirtualawlibraryand what is more, it
would confer upon these sociedades anonimas, whose obsolescence was
sought, the advantageous privilege of perpetual existence that the new
corporation could not possess.
Of course, the retroactive application of the limitations on the terms of
corporate existence could not be made in violation of constitutional inhibitions
specially those securing equal protection of the laws and prohibiting
impairment of the obligation of contracts. It needs no argument to show that if
Act No. 1459 allowed existing compaias anonimas to be governed by the
old law in respect to their organization, methods of transacting business and
the rights of the members among themselves, it was precisely in deference
to the vested rights already acquired by the entity and its members at the
time the Corporation Law was enacted. But we do not agree
with Petitioner Benguet (and here lies the second issue in this appeal) that
the possibility to extend its corporate life under the Code of Commerce
constituted a right already vested when Act No. 1459 was adopted. At that
time, Benguets existence was well within the 50 years period set in its
articles of association; chan roblesvirtualawlibraryand its members had not
entered into any agreement that such period should be extended. It is safe to
say that none of the members of Benguet anticipated in 1906 any need to
reach an agreement to increase the term of its corporate life, barely three
years after it had started. The prorogation was purely speculative; chan
roblesvirtualawlibrarya mere possibility that could not be taken for granted. It
was as yet conditional, depending upon the ultimate decision of the members
and directors. They might agree to extend Benguets existence beyond the
original 50 years; chan roblesvirtualawlibraryor again they might not. It must
be remembered that in 1906, the success of Benguet in its mining ventures
was by no means so certain as to warrant continuation of its operations
beyond the 50 years set in its articles. The records of this Court show that
Benguet ran into financial difficulties in the early part of its existence, to the
extent that, as late as 1913, ten years after it was found, 301,100 shares of
its capital stock (with a par value of $1 per share) were being offered for sale
at 25 centavos per share in order to raise the sum of P75,000 that was
needed to rehabilitate the company (Hanlon vs. Hausermann and Beam, 40
Phil., 796). Certainly the prolongation of the corporate existence of Benguet
in 1906 was merely a possibility in futuro, a contingency that did not fulfill the
requirements of a vested right entitled to constitutional protection, defined by
this Court in Balboa vs. Farrales, 51 Phil., 498, 502, as
follows:chanroblesvirtuallawlibrary
Vested right is some right or interest in the property which has become fixed
and established, and is no longer open to doubt or controversy,
A vested right is defined to be an immediate fixed right of present or future
enjoyment, and rights are vested in contradistinction to being expectant or
contingent (Pearsall vs. Great Northern R. Co., 161 U. S. 646, 40 L. Ed.
838).
In Corpus Juris Secundum we find:chanroblesvirtuallawlibrary
Rights are vested when the right to enjoyment, present or prospective, has
become the property of some particular person or persons as a present
interest. The right must be absolute, complete, and unconditional,
independent of a contingency, and a mere expectancy of future benefit, or a
contingent interest in property founded on anticipated continuance of existing
laws, does not constitute a vested right. So, inchoate rights which have not
been acted on are not vested. (16 C.J. S. 214-215.)
Since there was no agreement as yet to extend the period of Benguets
corporate existence (beyond the original 50 years) when the Corporation Law
was adopted in 1906, neither Benguet nor its members had any actual or
vested right to such extension at that time. Therefore, when the Corporation
Law, by section 18, forbade extensions of corporate life, neither Benguet nor
its members were deprived of any actual or fixed right constitutionally
protected.
To hold, as Petitioner Benguet asks, that the legislative power could not
deprive Benguet or its members of the possibility to enter at some indefinite
future time into an agreement to extend Benguets corporate life, solely
because such agreements were authorized by the Code of Commerce,
would be tantamount to saying that the said Code was irrepealable on that
230
point. It is a well settled rule that no person has a vested interest in any rule
of law entitling him to insist that it shall remain unchanged for his benefit.
(New York C. R. Co. vs. White, 61 L. Ed (U.S.) 667; chan
roblesvirtualawlibraryMondou vs. New York N. H. & H. R. Co., 56 L. Ed.
327; chan roblesvirtualawlibraryRainey vs. U. S., 58 L. Ed. 617; chan
roblesvirtualawlibraryLilly Co. vs. Saunders, 125 ALR. 1308; chan
roblesvirtualawlibraryShea vs. Olson, 111 ALR. 998).
There can be no vested right in the continued existence of a statute or rule
of the common law which precludes its change or repeal, nor in any omission
to legislate on a particular matter or subject. Any right conferred by statute
may be taken away by statute before it has become vested, but after a right
has vested, repeal of the statute or ordinance which created the right does
not and cannot affect much right. (16 C.J. S. 222-223.)
It is a general rule of constitutional law that a person has no vested right in
statutory privileges and exemptions (Brearly School vs. Ward, 201 NY. 358,
40 LRA NS. 1215; chan roblesvirtualawlibraryalso, Cooley, Constitutional
Limitations, 7th ed., p. 546).
It is not amiss to recall here that after Act No. 1459 the Legislature found it
advisable to impress further restrictions upon the power of corporations to
deal in public lands, or to hold real estate beyond a maximum area; chan
roblesvirtualawlibraryand to prohibit any corporation from endeavouring to
control or hold more than 15 per cent of the voting stock of an agricultural or
mining corporation (Act No. 3518). These prohibitions are so closely
integrated with our public policy that Commonwealth Act No. 219 sought to
extend such restrictions to associations of all kinds. It would be subversive of
that policy to enable Benguet to prolong its peculiar status of sociedad
anonimas, and enable it to cast doubt and uncertainty on whether it is, or not,
subject to those restrictions on corporate power, as it once endeavoured to
do in the previous case of Harden vs. Benguet Mining Corp. 58 Phil., 149.
Stress has been laid upon the fact that the Compaia Maritima (like Benguet,
a sociedad anonima established before the enactment of the Corporation
Law) has been twice permitted to extend its corporate existence by
amendment of its articles of association, without objection from the officers of
the defunct Bureau of Commerce and Industry, then in charge of the
enforcement of the Corporation Laws, although the exact question was never
raised then. Be that as it may, it is a well established rule in this jurisdiction
that the government is never estopped by mistake or error on the part of its
agents (Pineda vs. Court of First Instance of Tayabas, 52 Phil., 803, 807),
and that estopped cannot give validity to an act that is prohibited by law or is
against public policy (Eugenio vs. Perdido, (97 Phil., 41, May 19, 1955; chan
roblesvirtualawlibrary19 Am. Jur. 802); chan roblesvirtualawlibraryso that
the Respondent, Securities and Exchange Commissioner, was not bound by
the rulings of his predecessor if they be inconsistent with law. Much less
could erroneous decisions of executive officers bind this Court and induce it
to sanction an unwarranted interpretation or application of legal principles.
We now turn to the third and last issue of this appeal, concerning the
exercise of the option granted by section 75 of the Corporation Law to every
sociedad anonima formed, organized and existing under the laws of the
Philippines on the date of the passage of this Act to either continue business
as such sociedad anonima or to reform and organize under the provisions of
the Corporation Law. Petitioner-Appellant Benguet contends that as the law
does not determine the period within which such option may be exercised,
Benguet may exercise it at any time during its corporate existence; chan
roblesvirtualawlibraryand that in fact on June 22, 1953, it chose to reform
itself into a corporation for a period of 50 years from that date, filing the
corresponding papers and by-laws with the Respondent Commissioner of
Securities and Exchange registration; chan roblesvirtualawlibrarybut the
latter refused to accept them as belatedly made.
The Petitioners argument proceeds from the unexpressed assumption that
Benguet, as sociedad anonima, had not exercised the option given by
section 75 of the Corporation Law until 1953. This we find to be incorrect.
Under that section, by continuing to do business as sociedad anonima,
Benguet in fact rejected the alternative to reform as a corporation under Act
No. 1459. It will be noted from the text of section 75 (quoted earlier in this
opinion) that no special act or manifestation is required by the law from the
existing sociedades anonimas that prefer to remain and continue as such. It
is when they choose to reform and organize under the Corporation Law that
231
they must, in the words of the section, transfer all corporate interests to the
new corporation. Hence if they do not so transfer, the sociedades anonimas
affected are to be understood to have elected the alternative to continue
business as such corporation (sociedad anonima) 2
The election of Benguet to remain a sociedad anonima after the enactment
of the Corporation Law is evidence, not only by its failure, from 1906 to 1953,
to adopt the alternative to transfer its corporate interests to a new
corporation, as required by section 75; chan roblesvirtualawlibraryit also
appears from positive acts. Thus around 1933, Benguet claimed and
defended in court its acquisition of shares of the capital stock of the Balatoc
Mining Company, on the ground that as a sociedad anonima it (Benguet) was
not a corporation within the purview of the laws prohibiting a mining
corporation from becoming interested in another mining corporation (Harden
vs. Benguet Mining Corp., 58 Phil., p. 149). Even in the present proceedings,
Benguet has urged its right to amend its original articles of association as
sociedad anonima and extend its life as such under the provisions of the
Spanish Code of Commerce. Such appeals to privileges as sociedad
anonima under the Code of 1886 necessarily imply that Benguet has
rejected the alternative of reforming under the Corporation Law.
As Respondent Commissioners order, now under appeal, has stated
A sociedad anonima could not claim the benefit of both, but must have to
choose one and discard the other. If it elected to become a corporation it
could not continue as a sociedad anonima; chan roblesvirtualawlibraryand if
it choose to remain as a sociedad anonima, it could not become a
corporation.
Having thus made its choice, Benguet may not now go back and seek to
change its position and adopt the reformation that it had formerly repudiated.
The election of one of several alternatives is irrevocable once made (as now
expressly recognized in article 940 of the new Civil Code of the
Philippines):chanroblesvirtuallawlibrary such rule is inherent in the nature of
the choice, its purpose being to clarify and render definite the rights of the
one exercising the option, so that other persons may act in consequence.
While successive choices may be provided there is nothing in section 75 of
the Corporation Law to show or hint that a sociedad anonima may make
more than one choice thereunder, since only one option is provided for.
While no express period of time is fixed by the law within which sociedades
anonimas may elect under section 75 of Act No. 1459 either to reform or to
retain their status quo, there are powerful reasons to conclude that the
legislature intended such choice to be made within a reasonable time from
the effectivity of the Act. To enable a sociedad anonima to choose
reformation when its stipulated period of existence is nearly ended, would be
to allow it to enjoy a term of existence far longer than that granted to
corporations organized under the Corporation Law; chan
roblesvirtualawlibraryin Benguets case, 50 years as sociedad anonima, and
another 50 years as an American type of corporation under Act 1459; chan
roblesvirtualawlibrarya result incompatible with the avowed purpose of the
Act to hasten the disappearance of the sociedades anonimas. Moreover,
such belated election, if permitted, would enable sociedades anonimas to
reap the full advantage of both types of organization. Finally, it would permit
sociedades anonimas to prolong their corporate existence indirectly by
belated reformation into corporations under Act No. 1459, when they could
not do so directly by amending their articles of association.
Much stress is laid upon allegedly improper motives on the part of the
intervenor, Consolidated Mines, Inc., in supporting the orders appealed from,
on the ground that intervenor seeks to terminate Benguets operating
contract and appropriate the profits that are the result of Benguets efforts in
developing the mines of the intervenor. Suffice it to say that whatever such
motives should be, they are wholly irrelevant to the issues in this appeal, that
exclusively concern the legal soundness of the order of
the Respondent Securities and Exchange Commissioner rejecting the claims
of the Benguet Consolidated Mining Company to extend its corporate life.
Neither are we impressed by the prophesies of economic chaos that would
allegedly ensure with the cessation of Benguets activities. If its mining
properties are really susceptible of profitable operation, inexorable economic
laws will ensure their exploitation; chan roblesvirtualawlibraryif, on the other
hand, they can no longer be worked at a profit, then catastrophe becomes
inevitable, whether or not Petitioner Benguet retains corporate existence.
232
Sustaining the opinions of the Respondent Securities and Exchange
Commissioner and of the Secretary of Justice, we rule
that:chanroblesvirtuallawlibrary

(1) The prohibition contained in section 18 of Act No. 1459, against

extending the period of corporate existence by amendment of the original
articles, was intended to apply, and does apply, to sociedades anonimas
already formed, organized and existing at the time of the effectivity of the
Corporation Law (Act No. 1459) in 1906;

(2) The statutory prohibition is valid and impairs no vested rights or

constitutional inhibition where no agreement to extend the original period of
corporate life was perfected before the enactment of the Corporation Law;

(3) A sociedad anonima, existing before the Corporation Law, that continues
to do business as such for a reasonable time after its enactments, is deemed
to have made its election and may not subsequently claim to reform into a
corporation under section 75 of Act No. 1459.

In view of the foregoing, the order appealed from is affirmed. Costs

against Petitioner-AppellantBenguet Consolidated Mining Company.

Padilla, Montemayor, Reyes, A. Labrador, Concepcion and

Endencia, JJ., concur.

233
G.R. No. 9321 September 24, 1914

NORBERTO ASUNCION, ET AL., petitioners-appellants,

vs.
MANUEL DE YRIARTE, respondent-appellee.

Modesto Reyes for appellants.

Attorney-General Villamor for appellee.

MORELAND, J.:

This is an action to obtain a writ of mandamus to compel the chief of the

division of achieves of the Executive Bureau to file a certain articles of
incorporation.

The chief of the division of archives, the respondent, refused to file the
articles of incorporation, hereinafter referred to, upon the ground that the
object of the corporation, as stated in the articles, was not lawful and that, in
pursuance of section 6 of Act No. 1459, they were not registerable.

234
The proposed incorporators began an action in the Court of First Instance of
the city of Manila to compel the chief of the division of archives to receive
and register said articles of incorporation and to do any and all acts
necessary for the complete incorporation of the persons named in the
articles. The court below found in favor of the defendant and refused to order
the registration of the articles mentioned, maintaining ad holding that the
defendant, under the Corporation Law, had authority to determine both the
sufficiency of the form of the articles and the legality of the object of the
proposed corporation. This appeal is taken from that judgment.
The first question that arises is whether or not the chief of the division of
archives has authority, under the Corporation for registration, to decide not
only as to the sufficiency of the form of the articles, but also as to the
lawfulness of the purpose of the proposed corporation.
It is strongly urged on the part of the appellants that the duties of the
defendant are purely ministerial and that he has no authority to pass upon
the lawfulness of the object for which the incorporators propose to organize.
No authorities are cited to support this proposition and we are of the opinion
that it is not sound.
Section 6 of the Corporation Law reads in part as follows:
Five or more persons, not exceeding fifteen, a majority of whom are
residents of the Philippine Islands, may form a private corporation for
any lawful purpose by filing with the division of archives, patents,
copyrights, and trademarks if the Executive Bureau articles of
incorporation duly executed and acknowledged before a notary
public, . . . .
Simply because the duties of an official happens to be ministerial, it does not
necessarily follow that he may not, in the administration of his office,
determine questions of law. We are of the opinion that it is the duty of the
division of archives, when articles of incorporation are presented for
registration, to determine whether the objects of the corporation as
expressed in the articles are lawful. We do not believe that, simply because
articles of incorporation presented foe registration are perfect in form, the
division of archives must accept and register them and issue the
corresponding certificate of incorporation no matter what the purpose of the
corporation may be as expressed in the articles. We do not believe it was
intended that the division of archives should issue a certificate of
incorporation to, and thereby put the seal of approval of the Government
upon, a corporation which was organized for base of immoral purposes. That
such corporation might later, if it sought to carry out such purposes, be
dissolved, or its officials imprisoned or itself heavily fined furnished no reason
why it should have been created in the first instance. It seems to us to be not
only the right but the duty of the divisions of archives to determine the
lawfulness of the objects and purposes of the corporation before it issues a
certificate of incorporation.
It having determined that the division of archives, through its officials, has
authority to determine not only the sufficiency as to form of the articles of
incorporation offered for registration, but also the lawfulness of the purposes
of leads us to the determination of the question whether or not the chief of
the division of archives, who is the representative thereof and clothed by it
with authority to deal subject to mandamus in the performance of his duties.
We are of the opinion that he may be mandamused if he act in violation of
law or if he refuses, unduly, to comply with the law. While we have held that
defendant has power to pass upon the lawfulness of the purposes of the
proposed corporation and that he may, in the fulfillment of his duties,
determine the question of law whether or not those purposes are lawful and
embraced within that class concerning which the law permits corporations to
be formed, that does not necessarily mean, as we have already intimated,
that his duties are not ministerial. On the contrary, there is no incompatibility
in holding, as we do hold, that his duties are ministerial and that he has no
authority to exercise discretion in receiving and registering articles of
incorporation. He may exercise judgment that is, the judicial function in
the determination of the question of law referred to, but he may not use
discretion. The question whether or not the objects of a proposed corporation
are lawful is one that can be decided one way only. If he err in the
determination of that question and refuse to file articles which should be filed
under the law, the decision is subject to review and correction and, upon
235
proper showing, he will be ordered to file the articles. This is the same kind of
determination which a court makes when it decides a case upon the merits,
the court makes when it decides a case upon the merits. When a case is
presented to a court upon the merits, the court can decide only one way and
be right. As a matter of law, there is only one way and be right. As a matter of
law, there is only one course to pursue. In a case where the court or other
official has discretion in the resolution of a question, then, within certain
limitations, he may decide the question either way and still be right.
Discretion, it may be said generally, is a faculty conferred upon a court or
other official by which he may decide a question either way and still be right.
The power conferred upon the division of archives with respect to the
registration of articles of incorporation is not of that character. It is of the
same character as the determination of a lawsuit by a court upon the merits.
It can be decided only one way correctly.
If, therefore, the defendant erred in determining the question presented when
the articles were offered for registration, then that error will be corrected by
this court in this action and he will be compelled to register the articles as
offered. If, however, he did not commit an error, but decided that question
correctly, then, of course, his action will be affirmed to the extent that we will
deny the relief prayed for.
The next question leads us to the determination of whether or not the
purposes of the corporation as stated in the articles of incorporation are
lawful within the meaning of the Corporation Law.
The purpose of the incorporation as stated in the articles is: "That the object
of the corporation is (a) to organize and regulate the management,
disposition, administration and control which the barrio of Pulo or San Miguel
or its inhabitants or residents have over the common property of said
residents or inhabitants or property belonging to the whole barrio as such;
and (b) to use the natural products of the said property for institutions,
foundations, and charitable works of common utility and advantage to the
barrio or its inhabitants."
The municipality of Pasig as recognized by law contains within its limits
several barrios or small settlements, like Pulo or San Miguel, which have no
local government of their own but are governed by the municipality of Pasig
through its municipal president and council. The president and members of
the municipal council are elected by a general vote of the municipality, the
qualified electors of all the barrios having the right to participate.
The municipality of Pasig is a municipal corporation organized by law. It has
the control of all property of the municipality. The various barrios of the
municipality have no right to own or hold property, they not being recognized
as legal entities by any law. The residents of the barrios participate in the
advantages which accrue to the municipality from public property and receive
all the benefits incident to residence in a municipality organized by law. If
there is any public property situated in the barrio of Pulo or San Miguel not
belonging to the general government or the province, it belongs to the
municipality of Pasig and the sole authority to manage and administer the
same resides in that municipality. Until the present laws upon the subject are
charged no other entity can be the owner of such property or control or
administer it.
The object of the proposed corporation, as appears from the articles offered
for registration, is to make of the barrio of Pulo or San Miguel a corporation
which will become the owner of and have the right to control and administer
any property belonging to the municipality of Pasig found within the limits of
that barrio. This clearly cannot be permitted. Otherwise municipalities as now
established by law could be deprived of the property which they now own
and administer. Each barrio of the municipality would become under the
scheme proposed, a separate corporation, would take over the ownership,
administration, and control of that portion of the municipal territory within its
limits. This would disrupt, in a sense, the municipalities of the Islands by
dividing them into a series of smaller municipalities entirely independent of
the original municipality.
What the law does not permit cannot be obtained by indirection. The object
of the proposed corporation is clearly repugnant to the provisions of the
Municipal Code and the governments of municipalities as they have been
organized thereunder. (Act No. 82, Philippine Commission.)
236
The judgment appealed from is affirmed, with costs against appellants. G.R. No. 117188 August 7, 1997

Arellano, C.J., Torres, Johnson, Carson and Araullo, JJ., concur. LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION,
INC., petitioner,
vs.
HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY
CORPORATION, EMDEN ENCARNACION and HORATIO
AYCARDO, respondents.

ROMERO, J.:

May the failure of a corporation to file its by-laws within one month from the
date of its incorporation, as mandated by Section 46 of the Corporation
Code, result in its automatic dissolution?

This is the issue raised in this petition for review on certiorari of the
Decision 1 of the Court of Appeals affirming the decision of the Home
Insurance and Guaranty Corporation (HIGC). This quasi-judicial body
recognized Loyola Grand Villas Homeowners Association (LGVHA) as the
sole homeowners' association in Loyola Grand Villas, a duly registered
subdivision in Quezon City and Marikina City that was owned and developed
by Solid Homes, Inc. It revoked the certificates of registration issued to
Loyola Grand Villas homeowners (North) Association Incorporated (the North
Association for brevity) and Loyola Grand Villas Homeowners (South)
Association Incorporated (the South Association).

LGVHAI was organized on February 8, 1983 as the association of

homeowners and residents of the Loyola Grand Villas. It was registered with
the Home Financing Corporation, the predecessor of herein respondent
HIGC, as the sole homeowners' organization in the said subdivision under
Certificate of Registration No. 04-197. It was organized by the developer of
the subdivision and its first president was Victorio V. Soliven, himself the
owner of the developer. For unknown reasons, however, LGVHAI did not file
its corporate by-laws.

237
Sometime in 1988, the officers of the LGVHAI tried to register its by-laws.
They failed to do so. 2 To the officers' consternation, they discovered that
there were two other organizations within the subdivision the North
Association and the South Association. According to private respondents, a
non-resident and Soliven himself, respectively headed these associations.
They also discovered that these associations had five (5) registered
homeowners each who were also the incorporators, directors and officers
thereof. None of the members of the LGVHAI was listed as member of the
North Association while three (3) members of LGVHAI were listed as
members of the South Association. 3 The North Association was registered
with the HIGC on February 13, 1989 under Certificate of Registration No. 04-
1160 covering Phases West II, East III, West III and East IV. It submitted its
by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the status of LGVHAI, Atty.
Joaquin A. Bautista, the head of the legal department of the HIGC, informed
him that LGVHAI had been automatically dissolved for two reasons. First, it
did not submit its by-laws within the period required by the Corporation Code
and, second, there was non-user of corporate charter because HIGC had not
received any report on the association's activities. Apparently, this
information resulted in the registration of the South Association with the
HIGC on July 27, 1989 covering Phases West I, East I and East II. It filed its
by-laws on July 26, 1989.
These developments prompted the officers of the LGVHAI to lodge a
complaint with the HIGC. They questioned the revocation of LGVHAI's
certificate of registration without due notice and hearing and concomitantly
prayed for the cancellation of the certificates of registration of the North and
South Associations by reason of the earlier issuance of a certificate of
registration in favor of LGVHAI.
On January 26, 1993, after due notice and hearing, private respondents
obtained a favorable ruling from HIGC Hearing Officer Danilo C. Javier who
disposed of HIGC Case No. RRM-5-89 as follows:
WHEREFORE, judgment is hereby rendered recognizing the Loyola
Grand Villas Homeowners Association, Inc., under Certificate of
Registration No. 04-197 as the duly registered and existing
homeowners association for Loyola Grand Villas homeowners, and
declaring the Certificates of Registration of Loyola Grand Villas
Homeowners (North) Association, Inc. and Loyola Grand Villas
Homeowners (South) Association, Inc. as hereby revoked or
cancelled; that the receivership be terminated and the Receiver is
hereby ordered to render an accounting and turn-over to Loyola
Grand Villas Homeowners Association, Inc., all assets and records of
the Association now under his custody and possession.
The South Association appealed to the Appeals Board of the HIGC. In its
Resolution of September 8, 1993, the Board 4 dismissed the appeal for lack
of merit.
Rebuffed, the South Association in turn appealed to the Court of Appeals,
raising two issues. First, whether or not LGVHAI's failure to file its by-laws
within the period prescribed by Section 46 of the Corporation Code resulted
in the automatic dissolution of LGVHAI. Second, whether or not two
homeowners' associations may be authorized by the HIGC in one "sprawling
subdivision." However, in the Decision of August 23, 1994 being assailed
here, the Court of Appeals affirmed the Resolution of the HIGC Appeals
Board.
In resolving the first issue, the Court of Appeals held that under the
Corporation Code, a private corporation commences to have corporate
existence and juridical personality from the date the Securities and Exchange
Commission (SEC) issues a certificate of incorporation under its official seal.
The requirement for the filing of by-laws under Section 46 of the Corporation
Code within one month from official notice of the issuance of the certificate of
incorporation presupposes that it is already incorporated, although it may file
its by-laws with its articles of incorporation. Elucidating on the effect of a
delayed filing of by-laws, the Court of Appeals said:
238
 We also find nothing in the provisions cited by the petitioner, i.e.,
Section 46 and 22, Corporation Code, or in any other provision of the
Code and other laws which provide or at least imply that failure to file
the by-laws results in an automatic dissolution of the corporation.
While Section 46, in prescribing that by-laws must be adopted within
the period prescribed therein, may be interpreted as a mandatory
provision, particularly because of the use of the word "must," its
meaning cannot be stretched to support the argument that automatic
dissolution results from non-compliance.
We realize that Section 46 or other provisions of the Corporation
Code are silent on the result of the failure to adopt and file the by-
laws within the required period. Thus, Section 46 and other related
provisions of the Corporation Code are to be construed with Section
6 (1) of P.D. 902-A. This section empowers the SEC to suspend or
revoke certificates of registration on the grounds listed therein.
Among the grounds stated is the failure to file by-laws (see also II
Campos: The Corporation Code, 1990 ed., pp. 124-125). Such
suspension or revocation, the same section provides, should be
made upon proper notice and hearing. Although P.D. 902-A refers to
the SEC, the same principles and procedures apply to the public
respondent HIGC as it exercises its power to revoke or suspend the
certificates of registration or homeowners association. (Section 2 [a],
E.O. 535, series 1979, transferred the powers and authorities of the
SEC over homeowners associations to the HIGC.)
We also do not agree with the petitioner's interpretation that Section
46, Corporation Code prevails over Section 6, P.D. 902-A and that
the latter is invalid because it contravenes the former. There is no
basis for such interpretation considering that these two provisions
are not inconsistent with each other. They are, in fact,
complementary to each other so that one cannot be considered as
invalidating the other.
The Court of Appeals added that, as there was no showing that the
registration of LGVHAI had been validly revoked, it continued to be the duly
registered homeowners' association in the Loyola Grand Villas. More
importantly, the South Association did not dispute the fact that LGVHAI had
been organized and that, thereafter, it transacted business within the period
prescribed by law.
On the second issue, the Court of Appeals reiterated its previous ruling 5 that
the HIGC has the authority to order the holding of a referendum to determine
which of two contending associations should represent the entire community,
village or subdivision.
Undaunted, the South Association filed the instant petition for review
on certiorari. It elevates as sole issue for resolution the first issue it had
raised before the Court of Appeals, i.e., whether or not the LGVHAI's failure
to file its by-laws within the period prescribed by Section 46 of the
Corporation Code had the effect of automatically dissolving the said
corporation.
Petitioner contends that, since Section 46 uses the word "must" with respect
to the filing of by-laws, noncompliance therewith would result in "self-
extinction" either due to non-occurrence of a suspensive condition or the
occurrence of a resolutory condition "under the hypothesis that (by) the
issuance of the certificate of registration alone the corporate personality is
deemed already formed." It asserts that the Corporation Code provides for a
"gradation of violations of requirements." Hence, Section 22 mandates that
the corporation must be formally organized and should commence
transaction within two years from date of incorporation. Otherwise, the
corporation would be deemed dissolved. On the other hand, if the
corporation commences operations but becomes continuously inoperative for
five years, then it may be suspended or its corporate franchise revoked.
Petitioner concedes that Section 46 and the other provisions of the
Corporation Code do not provide for sanctions for non-filing of the by-laws.
However, it insists that no sanction need be provided "because the
mandatory nature of the provision is so clear that there can be no doubt
about its being an essential attribute of corporate birth." To petitioner, its
submission is buttressed by the facts that the period for compliance is
"spelled out distinctly;" that the certification of the SEC/HIGC must show that
239
the by-laws are not inconsistent with the Code, and that a copy of the by-
laws "has to be attached to the articles of incorporation." Moreover, no
sanction is provided for because "in the first place, no corporate identity has
been completed." Petitioner asserts that "non-provision for remedy or
sanction is itself the tacit proclamation that non-compliance is fatal and no
corporate existence had yet evolved," and therefore, there was "no need to
proclaim its demise." 6 In a bid to convince the Court of its arguments,
petitioner stresses that:
. . . the word MUST is used in Sec. 46 in its universal literal meaning
and corollary human implication its compulsion is integrated in its
very essence MUST is always enforceable by the inevitable
consequence that is, "OR ELSE". The use of the word MUST in
Sec. 46 is no exception it means file the by-laws within one month
after notice of issuance of certificate of registration OR ELSE.
The OR ELSE, though not specified, is inextricably a part of MUST .
Do this or if you do not you are "Kaput". The importance of the by-
laws to corporate existence compels such meaning for as decreed
the by-laws is "the government" of the corporation. Indeed, how can
the corporation do any lawful act as such without by-laws. Surely, no
law is indeed to create chaos. 7
Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of
the Corporation Code which itself does not provide sanctions for non-filing of
by-laws. For the petitioner, it is "not proper to assess the true meaning of
Sec. 46 . . . on an unauthorized provision on such matter contained in the
said decree."
In their comment on the petition, private respondents counter that the
requirement of adoption of by-laws is not mandatory. They point to P.D. No.
902-A as having resolved the issue of whether said requirement is mandatory
or merely directory. Citing Chung Ka Bio v. Intermediate Appellate
Court, 8 private respondents contend that Section 6(I) of that decree provides
that non-filing of by-laws is only a ground for suspension or revocation of the
certificate of registration of corporations and, therefore, it may not result in
automatic dissolution of the corporation. Moreover, the adoption and filing of
by-laws is a condition subsequent which does not affect the corporate
personality of a corporation like the LGVHAI. This is so because Section 9 of
the Corporation Code provides that the corporate existence and juridical
personality of a corporation begins from the date the SEC issues a certificate
of incorporation under its official seal. Consequently, even if the by-laws have
not yet been filed, a corporation may be considered a de facto corporation.
To emphasize the fact the LGVHAI was registered as the sole homeowners'
association in the Loyola Grand Villas, private respondents point out that
membership in the LGVHAI was an "unconditional restriction in the deeds of
sale signed by lot buyers."
In its reply to private respondents' comment on the petition, petitioner
reiterates its argument that the word " must" in Section 46 of the Corporation
Code is mandatory. It adds that, before the ruling in Chung Ka Bio
v.Intermediate Appellate Court could be applied to this case, this Court must
first resolve the issue of whether or not the provisions of P.D. No. 902-A
prescribing the rules and regulations to implement the Corporation Code can
"rise above and change" the substantive provisions of the Code.
The pertinent provision of the Corporation Code that is the focal point of
controversy in this case states:
Sec. 46. Adoption of by-laws. Every corporation formed under this
Code, must within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government
not inconsistent with this Code. For the adoption of by-laws by the
corporation, the affirmative vote of the stockholders representing at
least a majority of the outstanding capital stock, or of at least a
majority of the members, in the case of non-stock corporations, shall
be necessary. The by-laws shall be signed by the stockholders or
members voting for them and shall be kept in the principal office of
the corporation, subject to the stockholders or members voting for
them and shall be kept in the principal office of the corporation,
subject to inspection of the stockholders or members during office
hours; and a copy thereof, shall be filed with the Securities and
Exchange Commission which shall be attached to the original
articles of incorporation.
240
 Notwithstanding the provisions of the preceding paragraph, by-laws
may be adopted and filed prior to incorporation; in such case, such
by-laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with
the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-
laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing
the by-laws or any amendment thereto of any bank, banking
institution, building and loan association, trust company, insurance
company, public utility, educational institution or other special
corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that
such by-laws or amendments are in accordance with law.
As correctly postulated by the petitioner, interpretation of this provision of law
begins with the determination of the meaning and import of the word "must"
in this section Ordinarily, the word "must" connotes an imperative act or
operates to impose a duty which may be enforced. 9 It is synonymous with
"ought" which connotes compulsion or mandatoriness. 10 However, the word
"must" in a statute, like "shall," is not always imperative. It may be consistent
with an exercise of discretion. In this jurisdiction, the tendency has been to
interpret "shall" as the context or a reasonable construction of the statute in
which it is used demands or requires. 11 This is equally true as regards the
word "must." Thus, if the languages of a statute considered as a whole and
with due regard to its nature and object reveals that the legislature intended
to use the words "shall" and "must" to be directory, they should be given that
meaning. 12
In this respect, the following portions of the deliberations of the Batasang
Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we made to
understand here, Mr. Speaker, that by-laws must immediately be
filed within one month after the issuance? In other words, would this
be mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would
be the effect of the failure of the corporation to file these by-laws
within one month?
MR. MENDOZA. There is a provision in the latter part of the Code
which identifies and describes the consequences of violations of any
provision of this Code. One such consequences is the dissolution of
the corporation for its inability, or perhaps, incurring certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a
dissolution of the corporation by merely failing to file the by-laws
within one month. Supposing the corporation was late, say, five days,
what would be the mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the
automatic or ipso facto dissolution of the corporation. Perhaps, as in
the case, as you suggested, in the case of El Hogar Filipino where
a quo warranto action is brought, one takes into account the gravity
of the violation committed. If the by-laws were late the filing of the
by-laws were late by, perhaps, a day or two, I would suppose that
might be a tolerable delay, but if they are delayed over a period of
months as is happening now because of the absence of a clear
requirement that by-laws must be completed within a specified
period of time, the corporation must suffer certain consequences. 13
This exchange of views demonstrates clearly that automatic corporate
dissolution for failure to file the by-laws on time was never the intention of the
legislature. Moreover, even without resorting to the records of deliberations of
241
the Batasang Pambansa, the law itself provides the answer to the issue
propounded by petitioner.
Taken as a whole and under the principle that the best interpreter of a statute
is the statute itself (optima statuli interpretatix est ipsum statutum), 14 Section
46 aforequoted reveals the legislative intent to attach a directory, and not
mandatory, meaning for the word "must" in the first sentence thereof. Note
should be taken of the second paragraph of the law which allows the filing of
the by-laws even prior to incorporation. This provision in the same section of
the Code rules out mandatory compliance with the requirement of filing the
by-laws "within one (1) month after receipt of official notice of the issuance of
its certificate of incorporation by the Securities and Exchange Commission."
It necessarily follows that failure to file the by-laws within that period does not
imply the "demise" of the corporation. By-laws may be necessary for the
"government" of the corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related
statutes. 15 There are in fact cases where by-laws are unnecessary to
corporate existence or to the valid exercise of corporate powers, thus:
In the absence of charter or statutory provisions to the contrary, by-
laws are not necessary either to the existence of a corporation or to
the valid exercise of the powers conferred upon it, certainly in all
cases where the charter sufficiently provides for the government of
the body; and even where the governing statute in express terms
confers upon the corporation the power to adopt by-laws, the failure
to exercise the power will be ascribed to mere nonaction which will
not render void any acts of the corporation which would otherwise be
valid. 16 (Emphasis supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule of its
life, and that until by-laws have been adopted the corporation may
not be able to act for the purposes of its creation, and that the first
and most important duty of the members is to adopt them. This
would seem to follow as a matter of principle from the office and
functions of by-laws. Viewed in this light, the adoption of by-laws is a
matter of practical, if not one of legal, necessity. Moreover, the
peculiar circumstances attending the formation of a corporation may
impose the obligation to adopt certain by-laws, as in the case of a
close corporation organized for specific purposes. And the statute or
general laws from which the corporation derives its corporate
existence may expressly require it to make and adopt by-laws and
specify to some extent what they shall contain and the manner of
their adoption. The mere fact, however, of the existence of power in
the corporation to adopt by-laws does not ordinarily and of necessity
make the exercise of such power essential to its corporate life, or to
the validity of any of its acts. 17
Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within
the period provided for in Section 46. However, such omission has been
rectified by Presidential Decree No. 902-A, the pertinent provisions on the
jurisdiction of the SEC of which state:
Sec. 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
xxx xxx xxx
(1) To suspend, or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law, including the
following:
xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx
242
 In the exercise of the foregoing authority and jurisdiction of the
Commission or by a Commissioner or by such other bodies, boards,
committees and/or any officer as may be created or designated by
the Commission for the purpose. The decision, ruling or order of any
such Commissioner, bodies, boards, committees and/or officer may
be appealed to the Commission sitting en banc within thirty (30) days
after receipt by the appellant of notice of such decision, ruling or
order. The Commission shall promulgate rules of procedures to
govern the proceedings, hearings and appeals of cases falling with
its jurisdiction.
The aggrieved party may appeal the order, decision or ruling of the
Commission sitting en banc to the Supreme Court by petition for
review in accordance with the pertinent provisions of the Rules of
Court.
Even under the foregoing express grant of power and authority, there can be
no automatic corporate dissolutionsimply because the incorporators failed to
abide by the required filing of by-laws embodied in Section 46 of the
Corporation Code. There is no outright "demise" of corporate existence.
Proper notice and hearing are cardinal components of due process in any
democratic institution, agency or society. In other words, the incorporators
must be given the chance to explain their neglect or omission and remedy
the same.
That the failure to file by-laws is not provided for by the Corporation Code but
in another law is of no moment. P.D. No. 902-A, which took effect
immediately after its promulgation on March 11, 1976, is very much apposite
to the Code. Accordingly, the provisions abovequoted supply the law
governing the situation in the case at bar, inasmuch as the Corporation Code
and P.D. No. 902-A are statutes in pari materia. Interpretare et concordare
legibus est optimus interpretandi. Every statute must be so construed and
harmonized with other statutes as to form a uniform system of
jurisprudence. 18
As the "rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its
stockholders or members and directors and officers with relation thereto and
among themselves in their relation to it," 19 by-laws are indispensable to
corporations in this jurisdiction. These may not be essential to corporate birth
but certainly, these are required by law for an orderly governance and
management of corporations. Nonetheless, failure to file them within the
period required by law by no means tolls the automatic dissolution of a
corporation.
In this regard, private respondents are correct in relying on the
pronouncements of this Court in Chung Ka Bio v.Intermediate Appellate
Court, 20 as follows:
. . . . Moreover, failure to file the by-laws does not automatically
operate to dissolve a corporation but is now considered only a
ground for such dissolution.
Section 19 of the Corporation Law, part of which is now Section 22 of
the Corporation Code, provided that the powers of the corporation
would cease if it did not formally organize and commence the
transaction of its business or the continuation of its works within two
years from date of its incorporation. Section 20, which has been
reproduced with some modifications in Section 46 of the Corporation
Code, expressly declared that "every corporation formed under this
Act, must within one month after the filing of the articles of
incorporation with the Securities and Exchange Commission, adopt a
code of by-laws." Whether this provision should be given mandatory
or only directory effect remained a controversial question until it
became academic with the adoption of PD 902-A. Under this decree,
it is now clear that the failure to file by-laws within the required period
is only a ground for suspension or revocation of the certificate of
registration of corporations.
Non-filing of the by-laws will not result in automatic dissolution of the
corporation. Under Section 6(I) of PD 902-A, the SEC is empowered
243
 to "suspend or revoke, after proper notice and hearing, the franchise SO ORDERED.
or certificate of registration of a corporation" on the ground inter
alia of "failure to file by-laws within the required period." It is clear Regalado, Puno and Mendoza, JJ., concur.
from this provision that there must first of all be a hearing to
determine the existence of the ground, and secondly, assuming such Torres, Jr., J., is on leave.
finding, the penalty is not necessarily revocation but may be only
suspension of the charter. In fact, under the rules and regulations of
the SEC, failure to file the by-laws on time may be penalized merely
with the imposition of an administrative fine without affecting the
corporate existence of the erring firm.

It should be stressed in this connection that substantial compliance

with conditions subsequent will suffice to perfect corporate
personality. Organization and commencement of transaction of
corporate business are but conditions subsequent and not
prerequisites for acquisition of corporate personality. The adoption
and filing of by-laws is also a condition subsequent. Under Section
19 of the Corporation Code, a Corporation commences its corporate
existence and juridical personality and is deemed incorporated from
the date the Securities and Exchange Commission issues certificate
of incorporation under its official seal. This may be done even before
the filing of the by-laws, which under Section 46 of the Corporation
Code, must be adopted "within one month after receipt of official
notice of the issuance of its certificate of incorporation." 21

That the corporation involved herein is under the supervision of the HIGC
does not alter the result of this case. The HIGC has taken over the
specialized functions of the former Home Financing Corporation by virtue of
Executive Order No. 90 dated December 17, 1989. 22 With respect to
homeowners associations, the HIGC shall "exercise all the powers,
authorities and responsibilities that are vested on the Securities and
Exchange Commission . . . , the provision of Act 1459, as amended by P.D.
902-A, to the contrary notwithstanding." 23

WHEREFORE, the instant petition for review on certiorari is hereby DENIED

and the questioned Decision of the Court of Appeals AFFIRMED. This
Decision is immediately executory. Costs against petitioner.

244
[G.R. No. 121466. August 15, 1997]

PMI COLLEGES, petitioner, vs. THE NATIONAL LABOR RELATIONS

COMMISSION and ALEJANDRO GALVAN, respondents.

DECISION

245
ROMERO, J.:
Subject of the instant petition for certiorari under Rule 65 of the Rules of
Court is the resolution[1] of public respondent National Labor Relations
Commission[2] rendered on August 4, 1995, affirming in toto the December 7,
1994 decision[3] of Labor Arbiter Pablo C. Espiritu declaring petitioner PMI
Colleges liable to pay private respondent Alejandro Galvan P405,000.00 in
unpaid wages and P40,532.00 as attorneys fees.
A chronicle of the pertinent events on record leading to the filing of the
instant petition is as follows:
On July 7, 1991, petitioner, an educational institution offering courses on
basic seamans training and other marine-related courses, hired private
respondent as contractual instructor with an agreement that the latter shall
be paid at an hourly rate of P30.00 to P50.00, depending on the description
of load subjects and on the schedule for teaching the same. Pursuant to this
engagement, private respondent then organized classes in marine
engineering.
Initially, private respondent and other instructors were compensated for
services rendered during the first three periods of the abovementioned
contract. However, for reasons unknown to private respondent, he stopped
receiving payment for the succeeding rendition of services. This claim of non-
payment was embodied in a letter dated March 3, 1992, written by petitioners
Acting Director, Casimiro A. Aguinaldo, addressed to its President, Atty.
Santiago Pastor, calling attention to and appealing for the early approval and
release of the salaries of its instructors including that of private respondent. It
appeared further in said letter that the salary of private respondent
corresponding to the shipyard and plant visits and the ongoing on-the-job
training of Class 41 on board MV Sweet Glory of Sweet Lines, Inc. was not
yet included. This request of the Acting Director apparently went
unheeded. Repeated demands having likewise failed, private respondent
was soon constrained to file a complaint[4] before the National Capital Region
Arbitration Branch on September 14, 1993 seeking payment for salaries
earned from the following: (1) basic seaman course Classes 41 and 42 for
the period covering October 1991 to September 1992; (2) shipyard and plant
visits and on-the-job training of Classes 41 and 42 for the period covering
October 1991 to September 1992 on board M/V Sweet Glory vessel; and (3)
as Acting Director of Seaman Training Course for 3-1/2 months.
In support of the abovementioned claims, private respondent submitted
documentary evidence which were annexed to his complaint, such as the
detailed load and schedule of classes with number of class hours and rate
per hour (Annex A); PMI Colleges Basic Seaman Training Course (Annex B);
the aforementioned letter-request for payment of salaries by the Acting
Director of PMI Colleges (Annex C); unpaid load of private respondent
(Annex D); and vouchers prepared by the accounting department of
petitioner but whose amounts indicated therein were actually never paid to
private respondent (Exhibit E).
Private respondents claims, as expected, were resisted by petitioner. It
alleged that classes in the courses offered which complainant claimed to
have remained unpaid were not held or conducted in the school premises of
PMI Colleges. Only private respondent, it was argued, knew whether classes
were indeed conducted. In the same vein, petitioner maintained that it
exercised no appropriate and proper supervision of the said classes which
activities allegedly violated certain rules and regulations of the Department of
Education, Culture and Sports (DECS). Furthermore, the claims, according to
petitioner, were all exaggerated and that, at any rate, private respondent
abandoned his work at the time he should have commenced the same.
In reply, private respondent belied petitioners allegations contending,
among others, that he conducted lectures within the premises of petitioners
rented space located at 5th Floor, Manufacturers Bldg., Sta. Cruz, Manila;
that his students duly enrolled with the Registrars Office of petitioner; that
shipyard and plant visits were conducted at Fort San Felipe, Cavite Naval
Base; that petitioner was fully aware of said shipyard and plant visits
because it even wrote a letter for that purpose; and that basic seaman
courses 41 and 42 were sanctioned by the DECS as shown by the records of
the Registrars Office.
246
 Later in the proceedings below, petitioner manifested that Mr. Tomas G.
Cloma, Jr., a member of the petitioners Board of Trustees wrote a letter [5] to
the Chairman of the Board on May 23, 1994, clarifying the case of private
respondent and stating therein, inter alia, that under petitioners by-laws only
the Chairman is authorized to sign any contract and that private respondent,
in any event, failed to submit documents on the alleged shipyard and plant
visits in Cavite Naval Base.
Attempts at amicable settlement having failed, the parties were required
to submit their respective position papers. Thereafter, on June 16, 1994, the
Labor Arbiter issued an order declaring the case submitted for decision on
the basis of the position papers which the parties filed. Petitioner, however,
vigorously opposed this order insisting that there should be a formal trial on
the merits in view of the important factual issues raised. In another order
dated July 22, 1994, the Labor Arbiter impliedly denied petitioners opposition,
reiterating that the case was already submitted for decision. Hence, a
decision was subsequently rendered by the Labor Arbiter on December 7,
1994 finding for the private respondent. On appeal, the NLRC affirmed the
same in toto in its decision of August 4, 1995.
Aggrieved, petitioner now pleads for the Court to resolve the following
issues in its favor, to wit:
I. Whether the money claims of private respondent representing
salaries/wages as contractual instructor for class instruction,
on-the-job training and shipboard and plant visits have valid
legal and factual bases;
II. Whether claims for salaries/wages for services relative to on-the-
job training and shipboard and plant visits by instructors,
assuming the same were really conducted, have valid bases;
III. Whether the petitioner was denied its right to procedural due
process; and
IV. Whether the NLRC findings in its questioned resolution have
sound legal and factual support.
We see no compelling reason to grant petitioners plea; the same must,
therefore, be dismissed.
At once, a mere perusal of the issues raised by petitioner already invites
dismissal for demonstrated ignorance and disregard of settled rules
on certiorari. Except perhaps for the third issue, the rest glaringly call for a re-
examination, evaluation and appreciation of the weight and sufficiency of
factual evidence presented before the Labor Arbiter. This, of course, the
Court cannot do in the exercise of its certiorari jurisdiction without
transgressing the well-defined limits thereof. The corrective power of the
Court in this regard is confined only to jurisdictional issues and a
determination of whether there is such grave abuse of discretion amounting
to lack or excess of jurisdiction on the part of a tribunal or agency. So
unyielding and consistent are the decisional rules thereon that it is indeed
surprising why petitioners counsel failed to accord them the observance they
deserve.
Thus, in San Miguel Foods, Inc. Cebu B-Meg Feed Plant v. Hon.
Bienvenido Laguesma,[6] we were emphatic in declaring that:
This Court is definitely not the proper venue to consider this matter for it
is not a trier of facts. x x x Certiorari is a remedy narrow in its scope and
inflexible in character. It is not a general utility tool in the legal
workshop. Factual issues are not a proper subject for certiorari, as the power
of the Supreme Court to review labor cases is limited to the issue of
jurisdiction and grave abuse of discretion. x x x (Emphasis supplied).
Of the same tenor was our disquisition in Ilocos Sur Electric
Cooperative, Inc. v. NLRC[7] where we made plain that:
In certiorari proceedings under Rule 65 of the Rules of Court, judicial review
by this Court does not go so far as to evaluate the sufficiency of evidence
upon which the Labor Arbiter and the NLRC based their determinations, the
247
inquiry being limited essentially to whether or not said public respondents
had acted without or in excess of its jurisdiction or with grave abuse of
discretion. (Emphasis supplied).
To be sure, this does not mean that the Court would disregard
altogether the evidence presented. We merely declare that the extent of
review of evidence we ordinarily provide in other cases is different when it is
a special civil action of certiorari. The latter commands us to merely
determine whether there is basis established on record to support the
findings of a tribunal and such findings meet the required quantum of proof,
which in this instance, is substantial evidence. Our deference to the expertise
acquired by quasi-judicial agencies and the limited scope granted to us in the
exercise of certiorari jurisdiction restrain us from going so far as to probe into
the correctness of a tribunals evaluation of evidence, unless there is palpable
mistake and complete disregard thereof in which case certiorari would be
proper. In plain terms, in certiorari proceedings, we are concerned with mere
errors of jurisdiction and not errors of judgment. Thus:
The rule is settled that the original and exclusive jurisdiction of this Court to
review a decision of respondent NLRC (or Executive Labor Arbiter as in this
case) in a petition for certiorari under Rule 65 does not normally include an
inquiry into the correctness of its evaluation of the evidence. Errors of
judgment, as distinguished from errors of jurisdiction, are not within the
province of a special civil action for certiorari, which is merely confined to
issues of jurisdiction or grave abuse of discretion. It is thus incumbent upon
petitioner to satisfactorily establish that respondent Commission or executive
labor arbiter acted capriciously and whimsically in total disregard of evidence
material to or even decisive of the controversy, in order that the extraordinary
writ of certiorari will lie. By grave abuse of discretion is meant such capricious
and whimsical exercise of judgment as is equivalent to lack of jurisdiction,
and it must be shown that the discretion was exercised arbitrarily or
despotically. For certiorari to lie there must be capricious, arbitrary and
whimsical exercise of power, the very antithesis of the judicial prerogative in
accordance with centuries of both civil law and common law traditions. [8]
The Court entertains no doubt that the foregoing doctrines apply with
equal force in the case at bar.
In any event, granting that we may have to delve into the facts and
evidence of the parties, we still find no puissant justification for us to adjudge
both the Labor Arbiters and NLRCs appreciation of such evidence as
indicative of any grave abuse of discretion.
First. Petitioner places so much emphasis on its argument that private
respondent did not produce a copy of the contract pursuant to which he
rendered services. This argument is, of course, puerile. The absence of such
copy does not in any manner negate the existence of a contract of
employment since (C)ontracts shall be obligatory, in whatever form they have
been entered into, provided all the essential requisites for their validity are
present.[9] The only exception to this rule is when the law requires that a
contract be in some form in order that it may be valid or enforceable, or that a
contract be proved in a certain way. However, there is no requirement under
the law that the contract of employment of the kind entered into by petitioner
with private respondent should be in any particular form. While it may have
been desirable for private respondent to have produced a copy of his
contract if one really exists, but the absence thereof, in any case, does not
militate against his claims inasmuch as:
No particular form of evidence is required to prove the existence of an
employer-employee relationship. Any competent and relevant evidence to
prove the relationship may be admitted. For, if only documentary evidence
would be required to show that relationship, no scheming employer would
ever be brought before the bar of justice, as no employer would wish to come
out with any trace of the illegality he has authored considering that it should
take much weightier proof to invalidate a written instrument. x x x [10]
At any rate, the vouchers prepared by petitioners own accounting
department and the letter-request of its Acting Director asking for payment of
private respondents services suffice to support a reasonable conclusion that
private respondent was employed with petitioner. How else could one explain
the fact that private respondent was supposed to be paid the amounts
mentioned in those documents if he were not employed? Petitioners
evidence is wanting in this respect while private respondent affirmatively
stated that the same arose out of his employment with petitioner. As between
the two, the latter is weightier inasmuch as we accord affirmative testimony
248
greater value than a negative one. For the foregoing reasons, we find it
difficult to agree with petitioners assertion that the absence of a copy of the
alleged contract should nullify private respondents claims.
Neither can we concede that such contract would be invalid just
because the signatory thereon was not the Chairman of the Board which
allegedly violated petitioners by-laws. Since by-laws operate merely as
internal rules among the stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they have knowledge of the
same.[11]No proof appears on record that private respondent ever knew
anything about the provisions of said by-laws. In fact, petitioner itself merely
asserts the same without even bothering to attach a copy or excerpt thereof
to show that there is such a provision. How can it now expect the Labor
Arbiter and the NLRC to believe it? That this allegation has never been
denied by private respondent does not necessarily signify admission of its
existence because technicalities of law and procedure and the rules
obtaining in the courts of law do not strictly apply to proceedings of this
nature.
Second. Petitioner bewails the fact that both the Labor Arbiter and the
NLRC accorded due weight to the documents prepared by private
respondent since they are said to be self-serving. Self-serving evidence is
not to be literally taken as evidence that serves ones selfish interest. [12] The
fact alone that most of the documents submitted in evidence by private
respondent were prepared by him does not make them self-serving since
they have been offered in the proceedings before the Labor Arbiter and that
ample opportunity was given to petitioner to rebut their veracity and
authenticity. Petitioner, however, opted to merely deny them which denial,
ironically, is actually what is considered self-serving evidence [13] and,
therefore, deserves scant consideration. In any event, any denial made by
petitioner cannot stand against the affirmative and fairly detailed manner by
which private respondent supported his claims, such as the places where he
conducted his classes, on-the-job training and shipyard and plant visits; the
rate he applied and the duration of said rendition of services; the fact that he
was indeed engaged as a contractual instructor by petitioner; and that part of
his services was not yet remunerated. These evidence, to reiterate, have
never been effectively refuted by petitioner.
Third. As regards the amounts demanded by private respondent, we
can only rely upon the evidence presented which, in this case, consists of the
computation of private respondent as well as the findings of both the Labor
Arbiter and the NLRC. Petitioner, it must be stressed, presented no
satisfactory proof to the contrary. Absent such proof, we are constrained to
rely upon private respondents otherwise straightforward explanation of his
claims.
Fourth. The absence of a formal hearing or trial before the Labor Arbiter
is no cause for petitioner to impute grave abuse of discretion. Whether to
conduct one or not depends on the sole discretion of the Labor Arbiter, taking
into account the position papers and supporting documents submitted by the
parties on every issue presented. If the Labor Arbiter, in his judgment, is
confident that he can rely on the documents before him, he cannot be faulted
for not conducting a formal trial anymore, unless it would appear that, in view
of the particular circumstances of a case, the documents, without more, are
really insufficient.
As applied to the instant case, we can understand why the Labor Arbiter
has opted not to proceed to trial, considering that private respondent, through
annexes to his position paper, has adequately established that, first of all, he
was an employee of petitioner; second, the nature and character of his
services, and finally, the amounts due him in consideration of his
services. Petitioner, it should be reiterated, failed to controvert them. Actually,
it offered only four documents later in the course of the proceedings. It has
only itself to blame if it did not attach its supporting evidence with its position
paper. It cannot now insist that there be a trial to give it an opportunity to
ventilate what it should have done earlier. Section 3, Rule V of the New
Rules of Procedure of the NLRC is very clear on the matter:
Section 3. x x x
These verified position papers x x x shall be accompanied by all supporting
documents including the affidavits of their respective witnesses which shall
take the place of the latters direct testimony. The parties shall thereafter not
be allowed to allege facts, or present evidence to prove facts, not referred to
249
and any cause or causes of action not included in the complaint or position
papers, affidavits and other documents. x x x (Emphasis supplied).
Thus, given the mandate of said rule, petitioner should have foreseen
that the Labor Arbiter, in view of the non-litigious nature of the proceedings
before it, might not proceed at all to trial. Petitioner cannot now be heard to
complain of lack of due process. The following is apropos:
The petitioners should not have assumed that after they submitted their
position papers, the Labor Arbiter would call for a formal trial or hearing. The
holding of a trial is discretionary on the Labor Arbiter, it is not a matter of right
of the parties, especially in this case, where the private respondents had
already presented their documentary evidence.
what it perceives to be complex factual issues. We rule that the Labor Arbiter
and the NLRC were not remiss in their duty to afford petitioner due
process. The essence of due process is merely that a party be afforded a
reasonable opportunity to be heard and to submit any evidence he may have
in support of his defense.[18]
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED for lack of merit while the resolution of the National Labor
Relations Commission dated August 4, 1995 is hereby AFFIRMED.
SO ORDERED.
Regalado, (Chairman), Puno, and Mendoza, JJ., concur.

xxx Torres, Jr., J., on leave.

The petitioners did ask in their position paper for a hearing to thresh out
some factual matters pertinent to their case. However, they had no right or
reason to assume that their request would be granted. The petitioners should
have attached to their position paper all the documents that would prove their
claim in case it was decided that no hearing should be conducted or was
necessary. In fact, the rules require that position papers shall be
accompanied by all supporting documents, including affidavits of witnesses
in lieu of their direct testimony.[14]

It must be noted that adequate opportunity was given to petitioner in the

presentation of its evidence, such as when the Labor Arbiter granted
petitioners Manifestation and Motion[15]dated July 22, 1994 allowing it to
submit four more documents. This opportunity notwithstanding, petitioner still
failed to fully proffer all its evidence which might help the Labor Arbiter in
resolving the issues. What it desired instead, as stated in its petition, [16] was
to require presentation of witnesses buttressed by relevant documents in
support thereof. But this is precisely the opportunity given to petitioner when
the Labor Arbiter granted its Motion and Manifestation. It should have
presented the documents it was proposing to submit. The affidavits of its
witnesses would have sufficed in lieu of their direct testimony[17] to clarify

250
 Bank of the Philippines (DBP) on January 3, 1962 in consideration of
the amount of P935,000.00. This mortgage was foreclosed. In the
foreclosure sale under Act No. 3135 held on October 25, 1974, the
said properties were awarded to Rosita Pea as highest bidder. A
certificate of sale was issued in her favor by the Senior Deputy
Sheriff of Pampanga, Edgardo A. Zabat, upon payment of the sum of
P128,000.00 to the Office of the Provincial Sheriff (Exh. 23). The
certificate of sale was registered on October 29, 1974 (Exh. G).

On November 19, 1974, the board of directors of PAMBUSCO,

through three (3) out of its five (5) directors, resolved to assign its
G.R. No. 91478 February 7, 1991 right of redemption over the aforesaid lots and authorized one of its
members, Atty. Joaquin Briones "to execute and sign a Deed of
ROSITA PEA petitioner, Assignment for and in behalf of PAMBUSCO in favor of any
vs. interested party . . ." (Exh. 24). Consequently, on March 18, 1975,
THE COURT OF APPEALS, SPOUSES RISING T. YAP and CATALINA Briones executed a Deed of Assignment of PAMBUSCO's
YAP, PAMPANGA BUS CO., INC., JESUS DOMINGO, JOAQUIN redemption right over the subject lots in favor of Marcelino Enriquez
BRIONES, SALVADOR BERNARDEZ, MARCELINO ENRIQUEZ and (Exh. 25). The latter then redeemed the said properties and a
EDGARDO A. ZABAT, respondents. certificate of redemption dated August 15, 1975 was issued in his
favor by Sheriff Zabat upon payment of the sum of one hundred forty
Cesar L. Villanueva for petitioner. thousand, four hundred seventy four pesos P140,474.00) to the
Martin N. Roque for private respondents. Office of the Provincial Sheriff of Pampanga (Exh. 26).

A day after the aforesaid certificate was issued, Enriquez executed a

deed of absolute sale of the subject properties in favor of plaintiffs-
appellants, the spouses Rising T. Yap and Catalina Lugue, for the
GANCAYCO, J.: sum of P140,000.00 (Exh. F).

The validity of the redemption of a foreclosed real property is the center of
this controversy.
The facts as found by the respondent court are not disputed.
A reading of the records shows that [Pampanga Bus Co.]
PAMBUSCO, original owners of the lots in question under TCT Nos.
4314, 4315 and 4316, mortgaged the same to the Development
On August 18, 1975, a levy on attachment in favor of Capitol Allied
Trading was entered as an additional encumbrance on TCT Nos.
4314, 4315 and 4316 and a Notice of a pending consulta was also
annotated on the same titles concerning the Allied Trading case
entitled Dante Gutierrez, et al. vs. PAMBUSCO (Civil Case No. 4310)
in which the registrability of the aforesaid lots in the name of the
spouses Yap was sought to be resolved (Exh. 20-F). The certificate
of sale issued by the Sheriff in favor of defendant Pea, the
resolution of the PAMBUSCO's board of directors assigning its

251
redemption rights to any interested party, the deed of assignment
PAMBUSCO executed in favor of Marcelino B. Enriquez, the
certificate of redemption issued by the Sheriff in favor of Enriquez as
well as the deed of absolute sale of the subject lots executed by
Enriquez in favor of the plaintiffs-appellants were all annotated on
the same certificates of title likewise on August 18, 1975. Also, on the
same date, the Office of the Provincial Sheriff of San Fernando,
Pampanga informed defendant-appellee by registered mail "that the
properties under TCT Nos. 4314, 4315 and 4316 . . . . were all
redeemed by Mr. Marcelino B. Enriquez on August 15,1975 . . . ;"
and that she may now get her money at the Sheriffs Office (Exh. J
and J-1).
On September 8, 1975, Pea wrote the Sheriff notifying him that the
redemption was not valid as it was made under a void deed of
assignment. She then requested the recall of the said redemption
and a restraint on any registration or transaction regarding the lots in
question (Exh. 27).
On Sept. 10, 1975, the CFI Branch III, Pampanga in the
aforementioned Civil Case No. 4310, entitled Dante Gutierrez, et al.
vs. PAMBUSCO, et al., ordered the Register of Deeds of
Pampanga . . . to desist from registering or noting in his registry of
property . . . any of the following documents under contract, until
further orders:
(a) Deed of Assignment dated March 18, 1975 executed by the
defendant Pampanga Bus Company in virtue of a resolution of its
Board of Directors in favor of defendant Marcelino Enriquez;
(b) A Certificate of Redemption issued by defendant Deputy Sheriff
Edgardo Zabat in favor of defendant Marcelino Enriquez dated
August 15, 1975;
(c) Deed of Sale dated August 16, 1975 executed by defendant
Marcelino Enriquez in favor of defendant Rising Yap. (Original
Record, p. 244)
On November 17, 1975, the Land Registration Commission opined
under LRC Resolution No. 1029 that "the levy on attachment in favor
of Capitol Allied Trading (represented by Dante Gutierrez) should be
carried over on the new title that would be issued in the name of
Rising Yap in the event that he is able to present the owner's
duplicates of the certificates of title herein involved" (Exh. G).
Meanwhile, defendant Pea, through counsel, wrote the Sheriff
asking for the execution of a deed of final sale in her favor on the
ground that "the one (1) year period of redemption has long elapsed
without any valid redemption having been exercised;" hence she "will
now refuse to receive the redemption money . . . (Exh. 28).
On Dec. 30, 1977, plaintiff Yap wrote defendant Pea asking
payment of back rentals in the amount of P42,750.00 "for the use
and occupancy of the land and house located at Sta. Lucia, San
Fernando, Pampanga," and informing her of an increase in monthly
rental to P2,000; otherwise, to vacate the premises or face an
eviction cum collection suit (Exh. D).
In the meantime, the subject lots, formerly under TCT Nos. 4314,
4315 and 4316 were registered on June 16, 1978 in the name of the
spouses Yap under TCT Nos. 148983-R, 148984-R and 148985-R,
with an annotation of a levy on attachment in favor of Capitol Allied
Trading. The LRC Resolution No. 1029 allowing the conditioned
registration of the subject lots in the name of the spouses Yap was
also annotated on TCT No. 4315 on June 16, 1978 and the notice of
a pending consulta noted thereon on August 18, 1975 was cancelled
on the same date.
252
 No Trial on the merits was held concerning Civil Case No. 4310. In
an order dated February 17, 1983, the case was dismissed without
prejudice.
Despite the foregoing, defendant-appellee Pea remained in
possession of the lots in question hence, the spouses Yap were
prompted to file the instant case. 1
The antecedents of the present petition are as follows:
Plaintiffs-appellants, the spouses Rising T. Yap and Catalina Lugue,
are the registered owners of the lots in question under Transfer
Certificate of Title (TCT) Nos. 148983-R, 148984-R, 148985-R. In the
complaint filed on December 15, 1978, appellants sought to recover
possession over the subject lands from defendants Rosita Pea and
Washington Distillery on the ground that being registered owners,
they have to enforce their right to possession against defendants
who have been allegedly in unlawful possession thereof since
October 1974 "when the previous owners assigned (their) right to
collect rentals . . . in favor of plaintiffs" (Record, p. 5). The amount
claimed as damages is pegged on the total amount of unpaid rentals
from October 1974 (as taken from the allegations in the complaint)
up to December 1978 at a monthly rate of P1,500.00 'and the further
sum of P2,000.00 a month from January 1979 until the defendants
finally vacate the . . . premises in question with interest at the legal
rate (Record, p. 61).
In their answer, defendants Rosita Pea and Washington Distillery
denied the material allegations of the complaint and by way of an
affirmative and special defense asserted that Pea is now the
legitimate owner of the subject lands for having purchased the same
in a foreclosure proceeding instituted by the DBP . . . against
PAMBUSCO . . . and no valid redemption having been effected
within the period provided by law. It was contended that plaintiffs
could not have acquired ownership over the subject properties under
a deed of absolute sale executed in their favor by one Marcelino B.
Enriquez who likewise could not have become [the] owner of the
properties in question by redeeming the same on August 18, 1975
(Exh. 26) under an alleged[ly] void deed of assignment executed in
his favor on March 18, 1975 by the original owners of the land in
question, the PAMBUSCO. The defense was that since the deed of
assignment executed by PAMBUSCO in favor of Enriquez was
void ab initio for being an ultra vires act of its board of directors and,
for being without any valuable consideration, it could not have had
any legal effect; hence, all the acts which flowed from it and all the
rights and obligations which derived from the aforesaid void deed are
likewise void and without any legal effect.
Further, it was alleged in the same Answer that plaintiffs are buyers
in bad faith because they have caused the titles of the subject
properties with the Register of Deeds to be issued in their names
despite an order from the then CFI, Br. III, Pampanga in Civil Case
No. 4310, entitled Dante Gutierrez, et al. vs. Pampanga Bus
Company, Inc., et al., to desist from registering or noting in his
registry of property . . . any of the above-mentioned documents
under contest, until further orders. (Record, p. 11).
For its part, defendant Washington Distillery stated that it has never
occupied the subject lots hence they should not have been
impleaded in the complaint.
The defendants, therefore, prayed that the complaint be dismissed;
that the deed of assignment executed in favor of Marcelino Enriquez,
the certificate of redemption issued by the Provincial Sheriff also in
favor of Marcelino Enriquez, and the deed of sale of these parcels of
land executed by Marcelino Enriquez in favor of the plaintiffs herein
be all declared null and void; and further, that TCT Nos. 148983-R,
148984-R and 148985-R, covering these parcels issued in the
plaintiffs name be cancelled and, in lieu thereof, corresponding
certificates of title over these same parcels be issued in the name of
defendant Rosita Pea.
253
Thereafter, the defendants with prior leave of court filed a third-party
complaint third-party defendants PAMBUSCO, Jesus Domingo,
Joaquin Briones, Salvador Bernardez (as members of the Board of
Directors of PAMBUSCO), Marcelino Enriquez, and Deputy Sheriff
Edgardo Zabat of Pampanga. All these third-party defendants, how
ever, were declared as in default for failure to file their answer,
except Edgardo Zabat who did file his answer but failed to appear at
the pre-trial.
After trial, a decision was rendered by the court in favor of the
defendants-appellees, to wit:
WHEREFORE, and in view of all the foregoing, judgment is
hereby rendered dismissing the complaint filed by the
plaintiffs against the defendants and declaring as null and
void the following:
(a) The resolution of the Board of Directors of PAMBUSCO
approved on November 19, 1974 assigning the
PAMBUSCO's right of redemption concerning the parcels
involved herein
(b) The deed of assignment dated March 18, 1975 executed
in favor of Marcelino Enriquez pursuant to the resolution
referred to in the preceding paragraph;
(c) The certificate of redemption dated August 15, 1975
issued by Deputy Sheriff Edgardo Zabat in favor of Marcelino
Enriquez concerning these parcels;
(d) The deed of absolute sale dated August 15, 1975
executed by Marcelino Enriquez in favor of the plaintiffs
concerning the same parcels and
(e) TCT Nos. 148983-R, 148984-R and 148985-R of the
Register of Deeds of Pampanga in the name of the plaintiffs
also covering these parcels.
Third-party defendant Edgardo Zabat, in his capacity as
Deputy Sheriff of Pampanga is directed to execute in favor of
defendant Rosita Pea the corresponding certificate of final
sale involving the parcels bought by her in the auction sale
of October 25, 1974 for which a certificate of sale had been
issued to her.
Finally, the third-party defendants herein except Deputy
Sheriff Edgardo Zabat are hereby ordered to pay the
defendants/third party plaintiffs, jointly and severally, the
amount of P10,000.00 as attorney's fees plus costs. 2
Thus, an appeal from said judgment of the trial court was interposed by
private respondents to the Court of Appeals wherein in due course a decision
was rendered on June 20, 1989, the dispositive part of which reads as
follows:
WHEREFORE, premises considered, the judgment of the trial court
on appeal is REVERSED. Defendant-appellee Pea is hereby
ordered to vacate the lands in question and pay the plaintiffs-
appellants the accrued rentals from October, 1974 in the amount of
P1,500.00 per month up to December, 1978 and the amount of
P2,000.00 per month thereafter, until appellee finally vacate (sic) the
premises with interest at the legal rate.
SO ORDERED.3
A motion for reconsideration filed by the appellee was denied in a resolution
dated December 27, 1989.
Hence, this petition for review on certiorari of said decision and resolution of
the appellate court predicated on the following assigned errors:
254
First Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING
THAT THE TRIAL COURT HAD NO JURISDICTION TO RULE ON
THE VALIDITY OF THE QUESTIONED RESOLUTION AND
TRANSFERS.
Second Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING
THAT PETITIONER HAS NO LEGAL STANDING TO ASSAIL THE
VALIDITY OF THE QUESTIONED RESOLUTION AND THE SERIES
OF SUCCEEDING TRANSACTIONS LEADING TO THE
REGISTRATION OF THE SUBJECT PROPERTIES IN FAVOR OF
THE RESPONDENTS YAP.
Third Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING
THAT THE RESOLUTION OF RESPONDENT PAMBUSCO,
ADOPTED ON 19 NOVEMBER 1974, ASSIGNING ITS RIGHT OF
REDEMPTION IS NOT VOID OR AT THE VERY LEAST LEGALLY
DEFECTIVE.
Fourth Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING
THAT THE DEED OF ASSIGNMENT, DATED 8 MARCH 1975, IN
FAVOR OF RESPONDENT ENRIQUEZ IS NOT VOID OR AT THE
VERY LEAST VOIDABLE OR RESCISSIBLE.
Fifth Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN NOT
HOLDING THAT THE QUESTIONED DEED OF ASSIGNMENT,
DATED 8 MARCH 1975, WAS VOID AB INITIO FOR FAILING TO
COMPLY WITH THE FORMALITIES MANDATORILY REQUIRED
UNDER THE LAW FOR DONATIONS.
Sixth Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING
THAT RESPONDENTS YAP ARE PURCHASERS IN GOOD FAITH
AND IN FURTHER HOLDING THAT IT WAS TOO LATE FOR
PETITIONER TO INTERPOSE THE ISSUE THAT RESPONDENTS
YAP WERE PURCHASERS IN BAD FAITH.
Seventh Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN
REVERSING THE DECISION OF THE TRIAL COURT. 4
The petition is impressed with merit.
First, the preliminary issues.
The respondent court ruled that the trial court has no jurisdiction to annul the
board resolution as the matter falls within the jurisdiction of the Securities
and Exchange Commission (SEC) and that petitioner did not have the proper
standing to have the same declared null and void.
In Philex Mining Corporation vs. Reyes, 5
this Court held that it is the fact of relationship between the parties that
determines the proper and exclusive jurisdiction of the SEC to hear and
decide intra-corporate disputes; that unless the controversy has arisen
between and among stockholders of the corporation, or between the
stockholders and the officers of the corporation, then the case is not within
the jurisdiction of the SEC. Where the issue involves a party who is neither a
stockholder or officer of the corporation, the same is not within the jurisdiction
of the SEC.
255
In Union Glass & Container Corporation vs. Securities and Exchange
Commission, 6 this Court defined the relationships which are covered within
"intra-corporate disputes" under Presidential Decree No. 902-A, as amended,
as follows:
Otherwise stated, in order that the SEC can take cognizance of a
case, the controversy must pertain to any of the following
relationships (a) between the corporation, partnership or association
and the public; (b) between the corporation, partnership or
association and its stockholders, partners, members, or officers; (c)
between the corporation, partnership or association and the state in
so far as its franchise, permit or license to operate is concerned; and
(d) among the stockholders, partners or associates themselves.
In this case, neither petitioner nor respondents Yap spouses are stockholders
or officers of PAMBUSCO. Consequently, the issue of the validity of the
series of transactions resulting in the subject properties being registered in
the names of respondents Yap may be resolved only by the regular courts.
Respondent court held that petitioner being a stranger to the questioned
resolution and series of succeeding transactions has no legal standing to
question their validity.
In Teves vs. People's Homesite and Housing Corporation, 7 this Court held:
We note however, in reading the complaint that the plaintiff is
seeking the declaration of the nullity of the deed of sale, not as a
party in the deed, or because she is obliged principally or subsidiarily
under the deed, but because she has an interest that is affected by
the deed. This Court has held that a person who is not a party
obliged principally or subsidiarily in a contract may exercise an
action for nullity of the contract if he is prejudiced in his rights with
respect to one of the contracting parties, and can show the detriment
which would positively result to him from the contract in which he
had no intervention, Indeed, in the case now before Us, the
complaint alleges facts which show that plaintiff suffered detriment as
a result of the deed of sale entered into by and between defendant
PHHC and defendant Melisenda L. Santos. We believe that the
plaintiff should be given a chance to present evidence to establish
that she suffered detriment and that she is entitled to relief.
(Emphasis supplied.)
There can be no question in this case that the questioned resolution and
series of transactions resulting in the registration of the properties in the
name of respondent Yap spouses adversely affected the rights of petitioner
to the said properties. Consequently, petitioner has the legal standing to
question the validity of said resolution and transactions.
As to the question of validity of the board resolution of respondent
PAMBUSCO adopted on November 19, 1974, Section 4, Article III of the
amended by-laws of respondent PAMBUSCO, provides as follows:
Sec. 4. Notices of regular and special meetings of the Board of
Directors shall be mailed to each Director not less than five days
before any such meeting, and notices of special meeting shall state
the purpose or purposes thereof Notices of regular meetings shall be
sent by the Secretary and notices of special meetings by the
President or Directors issuing the call. No failure or irregularity of
notice of meeting shall invalidate any regular meeting or proceeding
thereat; Provided a quorum of the Board is present, nor of any
special meeting; Provided at least four Directors are present.
(Emphasis supplied.) 8
The trial court in finding the resolution void held as follows:
On the other hand, this Court finds merit in the position taken by the
defendants that the questioned resolution should be declared invalid
it having been approved in a meeting attended by only 3 of the 5
members of the Board of Directors of PAMBUSCO which attendance
is short of the number required by the by-laws of the corporation.
xxx xxx xxx
256
 In the meeting of November 19, 1974 when the questioned
resolution was approved, the three members of the Board of
Directors of PAMBUSCO who were present were Jesus Domingo,
Joaquin Briones, and Salvador Bernardez The remaining 2 others,
namely: Judge Pio Marcos and Alfredo Mamuyac were both absent
therefrom.
As it becomes clear that the resolution approved on November 19,
1974 is null and void it having been approved by only 3 of the
members of the Board of Directors who were the only ones present
at the said meeting, the deed of assignment subsequently executed
in favor of Marcelino Enriquez pursuant to this resolution also
becomes null and void. . . . 9
However, the respondent court overturning said legal conclusions of the trial
court made the following disquisition:
It should be noted that the provision in Section 4, Article III of
PAMBUSCO's amended by-laws would apply only in case of a failure
to notify the members of the board of directors on the holding of a
special meeting, . . . .
In the instant case, however, there was no proof whatsoever, either
by way of documentary or testimonial evidence, that there was such
a failure or irregularity of notice as to make the aforecited provision
apply. There was not even such an allegation in the Answer that
should have necessitated a proof thereof. The fact alone that only
three (3) out of five (5) members of the board of directors attended
the subject special meeting, was not enough to declare the aforesaid
proceeding void ab initio, much less the board resolution borne out of
it, when there was no proof of irregularity nor failure of notice and
when the defense made in the Answer did not touch upon the said
failure of attendance. Therefore, the judgment declaring the nullity of
the subject board resolution must be set aside for lack of proof.
Moreover, there is no categorical declaration in the by-laws that a
failure to comply with the attendance requirement in a special
meeting should make all the acts of the board therein null and
void ab initio. A cursory reading of the subject provision, as
aforequoted, would show that its framers only intended to make
voidable a board meeting held without the necessary compliance
with the attendance requirement in the by-laws. Just the use of the
word "invalidate" already denotes a legal imputation of validity to the
questioned board meeting absent its invalidation in the proceedings
prescribed by the corporation's by-laws and/or the general
incorporation law. More significantly, it should be noted that even if
the subject special meeting is itself declared void, it does not follow
that the acts of the board therein are ipso facto void and without any
legal effect. Without the declaration of nullity of the subject board
proceedings, its validity should be maintained and the acts borne out
of it should be presumed valid. Considering that the subject special
board meeting has not been declared void in a proper proceeding,
nor even in the trial by the court below, there is no reason why the
acts of the board in the said special meeting should be treated as
void AB. initio. . . . 10
The Court disagrees.
The by-laws of a corporation are its own private laws which substantially
have the same effect as the laws of the corporation. They are in effect,
written, into the charter. In this sense they become part of the fundamental
law of the corporation with which the corporation and its directors and officers
must comply. 11
Apparently, only three (3) out of five (5) members of the board of directors of
respondent PAMBUSCO convened on November 19, 1974 by virtue of a
prior notice of a special meeting. There was no quorum to validly transact
business since, under Section 4 of the amended by-laws hereinabove
reproduced, at least four (4) members must be present to constitute a
quorum in a special meeting of the board of directors of respondent
PAMBUSCO.
257
Under Section 25 of the Corporation Code of the Philippines, the articles of
incorporation or by-laws of the corporation may fix a greater number than the
majority of the number of board members to constitute the quorum necessary
for the valid transaction of business. Any number less than the number
provided in the articles or by-laws therein cannot constitute a quorum and
any act therein would not bind the corporation; all that the attending directors
could do is to adjourn. 12
Moreover, the records show that respondent PAMBUSCO ceased to operate
as of November 15, 1949 as evidenced by a letter of the SEC to said
corporation dated April 17, 1980. 13 Being a dormant corporation for several
years, it was highly irregular, if not anomalous, for a group of three (3)
individuals representing themselves to be the directors of respondent
PAMBUSCO to pass a resolution disposing of the only remaining asset of the
corporation in favor of a former corporate officer.
As a matter of fact, the three (3) alleged directors who attended the special
meeting on November 19, 1974 were not listed as directors of respondent
PAMBUSCO in the latest general information sheet of respondent
PAMBUSCO filed with the SEC dated 18 March 1951. 14 Similarly, the latest
list of stockholders of respondent PAMBUSCO on file with the SEC does not
show that the said alleged directors were among the stockholders of
respondent PAMBUSCO. 15
Under Section 30 of the then applicable Corporation Law, only persons who
own at least one (1) share in their own right may qualify to be directors of a
corporation. Further, under Section 28 1/2 of the said law, the sale or
disposition of an and/or substantially all properties of the corporation
requires, in addition to a proper board resolution, the affirmative votes of the
stockholders holding at least two-thirds (2/3) of the voting power in the
corporation in a meeting duly called for that purpose. No doubt, the
questioned resolution was not confirmed at a subsequent stockholders
meeting duly called for the purpose by the affirmative votes of the
stockholders holding at least two-thirds (2/3) of the voting power in the
corporation. The same requirement is found in Section 40 of the present
Corporation Code.
It is also undisputed that at the time of the passage of the questioned
resolution, respondent PAMBUSCO was insolvent and its only remaining
asset was its right of redemption over the subject properties. Since the
disposition of said redemption right of respondent PAMBUSCO by virtue of
the questioned resolution was not approved by the required number of
stockholders under the law, the said resolution, as well as the subsequent
assignment executed on March 8, 1975 assigning to respondent Enriquez
the said right of redemption, should be struck down as null and void.
Respondent court, in upholding the questioned deed of assignment, which
appears to be without any consideration at all, held that the consideration
thereof is the liberality of the respondent PAMBUSCO in favor of its former
corporate officer, respondent Enriquez, for services rendered. Assuming this
to be so, then as correctly argued by petitioner, it is not just an ordinary deed
of assignment, but is in fact a donation. Under Article 725 of the Civil Code,
in order to be valid, such a donation must be made in a public document and
the acceptance must be made in the same or in a separate instrument. In the
latter case, the donor shall be notified of the acceptance in an authentic form
and such step must be noted in both instruments. 16
Non-compliance with this requirement renders the donation null and
void. 17 Since undeniably the deed of assignment dated March 8, 1975 in
question, 18 shows that there was no acceptance of the donation in the same
and in a separate document, the said deed of assignment is thus void ab
initio and of no force and effect.
WHEREFORE, the petition is GRANTED. The questioned decision of the
respondent Court of Appeals dated June 20, 1989 and its resolution dated
December 27, 1989 are hereby REVERSED AND SET ASIDE and another
judgment is hereby rendered AFFIRMING in toto the decision of the trial
court.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.
258
G.R. No. 101699 March 13, 1996

BENJAMIN A. SANTOS, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION, HON. LABOR ARBITER
FRUCTUOSO T. AURELLANO and MELVIN D. MILLENA, respondents.

VITUG, J.:p

In a petition for certiorari under Rule 65 of the Rules of Court, petitioner

Benjamin A. Santos, former President of the Mana Mining and Development
Corporation ("MMDC"), questions the resolution of the National Labor
Relations Commission ("NLRC") affirming the decision of Labor Arbiter
Fructuoso T. Aurellano who, having held illegal the termination of
employment of private respondent Melvin D. Millena, has ordered petitioner
MMDC, as well as its president (herein petitioner) and the executive vice-
president in their personal capacities, to pay Millena his monetary claims.

259
Private respondent, on 01 October 1985, was hired to be the project
accountant for MMDC's mining operations in Gatbo, Bacon, Sorsogon. On 12
August 1986, private respondent sent to Mr. Gil Abao, the MMDC corporate
treasurer, a memorandum calling the latter's attention to the failure of the
company to comply with the withholding tax requirements of, and to make the
corresponding monthly remittances to, the Bureau of Internal Revenue
("BIR") on account of delayed payments of accrued salaries to the company's
laborers and employees. 1
In a letter, dated 08 September 1986, Abao advised private respondent
thusly:
Regarding Gatbo operations, as you also are aware, the
rainy season is now upon us and the peace and order
condition in Sorsogon has deteriorated. It is therefore, the
board's decision that it would be useless for us to continue
operations, especially if we will always be in the "hole," so to
speak. Our first funds receipts will be used to pay all our
debts. We will stop production until the advent of the dry
season, and until the insurgency problem clears. We will
undertake only necessary maintenance and repair work and
will keep our overhead down to the minimum manageable
level. Until we resume full-scale operations, we will not need
a project accountant as there will be very little paper work at
the site, which can be easily handled at Makati.
We appreciate the work you have done for Mana and we will
not hesitate to take you back when we resume work at
Gatbo. However it would be unfair to you if we kept you in
the payroll and deprive you of the opportunity to earn more,
during this period of Mana's crisis. 2
Private respondent expressed "shock" over the termination of his
employment. He complained that he would not have resigned from the Sycip,
Gorres & Velayo accounting firm, where he was already a senior staff auditor,
had it not been for the assurance of a "continuous job" by MMDC's Engr.
Rodillano E. Velasquez. Private respondent requested that he be reimbursed
the "advances" he had made for the company and be paid his "accrued
salaries/claims. 3
The claim was not heeded; on 20 October 1986, private respondent filed with
the NLRC Regional Arbitration, Branch No. V, in Legazpi City, a complaint for
illegal dismissal, unpaid salaries, 13th month pay, overtime pay, separation
pay and incentive leave pay against MMDC and its two top officials, namely,
herein petitioner Benjamin A. Santos (the President) and Rodillano A.
Velasquez (the executive vice-president). in his complaint-affidavit (position
paper), submitted on 27 October 1986, Millena alleged, among other things,
that his dismissal was merely an offshoot of his letter of 12 August 1986 to
Abao about the company's inability to pay its workers and to remit
withholding taxes to the BIR. 4
A copy of the notice and summons was served on therein respondents
(MMDC, Santos and Velasquez) on 29 October 1986. 5 At the initial hearing
on 14 November 1986 before the Labor Arbiter, only the complainant,
Millena, appeared; however, Atty. Romeo Perez, in representation of the
respondents, requested by telegram that the hearing be reset to 01
December 1986. Although the request was granted by the Labor Arbiter,
private respondent was allowed, nevertheless, to present his evidence ex
parte at that initial hearing.
The scheduled 01st December 1986 hearing was itself later reset to 19
December 1986. On 05 December 1986, the NLRC in Legazpi City again
received a telegram from Atty. Perez asking for fifteen (15) days within which
to submit the respondents' position paper. On 19 December 1986, Atty. Perez
sent yet another telegram seeking a further postponement of the hearing and
asking for a period until 15 January 1987 within which to submit the position
paper.
On 15 January 1987, Atty. Perez advised the NLRC in Legazpi City that the
position paper had finally been transmitted through the mail and that he was
submitting the case for resolution without further hearing. The position paper
was received by the Legazpi City NLRC office on 19 January 1987.
260
Complainant Millena filed, on 26 February 1987, his rejoinder to the position
paper.
On 27 July 1988, Labor Arbiter Fructuoso T. Aurellano, finding no valid cause
for terminating complainant's employment, ruled, citing this Court's
pronouncement in Construction & Development Corporation of the
Philippines vs. Leogardo, Jr. 6 that a partial closure of an establishment due
to losses was a retrenchment measure that rendered the employer liable for
unpaid salaries and other monetary claims. The Labor Arbiter adjudged
WHEREFORE, the respondents are hereby ordered to pay
the petitioner the amount of P37,132.25 corresponding to the
latter's unpaid salaries and advances; P5,400.00 for
petitioner's 13th month pay; P3,340.95 as service incentive
leave pay; and P5,400.00 as separation pay. The
respondents are further ordered to pay the petitioner 10% of
the monetary awards as attorney's fees.
All other claims are dismissed for lack of sufficient evidence.
SO ORDERED. 7
Alleging abuse of discretion by the Labor Arbiter, the company and its co-
respondents filed a "motion for reconsideration and/or appeal. 8 The
motion/appeal was forthwith indorsed to the Executive Director of the NLRC
in Manila.
In a resolution, dated 04 September 1989, the NLRC 9 affirmed the decision
of the Labor Arbiter. It held that the reasons relied upon by MMDC and its co-
respondents in the dismissal of Millena, i.e., the rainy season, deteriorating
peace and order situation and little paperwork, were "not causes mentioned
under Article 282 of the Labor Code of the Philippines" and that Millena,
being a regular employee, was "shielded by the tenurial clause mandated
under the law. 10
A writ of execution correspondingly issued; however, it was returned
unsatisfied for the failure of the sheriff to locate the offices of the corporation
in the address indicated. Another writ of execution and an order of
garnishment was thereupon served on petitioner at his residence.
Contending that he had been denied due process, petitioner filed a motion
for reconsideration of the NLRC's resolution along with a prayer for the
quashal of the writ of execution and order of garnishment. He averred that he
had never received any notice, summons or even a copy of the complaint;
hence, he said, the Labor Arbiter at no time had acquired jurisdiction over
him.
On 16 August 1991, the NLRC 11 dismissed the motion for reconsideration.
Citing Section 2, Rule 13, 12 and Section 13, Rule 14, 13 of the Rules of Court,
it ruled that the Regional Arbitration office had not, in fact, been remiss in the
observance of the legal processes for acquiring jurisdiction over the case and
over the persons of the respondents therein. The NLRC was also convinced
that Atty. Perez had been the authorized counsel of MMDC and its two most
ranking officers.
In holding petitioner personally liable for private respondent's claim, the
NLRC cited Article 289 14 of the Labor Code and the ruling in A.C. Ransom
Labor Union-CCLU vs. NLRC 15 to the effect that "(t)he responsible officer of
an employer corporation (could) be held personally, not to say even
criminally, liable for non-payment of backwages," and that
of Gudez vs. NLRC 16 which amplified that "where the employer corporation
(was) no longer existing and unable to satisfy the judgment in favor of the
employee, the officer should be liable for acting on behalf of the corporation.
In the instant petition for certiorari, petitioner Santos reiterates that he should
not have been adjudged personally liable by public respondents, the latter
not having validly acquired jurisdiction over his person whether by personal
service of summons or by substituted service under Rule 19 of the Rules of
Court.
261
Petitioner's contention is unacceptable. The fact that Atty. Romeo B. Perez
has been able to timely ask for a deferment of the initial hearing on 14
November 1986, coupled with his subsequent active participation in the
proceedings, should disprove the supposed want of service of legal process.
Although as a rule, modes of service of summons are strictly followed in
order that the court may acquire jurisdiction over the person of a
defendant, 17such procedural modes, however, are liberally construed
in quasi-judicial proceedings, substantial compliance with the same being
considered adequate. 18 Moreover, jurisdiction over the person of the
defendant in civil cases is acquired not only by service of summons but also
by voluntary appearance in court and submission to its
authority. 19 "Appearance" by a legal advocate is such "voluntary submission
to a court's jurisdiction." 20 It may be made not only by actual physical
appearance but likewise by the submission of pleadings in compliance with
the order of the court or tribunal.
To say that petitioner did not authorize Atty. Perez to represent him in the
case 21 is to unduly tax credulity. Like the Solicitor General, the Court likewise
considers it unlikely that Atty. Perez would have been so irresponsible as to
represent petitioner if he were not, in fact, authorized. 22 Atty. Perez is an
officer of the court, and he must be presumed to have acted with due
propriety. The employment of a counsel or the authority to employ an
attorney, it might be pointed out, need not be proved in writing; such fact
could be inferred from circumstantial evidence. 23 Petitioner was not just an
ordinary official of the MMDC; he was the President of the company.
Petitioner, in any event, argues that public respondents have gravely abused
their discretion "in finding petitioner solidarily liable with MMDC even (in) the
absence of bad faith and malice on his part." 24 There is merit in this plea.
A corporation is a juridical entity with legal personality separate and distinct
from those acting for and in its behalf and, in general, from the people
comprising it. The rule is that obligations incurred by the corporation, acting
through its directors, officers and employees, are its sole liabilities.
Nevertheless, being a mere fiction of law, peculiar situations or valid grounds
can exist to warrant, albeit done sparingly, the disregard of its independent
being and the lifting of the corporate veil. 25 As a rule, this situation might
arise when a corporation is used to evade a just and due obligation or to
justify a wrong, 26 to shield or perpetrate fraud, 27 to carry out similar other
unjustifable aims or intentions, or as a subterfuge to commit injustice and so
circumvent the law. 28 In Tramat Mercantile, Inc., vs. Court of Appeals, 29 the
Court has collated the settled instances when, without necessarily piercing
the veil of corporate fiction, personal civil liability can also be said to lawfully
attach to a corporate director, trustee or officer; to wit: When
(1) He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other
persons;
(2) He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
(3) He agrees to hold himself personally and solidarily liable
with the corporation; or
(4) He is made, by a specific provision of law, to personally
answer for his corporate action.
The case of petitioner is way off these exceptional instances. It is not
even shown that petitioner has had a direct hand in the dismissal of
private respondent enough to attribute to him (petitioner) a patently
unlawful act while acting for the corporation. Neither can Article
289 30 of the Labor Code be applied since this law specifically refers
only to the imposition of penalties under the Code. It is undisputed
that the termination of petitioner's employment has, instead, been
due, collectively, to the need for a further mitigation of losses, the
onset of the rainy season, the insurgency problem in Sorsogon and
the lack of funds to further support the mining operation in Gatbo.
262
It is true, there were various cases when corporate officers were themselves
held by the Court to be personally accountable for the payment of wages and
money claims to its employees. In A.C. Ransom Labor Union-CCLU
vs. NLRC, 31 for instance, the Court ruled that under the Minimum Wage Law,
the responsible officer of an employer corporation could be held personally
liable for nonpayment of backwages for "(i)f the policy of the law were
otherwise, the corporation employer (would) have devious ways for evading
payment of back wages." In the absence of a clear identification of the officer
directly responsible for failure to pay the backwages, the Court considered
the President of the corporation as such officer. The case was cited in Chua
vs. NLRC 32 in holding personally liable the vice-president of the company,
being the highest and most ranking official of the corporation next to the
President who was dismissed, for the latter's claim for unpaid wages.
A review of the above exceptional cases would readily disclose the
attendance of facts and circumstances that could rightly sanction personal
liability an the part of the company officer. In A.C. Ransom, the corporate
entity was a family corporation and execution against it could not be
implemented because of the disposition posthaste of its leviable assets
evidently in order to evade its just and due obligations. The doctrine of
"piercing the veil of corporate fiction" was thus clearly appropriate. Chua
likewise involved another family corporation, and this time the conflict was
between two brothers occupying the highest ranking positions in the
company. There were incontrovertible facts which pointed to extreme
personal animosity that resulted, evidently in bad faith, in the easing out from
the company of one of the brothers by the other.
The basic rule is still that which can be deduced from the Court's
pronouncement in Sunio vs. National Labor Relations Commission; 33 thus:
We come now to the personal liability of petitioner, Sunio,
who was made jointly and severally responsible with
petitioner company and CIPI for the payment of the
backwages of private respondents. This is reversible error.
The Assistant Regional Director's Decision failed to disclose
the reason why he was made personally liable.
Respondents, however, alleged as grounds thereof, his the
being owner of one-half (1/2) interest of said corporation,
and his alleged arbitrary dismissal of private respondents.
Petitioner Sunio was impleaded in the Complaint in his
capacity as General Manager of petitioner corporation. There
appears to be no evidence on record that he acted
maliciously or in bad faith in terminating the services of
private respondents. His act, therefore, was within the scope
of his authority and was a corporate act.
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. Mere ownership by a single
stockholder or by another corporation of all or nearly all of
the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personality.
Petitioner Sunio, therefore, should not have been made
personally answerable for the payment of private
respondents' back salaries.
The Court, to be sure, did appear to have deviated somewhat in Gudez
vs. NLRC; 34 however, it should be clear from our recent pronouncement
in Mam Realty Development Corporation and Manuel Centeno
vs. NLRC 35 that the Sunio doctrine still prevails.
WHEREFORE, the instant petition for certiorari is given DUE COURSE and
the decision of the Labor Arbiter, affirmed by the NLRC, is hereby MODIFIED
insofar as it holds herein petitioner Benjamin Santos personally liable with
Mana Mining and Development Corporation, which portion of the questioned
judgment is now SET ASIDE. In all other respects, the questioned decision
remains unaffected. No costs.
SO ORDERED.
Padilla, Bellosillo, Kapunan and Hermosisima, Jr., JJ., concur.
263
264
G.R. No. L-18216 October 30, 1962

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-

appellants,
vs.
REGISTER OF DEEDS OF MANILA, respondent-appellee.

Ramon C. Fernando for petitioners-appellants.

Office of the Solicitor General for respondent-appellee.

BAUTISTA ANGELO, J.:

On September 19, 1960, the five stockholders of the F. Guanzon and Sons,
Inc. executed a certificate of liquidation of the assets of the corporation
reciting, among other things, that by virtue of a resolution of the stockholders
adopted on September 17, 1960, dissolving the corporation, they have
distributed among themselves in proportion to their shareholdings, as
liquidating dividends, the assets of said corporation, including real properties
located in Manila.

265
The certificate of liquidation, when presented to the Register of Deeds of
Manila, was denied registration on seven grounds, of which the following
were disputed by the stockholders:
3. The number of parcels not certified to in the acknowledgment;
5. P430.50 Reg. fees need be paid;
6. P940.45 documentary stamps need be attached to the document;
7. The judgment of the Court approving the dissolution and directing
the disposition of the assets of the corporation need be presented
(Rules of Court, Rule 104, Sec. 3).
Deciding the consulta elevated by the stockholders, the Commissioner of
Land Registration overruled ground No. 7 and sustained requirements Nos.
3, 5 and 6.
The stockholders interposed the present appeal.
As correctly stated by the Commissioner of Land Registration, the propriety
or impropriety of the three grounds on which the denial of the registration of
the certificate of liquidation was predicated hinges on whether or not that
certificate merely involves a distribution of the corporation's assets or should
be considered a transfer or conveyance.
Appellants contend that the certificate of liquidation is not a conveyance or
transfer but merely a distribution of the assets of the corporation which has
ceased to exist for having been dissolved. This is apparent in the minutes for
dissolution attached to the document. Not being a conveyance the certificate
need not contain a statement of the number of parcel of land involved in the
distribution in the acknowledgment appearing therein. Hence the amount of
documentary stamps to be affixed thereon should only be P0.30 and not
P940.45, as required by the register of deeds. Neither is it correct to require
appellants to pay the amount of P430.50 as registration fee.
The Commissioner of Land Registration, however, entertained a different
opinion. He concurred in the view expressed by the register of deed to the
effect that the certificate of liquidation in question, though it involves a
distribution of the corporation's assets, in the last analysis represents a
transfer of said assets from the corporation to the stockholders. Hence, in
substance it is a transfer or conveyance.
We agree with the opinion of these two officials. A corporation is a juridical
person distinct from the members composing it. Properties registered in the
name of the corporation are owned by it as an entity separate and distinct
from its members. While shares of stock constitute personal property they do
not represent property of the corporation. The corporation has property of its
own which consists chiefly of real estate (Nelson v. Owen, 113 Ala., 372, 21
So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only
typifies an aliquot part of the corporation's property, or the right to share in its
proceeds to that extent when distributed according to law and equity (Hall &
Faley v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is not the
owner of any part of the capital of the corporation (Bradley v. Bauder 36 Ohio
St., 28). Nor is he entitled to the possession of any definite portion of its
property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio
St., 474). The stockholder is not a co-owner or tenant in common of the
corporate property (Halton v. Hohnston, 166 Ala 317, 51 So 992).
On the basis of the foregoing authorities, it is clear that the act of liquidation
made by the stockholders of the F. Guanzon and Sons, Inc. of the latter's
assets is not and cannot be considered a partition of community property, but
rather a transfer or conveyance of the title of its assets to the individual
stockholders. Indeed, since the purpose of the liquidation, as well as the
distribution of the assets of the corporation, is to transfer their title from the
corporation to the stockholders in proportion to their shareholdings, and
this is in effect the purpose which they seek to obtain from the Register of
Deeds of Manila, that transfer cannot be effected without the
corresponding deed of conveyance from the corporation to the stockholders.
It is, therefore, fair and logical to consider the certificate of liquidation as one
in the nature of a transfer or conveyance.
266
WHEREFORE, we affirm the resolution appealed from, with costs against 2. The trial court erred in not holding that the interest on bonds and
appellants. other indebtedness of the plaintiff corporation, paid by it outside of
the Philippine Islands to corporations not residing therein, were not,
Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and on the part of the recipients thereof, income from Philippine sources,
Makalintal, JJ., concur. and hence not subject to Philippine income tax.
Barrera, J., took no part.
The facts, as stated by the appellant and as accepted by the appellee, may
be summarized as follows: The plaintiff is a corporation organized under the
laws of the Philippine Islands. It operates a gas plant in the City of Manila
and furnishes gas service to the people of the metropolis and surrounding
municipalities by virtue of a franchise granted to it by the Philippine
Government. Associated with the plaintiff are the Islands Gas and Electric
G.R. No. L-42780 January 17, 1936
Company domiciled in New York, United States, and the General Finance
Company domiciled in Zurich, Switzerland. Neither of these last mentioned
MANILA GAS CORPORATION, plaintiff-appellant, corporations is resident in the Philippines.
vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
For the years 1930, 1931, and 1932, dividends in the sum of P1,348,847.50
were paid by the plaintiff to the Islands Gas and Electric Company in the
DeWitt, Perkins and Ponce Enrile for appellant. capacity of stockholders upon which withholding income taxes were paid to
Office of the Solicitor-General Hilado for appellee. the defendant totalling P40,460.03 For the same years interest on bonds in
the sum of P411,600 was paid by the plaintiff to the Islands Gas and Electric
MALCOLM, J.: Company upon which withholding income taxes were paid to the defendant
totalling P12,348. Finally for the stated time period, interest on other
This is an action brought by the Manila Gas Corporation against the Collector indebtedness in the sum of P131,644,90 was paid by the plaintiff to the
of Internal Revenue for the recovery of P56,757.37, which the plaintiff was Islands Gas and Electric Company and the General Finance Company
required by the defendant to deduct and withhold from the various sums paid respectively upon which withholding income taxes were paid to the defendant
it to foreign corporations as dividends and interest on bonds and other totalling P3,949.34.
indebtedness and which the plaintiff paid under protest. On the trial court
dismissing the complaint, with costs, the plaintiff appealed assigning as the Some uncertainty existing regarding the place of payment, we will not go into
principal errors alleged to have been committed the following: this factor of the case at this point, except to remark that the bonds and other
tokens of indebtedness are not to be found in the record. However, Exhibits
1. The trial court erred in holding that the dividends paid by the E, F, and G, certified correct by the Treasurer of the Manila Gas Corporation,
plaintiff corporation were subject to income tax in the hands of its purport to prove that the place of payment was the United States and
stockholders, because to impose the tax thereon would be to impose Switzerland.
a tax on the plaintiff, in violation of the terms of its franchise, and
would, moreover, be oppressive and inequitable.

267
The appeal naturally divides into two subjects, one covered by the first
assigned error, and the other by the second assigned error. We shall discuss
these subjects and errors in order.
1. Appellant first contends that the dividends paid by it to its
stockholders, the Islands Gas and Electric Company , were not
subject to tax because to impose a tax thereon would be to do so on
the plaintiff corporation, in violation of the terms of its franchise and
would, moreover, be oppressive and inequitable. This argument is
predicated on the constitutional provision that no law impairing the
obligation of contracts shall be enacted. The particular portion of the
franchise which is invoked provides:
The grantee shall annually on the fifth day of January of
each year pay to the City of Manila and the municipalities in
the Province of Rizal in which gas is sold, two and one half
per centum of the gross receipts within said city and
municipalities, respectively, during the preceding year. Said
payment shall be in lieu of all taxes, Insular, provincial and
municipal, except taxes on the real estate, buildings, plant,
machinery, and other personal property belonging to the
grantee.
The trial judge was of the opinion that the instant case was governed
by our previous decision in the case of Philippine Telephone and
Telegraph Co., vs. Collector of Internal Revenue ([1933], 58 Phil.
639). In this view we concur. It is true that the tax exemption
provision relating to the Manila Gas Corporation hereinbefore quoted
differs in phraseology from the tax exemption provision to be found in
the franchise of the Telephone and Telegraph Company, but the ratio
decidendi of the two cases is substantially the same. As there held
and as now confirmed, a corporation has a personality distinct from
that of its stockholders, enabling the taxing power to reach the latter
when they receive dividends from the corporation. It must be
considered as settled in this jurisdiction that dividends of a domestic
corporation, which are paid and delivered in cash to foreign
corporations as stockholders, are subject to the payment in the
income tax, the exemption clause in the charter of the corporation
notwithstanding.
For the foreign reasons, we are led to sustain the decision of the trial
court and to overrule appellant's first assigned error.
2. In support of its second assignment of error, appellant contends
that, as the Islands Gas and Electric Company and the General
Finance Company are domiciled in the United States and
Switzerland respectively, and as the interest on the bonds and other
indebtedness earned by said corporations has been paid in their
respective domiciles, this is not income from Philippine sources
within the meaning of the Philippine Income Tax Law. Citing sections
10 (a) and 13 (e) of Act No. 2833, the Income Tax Law, appellant
asserts that their applicability has been squarely determined by
decisions of this court in the cases of Manila Railroad Co. vs.
Collector of Internal Revenue (No. 31196, promulgated December 2,
1929, nor reported), and Philippine Railway Co. vs. Posadas (No.
38766, promulgated October 30, 1933 [58 Phil., 968]) wherein it was
held that interest paid to non-resident individuals or corporations is
not income from Philippine sources, and hence not subject to the
Philippine Income Tax. The Solicitor-General answers with the
observation that the cited decisions interpreted the Income Tax Law
before it was amended by Act No. 3761 to cover the interest on
bonds and other obligations or securities paid "within or without the
Philippine Islands." Appellant rebuts this argument by "assuming, for
the sake of the argument, that by the amendment introduced to
section 13 of Act No. 2833 by Act No. 3761 the Legislature intended
the interest from Philippine sources and so is subject to tax," but with
the necessary sequel that the amendatory statute is invalid and
unconstitutional as being the power of the Legislature to enact.
Taking first under observation that last point, it is to be observed that neither
in the pleadings, the decision of the trial court, nor the assignment of errors,
was the question of the validity of Act No. 3761 raised. Under such
circumstances, and no jurisdictional issue being involved, we do not feel that
it is the duty of the court to pass on the constitutional question, and
268
accordingly will refrain from doing so. (Cadwaller-Gibson Lumber Co. vs. Del
Rosario [1913], 26 Phil., 192; Macondray and Co. vs. Benito and Ocampo, P.
137, ante; State vs. Burke [1912], 175 Ala., 561.)
As to the applicability of the local cases cited and of the Porto Rican case of
Domenech vs. United Porto Rican Sugar co. ([1932], 62 F. [2d], 552), we
need only observe that these cases announced good law, but that each he
must be decided on its particular facts. In other words, in the opinion of the
majority of the court, the facts at bar and the facts in those cases can be
clearly differentiated. Also, in the case at bar there is some uncertainty
concerning the place of payment, which under one view could be considered
the Philippines and under another view the United States and Switzerland,
but which cannot be definitely determined without the necessary
documentary evidence before, us.
The approved doctrine is that no state may tax anything not within its
jurisdiction without violating the due process clause of the constitution. The
taxing power of a state does not extend beyond its territorial limits, but within
such it may tax persons, property, income, or business. If an interest in
property is taxed, the situs of either the property or interest must be found
within the state. If an income is taxed, the recipient thereof must have a
domicile within the state or the property or business out of which the income
issues must be situated within the state so that the income may be said to
have a situs therein. Personal property may be separated from its owner, and
he may be taxed on its account at the place where the property is although it
is not the place of his own domicile and even though he is not a citizen or
resident of the state which imposes the tax. But debts owing by corporations
are obligations of the debtors, and only possess value in the hands of the
creditors. (Farmers Loan Co. vs. Minnesota [1930], 280 U.S., 204; Union
Refrigerator Transit Co. vs. Kentucky [1905], 199 U.S., 194 State Tax on
Foreign held Bonds [1873, 15 Wall., 300; Bick vs. Beach [1907], 206 U. S.,
392; State ex rel. Manitowoc Gas Co. vs. Wig. Tax Comm. [1915], 161 Wis.,
111; United States Revenue Act of 1932, sec. 143.)
These views concerning situs for taxation purposes apply as well to an
organized, unincorporated territory or to a Commonwealth having the status
of the Philippines.
Pushing to one side that portion of Act No. 3761 which permits taxation of
interest on bonds and other indebtedness paid without the Philippine Islands,
the question is if the income was derived from sources within the Philippine
Islands.
In the judgment of the majority of the court, the question should be answered
in the affirmative. The Manila Gas Corporation operates its business entirely
within the Philippines. Its earnings, therefore come from local sources. The
place of material delivery of the interest to the foreign corporations paid out
of the revenue of the domestic corporation is of no particular moment. The
place of payment even if conceded to be outside of tho country cannot alter
the fact that the income was derived from the Philippines. The word "source"
conveys only one idea, that of origin, and the origin of the income was the
Philippines.
In synthesis, therefore, we hold that conditions have not been provided which
justify the court in passing on the constitutional question suggested; that the
facts while somewhat obscure differ from the facts to be found in the cases
relied upon, and that the Collector of Internal Revenue was justified in
withholding income taxes on interest on bonds and other indebtedness paid
to non-resident corporations because this income was received from sources
within the Philippine Islands as authorized by the Income Tax Law. For the
foregoing reasons, the second assigned error will be overruled.
Before concluding, it is but fair to state that the writer's opinion on the first
subject and the first assigned error herein discussed is accurately set forth,
but that his opinion on the second subject and the second assigned error is
not accurately reflected, because on this last division his views coincide with
those of the appellant. However, in the interest of the prompt disposition of
this case, the decision has been written up in accordance with instructions
received from the court.
Judgment affirmed, with the cost of this instance assessed against the
appellant.
Hull, Vickers, Imperial, Butte, and Recto, JJ., concur.
269
270
G.R. No. 58168 December 19, 1989

CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAY-

CABRERA, LUISA MAGSAYSAY-CORPUZ, 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

271
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
272
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
273
claim pursuant to Section 5, Rule 86, Revised Rules of Court. 9 Petitioners' Feliciano, J., is on leave.
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 widow-respondent 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.

274
275
G.R. No. 82797 February 27, 1991

GOOD EARTH EMPORIUM INC., and LIM KA PING, petitioners,

vs.
HONORABLE COURT OF APPEALS and ROCES-REYES REALTY
INC., respondents.

A.E. Dacanay for petitioners.

Antonio Quintos Law Office for private respondent.

PARAS, J.:

This is a petition for review on certiorari of the December 29, 1987

decision * of the Court of Appeals in CA-G.R. No. 11960 entitled "ROCES-
REYES REALTY, INC. vs. HONORABLE JUDGE REGIONAL TRIAL COURT
OF MANILA, BRANCH 44, GOOD EARTH EMPORIUM, INC. and LIM KA

276
PING" reversing the decision of respondent Judge ** of the Regional Trial
Court of Manila, Branch 44 in Civil Case No. 85-30484, which reversed the
resolution of the Metropolitan Trial Court Of Manila, Branch 28 in Civil Case
No. 09639, *** denying herein petitioners' motion to quash the alias writ of
execution issued against them.
As gathered from the records, the antecedent facts of this case, are as
follows:
A Lease Contract, dated October 16, 1981, was entered into by and between
ROCES-REYES REALTY, INC., as lessor, and GOOD EARTH EMPORIUM,
INC., as lessee, for a term of three years beginning November 1, 1981 and
ending October 31, 1984 at a monthly rental of P65,000.00 (Rollo, p. 32;
Annex "C" of Petition). The building which was the subject of the contract of
lease is a five-storey building located at the corner of Rizal Avenue and
Bustos Street in Sta. Cruz, Manila.
From March 1983, up to the time the complaint was filed, the lessee had
defaulted in the payment of rentals, as a consequence of which, private
respondent ROCES-REYES REALTY, INC., (hereinafter designated as
ROCES for brevity) filed on October 14, 1984, an ejectment case (Unlawful
Detainer) against herein petitioners, GOOD EARTH EMPORIUM, INC. and
LIM KA PING, hereinafter designated as GEE, (Rollo, p. 21; Annex "B" of the
Petition). After the latter had tendered their responsive pleading, the lower
court (MTC, Manila) on motion of Roces rendered judgment on the pleadings
dated April 17, 1984, the dispositive portion of which states:
Judgment is hereby rendered ordering defendants (herein
petitioners) and all persons claiming title under him to vacate the
premises and surrender the same to the plaintiffs (herein
respondents); ordering the defendants to pay the plaintiffs the rental
of P65,000.00 a month beginning March 1983 up to the time
defendants actually vacate the premises and deliver possession to
the plaintiff; to pay attorney's fees in the amount of P5,000.00 and to
pay the costs of this suit. (Rollo, p. 111; Memorandum of
Respondents)
On May 16, 1984, Roces filed a motion for execution which was opposed by
GEE on May 28, 1984 simultaneous with the latter's filing of a Notice of
Appeal (Rollo, p. 112, Ibid.). On June 13, 1984, the trial court resolved such
motion ruling:
After considering the motion for the issuance of a writ of execution
filed by counsel for the plaintiff (herein respondents) and the
opposition filed in relation thereto and finding that the defendant
failed to file the necessary supersedeas bond, this court resolved to
grant the same for being meritorious. (Rollo, p. 112)
On June 14, 1984, a writ of execution was issued by the lower court.
Meanwhile, the appeal was assigned to the Regional Trial Court (Manila)
Branch XLVI. However, on August 15, 1984, GEE thru counsel filed with the
Regional Trial Court of Manila, a motion to withdraw appeal citing as reason
that they are satisfied with the decision of the Metropolitan Trial Court of
Manila, Branch XXVIII, which said court granted in its Order of August 27,
1984 and the records were remanded to the trial court (Rollo, p. 32; CA
Decision). Upon an ex-parte Motion of ROCES, the trial court issued
an Alias Writ of Execution dated February 25, 1985 (Rollo, p. 104; Annex "D"
of Petitioner's Memorandum), which was implemented on February 27, 1985.
GEE thru counsel filed a motion to quash the writ of execution and notice of
levy and an urgent Ex-parte Supplemental Motion for the issuance of a
restraining order, on March 7, and 20, 1985, respectively. On March 21,
1985, the lower court issued a restraining order to the sheriff to hold the
execution of the judgment pending hearing on the motion to quash the writ of
execution (Rollo, p. 22; RTC Decision). While said motion was pending
resolution, GEE filed a Petition for Relief from judgment before another court,
Regional Trial Court of Manila, Branch IX, which petition was docketed as
Civil Case No. 80-30019, but the petition was dismissed and the injunctive
writ issued in connection therewith set aside. Both parties appealed to the
Court of Appeals; GEE on the order of dismissal and Roces on denial of his
motion for indemnity, both docketed as CA-G.R. No. 15873-CV. Going back
to the original case, the Metropolitan Trial Court after hearing and disposing
some other incidents, promulgated the questioned Resolution, dated April 8,
1985, the dispositive portion of which reads as follows:
277
 Premises considered, the motion to quash the writ is hereby denied
for lack of merit.
The restraining orders issued on March 11 and 23, 1985 are hereby
recalled, lifted and set aside. (Rollo, p. 20, MTC Decision)
GEE appealed and by coincidence. was raffled to the same Court, RTC
Branch IX. Roces moved to dismiss the appeal but the Court denied the
motion. On certiorari, the Court of Appeals dismissed Roces' petition and
remanded the case to the RTC. Meantime, Branch IX became vacant and
the case was re-raffled to Branch XLIV.
On April 6, 1987, the Regional Trial Court of Manila, finding that the amount
of P1 million evidenced by Exhibit "I" and another P1 million evidenced by
the pacto de retro sale instrument (Exhibit "2") were in full satisfaction of the
judgment obligation, reversed the decision of the Municipal Trial Court, the
dispositive portion of which reads:
Premises considered, judgment is hereby rendered reversing the
Resolution appealed from quashing the writ of execution and
ordering the cancellation of the notice of levy and declaring the
judgment debt as having been fully paid and/or Liquidated. (Rollo, p.
29).
On further appeal, the Court of Appeals reversed the decision of the Regional
Trial Court and reinstated the Resolution of the Metropolitan Trial Court of
Manila, the dispositive portion of which is as follows:
WHEREFORE, the judgment appealed from is hereby REVERSED
and the Resolution dated April 8, 1985, of the Metropolitan Trial
Court of Manila Branch XXXIII is hereby REINSTATED. No
pronouncement as to costs. (Rollo, p. 40).
GEE's Motion for Reconsideration of April 5, 1988 was denied (Rollo, p. 43).
Hence, this petition.
The main issue in this case is whether or not there was full satisfaction of the
judgment debt in favor of respondent corporation which would justify the
quashing of the Writ of Execution.
A careful study of the common exhibits (Exhibits 1/A and 2/B) shows that
nowhere in any of said exhibits was there any writing alluding to or referring
to any settlement between the parties of petitioners' judgment obligation
(Rollo, pp. 45-48).
Moreover, there is no indication in the receipt, Exhibit "1", that it was in
payment, full or partial, of the judgment obligation. Likewise, there is no
indication in the pacto de retro sale which was drawn in favor of Jesus
Marcos Roces and Marcos V. Roces and not the respondent corporation, that
the obligation embodied therein had something to do with petitioners'
judgment obligation with respondent corporation.
Finding that the common exhibit, Exhibit 1/A had been signed by persons
other than judgment creditors (Roces-Reyes Realty, Inc.) coupled with the
fact that said exhibit was not even alleged by GEE and Lim Ka Ping in their
original motion to quash the alias writ of execution (Rollo, p. 37) but
produced only during the hearing (Ibid.) which production resulted in
petitioners having to claim belatedly that there was an "overpayment" of
about half a million pesos (Rollo, pp. 25-27) and remarking on the utter
absence of any writing in Exhibits "1/A" and "2/B" to indicate payment of the
judgment debt, respondent Appellate Court correctly concluded that there
was in fact nopayment of the judgment debt. As aptly observed by the said
court:
What immediately catches one's attention is the total absence of any
writing alluding to or referring to any settlement between the parties
of private respondents' (petitioners') judgment obligation. In moving
for the dismissal of the appeal Lim Ka Ping who was then assisted
by counsel simply stated that defendants (herein petitioners) are
satisfied with the decision of the Metropolitan Trial Court (Records of
CA, p. 54).
278
 Notably, in private respondents' (petitioners') Motion to Quash the
Writ of Execution and Notice of Levy dated March 7, 1985, there is
absolutely no reference to the alleged payment of one million pesos
as evidenced by Exhibit 1 dated September 20, 1984. As pointed out
by petitioner (respondent corporation) this was brought out by Linda
Panutat, Manager of Good Earth only in the course of the latter's
testimony. (Rollo, p. 37)
Article 1240 of the Civil Code of the Philippines provides that:
Payment shall be made to the person in whose favor the obligation
has been constituted, or his successor in interest, or any person
authorized to receive it.
In the case at bar, the supposed payments were not made to Roces-Reyes
Realty, Inc. or to its successor in interest nor is there positive evidence that
the payment was made to a person authorized to receive it. No such proof
was submitted but merely inferred by the Regional Trial Court (Rollo, p. 25)
from Marcos Roces having signed the Lease Contract as President which
was witnessed by Jesus Marcos Roces. The latter, however, was no longer
President or even an officer of Roces-Reyes Realty, Inc. at the time he
received the money (Exhibit "1") and signed the sale with pacto de
retro (Exhibit "2"). He, in fact, denied being in possession of authority to
receive payment for the respondent corporation nor does the receipt show
that he signed in the same capacity as he did in the Lease Contract at a time
when he was President for respondent corporation (Rollo, p. 20, MTC
decision).
On the other hand, Jesus Marcos Roces testified that the amount of P1
million evidenced by the receipt (Exhibit "1") is the payment for a loan
extended by him and Marcos Roces in favor of Lim Ka Ping. The assertion is
home by the receipt itself whereby they acknowledged payment of the loan in
their names and in no other capacity.
A corporation has a personality distinct and separate from its individual
stockholders or members. Being an officer or stockholder of a corporation
does not make one's property also of the corporation, and vice-versa, for
they are separate entities (Traders Royal Bank v. CA-G.R. No. 78412,
September 26, 1989; Cruz v. Dalisay, 152 SCRA 482). Shareowners are in
no legal sense the owners of corporate property (or credits) which is owned
by the corporation as a distinct legal person (Concepcion Magsaysay-
Labrador v. CA-G.R. No. 58168, December 19, 1989). As a consequence of
the separate juridical personality of a corporation, the corporate debt or credit
is not the debt or credit of the stockholder, nor is the stockholder's debt or
credit that of the corporation (Prof. Jose Nolledo's "The Corporation Code of
the Philippines, p. 5, 1988 Edition, citing Professor Ballantine).
The absence of a note to evidence the loan is explained by Jesus Marcos
Roces who testified that the IOU was subsequently delivered to private
respondents (Rollo, pp. 97-98). Contrary to the Regional Trial Court's
premise that it was incumbent upon respondent corporation to prove that the
amount was delivered to the Roces brothers in the payment of the loan in the
latter's favor, the delivery of the amount to and the receipt thereof by the
Roces brothers in their names raises the presumption that the said amount
was due to them.1wphi1 There is a disputable presumption that money paid
by one to the other was due to the latter (Sec. 5(f) Rule 131, Rules of Court).
It is for GEE and Lim Ka Ping to prove otherwise. In other words, it is for the
latter to prove that the payments made were for the satisfaction of their
judgment debt and not vice versa.
The fact that at the time payment was made to the two Roces brothers, GEE
was also indebted to respondent corporation for a larger amount, is not
supportive of the Regional Trial Court's conclusions that the payment was in
favor of the latter, especially in the case at bar where the amount was not
receipted for by respondent corporation and there is absolutely no indication
in the receipt from which it can be reasonably inferred, that said payment
was in satisfaction of the judgment debt. Likewise, no such inference can be
made from the execution of the pacto de retro sale which was not made in
favor of respondent corporation but in favor of the two Roces brothers in their
individual capacities without any reference to the judgment obligation in favor
of respondent corporation.
279
In addition, the totality of the amount covered by the receipt (Exhibit "1/A")
and that of the sale with pacto de retro(Exhibit "2/B") all in the sum of P2
million, far exceeds petitioners' judgment obligation in favor of respondent
corporation in the sum of P1,560,000.00 by P440,000.00, which militates
against the claim of petitioner that the aforesaid amount (P2M) was in full
payment of the judgment obligation.
Petitioners' explanation that the excess is interest and advance rentals for an
extension of the lease contract (Rollo, pp. 25-28) is belied by the absence of
any interest awarded in the case and of any agreement as to the extension of
the lease nor was there any such pretense in the Motion to Quash
the Alias Writ of Execution.
payment of the judgment obligation as claimed by petitioner. The burden of
evidence resting on the petitioners to establish the facts upon which their
action is premised has not been satisfactorily discharged and therefore, they
have to bear the consequences.
PREMISES CONSIDERED, the petition is hereby DENIED and the Decision
of the Respondent court is hereby AFFIRMED, reinstating the April 8, 1985
Resolution of the Metropolitan Trial Court of Manila.
SO ORDERED.
Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur.

Petitioners' averments that the respondent court had gravely abused its
discretion in arriving at the assailed factual findings as contrary to the
evidence and applicable decisions of this Honorable Court are therefore,
patently unfounded. Respondent court was correct in stating that it "cannot
go beyond what appears in the documents submitted by petitioners
themselves (Exhibits "1" and "2") in the absence of clear and convincing
evidence" that would support its claim that the judgment obligation has
indeed been fully satisfied which would warrant the quashal of the Alias Writ
of Execution.
G.R. No. L-30188 October 2, 1928
It has been an established rule that when the existence of a debt is fully
established by the evidence (which has been done in this case), the burden FELIPE TAYKO, EDUARDO BUENO, BAUTISTA TAYKO, BERNARDO
of proving that it has been extinguished by payment devolves upon the SOLDE and VICENTE ELUM, petitioners,
debtor who offers such a defense to the claim of the plaintiff creditor (herein vs.
respondent corporation) (Chua Chienco v. Vargas, 11 Phil. 219; Ramos v. NICOLAS CAPISTRANO, acting as Judge of First Instance of Oriental
Ledesma, 12 Phil. 656; Pinon v. De Osorio, 30 Phil. 365). For indeed, it is Negros. ALFREDO B. CACNIO, as Provincial Fiscal of Oriental Negros,
well-entrenched in Our jurisprudence that each party in a case must prove and JUAN GADIANI, respondents.
his own affirmative allegations by the degree of evidence required by law
(Stronghold Insurance Co. v. CA, G.R. No. 83376, May 29,1989; Tai Tong Abad Santos, Camus and Delgado and Teopisto Guingona for petitioners.
Chuache & Co. v. Insurance Commission, 158 SCRA 366). Araneta and Zaragoza for respondents.
The respondent Judge in his own behalf.
The appellate court cannot, therefore, be said to have gravely abused its
discretion in finding lack of convincing and reliable evidence to establish

280
OSTRAND, J.:
This is a petition for a writ of prohibition enjoining the respondent judge from
making cognizance of certain civil and criminal election cases in which the
petitioners are parties.
The petitioners allege that the respondent judge, previous to this date, was
appointed judge of the Court of First Instance of Oriental Negros, to hold
office during good behavior and until he should reach the age of 65 years;
that he now has reached that age and, therefore, under the provisions of
section 148 of the Administrative Code as amended, is disqualified from
acting as a judge of the Court of First Instance. The petitioners further allege
that in view of the many election protests and criminal cases for violation of
the election law filed in the Court of First Instance of Oriental Negros arising
in the Court of First Instance of Oriental Negros arising from the last election
of June 5, 1928, the Honorable Sixto de la Costa was duly designated and
acted as auxiliary judge of the Province of Oriental Negros; that between the
auxiliary judge and the respondent judge herein there was an understanding,
and the assignment of the said auxiliary judge was made with this
understanding, that the said auxiliary judge so designated would hear and
take cognizance of all election protests and criminal actions then pending or
to filed arising from the said last general election, and that the respondent
Honorable Nicolas Capistrano would try and hear the ordinary cases pending
in the said court, but, notwithstanding this understanding or agreement, the
respondent judge tried and is still trying to take cognizance of the election
protests an criminal actions in said court; that the respondent judge declared
in open court that he will try the criminal cases herein mentioned for the
reason that the auxiliary judge refused to try the same on the ground that the
preliminary investigations were held before him, when, in truth and in fact,
the said auxiliary judge did not make the statement imputed to him and was
and is still willing to try the election protests and criminal cases for violation of
the election law pending in the court of the Province of Oriental Negros; that
the respondent Honorable Nicolas Capistrano, in spite of the fact that he was
holding and is now pretending to hold the office of judge of the Court of First
Instance of Oriental Negros, took great interest and active part in the filing of
criminal charges against the petitioners herein to the unjustifiable extent of
appointing a deputy fiscal, who then filed the proper informations, when the
provincial fiscal refused to file criminal charges against the petitioners for
violation of the election law for lack of sufficient evidence to sustain the
same; that said respondent is neither a judge de jure nor de facto, but that,
notwithstanding this fact, he continues to hold the office of judge of the Court
of First Instance of Oriental Negros and pretends to be duly qualified and
acting judge of the said province; and that he has tried, and continues to try,
to act as such judge and that there is reasonable ground to believe that he
will take cognizance of the cases in question unless he be restrained by
order of this court; that in acting as a duly qualified judge notwithstanding the
facts alleged in the fifth, sixth, and seventh paragraphs hereof, the
respondent judge acted and is about to act without and in excess of
jurisdiction and also after the loss of jurisdiction.
To this petition the respondents demur on the ground that the facts stated in
that (1) none of the facts alleged in the petition divest the respondent judge
of his jurisdiction to take cognizance of the cases referred to in the complaint,
and (2) even admitting as true, for the sake of this demurrer, the facts alleged
in paragraph 7 of the petition, the respondent judge is still a de facto judge
and his title to the office and his jurisdiction to hear the cases referred to in
the petition cannot be questioned by prohibition, as this writ, even when
directed against persons acting as judges, cannot be treated as a substitute
for quo warranto, or be rightfully called upon to perform any of the functions
of that writ.
The ground upon which the petition rests may be reduced to three
propositions. (1) That the assignment of the Auxiliary Judge, Sixto de la
Costa, to Dumaguete was made with the understanding that the he was to
hear and take cognizance of all election contests and criminal causes for
violation of the election law and that the respondent judge was to take
cognizance of the ordinary cases and that there was an understanding
between them that this arrangement was to be followed.
(2) That the respondent judge took great interest and an active part
in the filing of the criminal charges against the petitioners herein to
the unjustifiable extent of appointing a deputy fiscal who filed the
proper informations when the regular provincial fiscal refused to file
them for lack of sufficient evidence.
281
(3) That the respondent judge is already over 65 years of age and
has, therefore, automatically ceased as judge of the Court of First
Instance of Oriental Negros and that he is neither a judge de
jure nor de facto.
(a) But little need be said as to the first proposition. A writ of
prohibition to a judge of an interior court will only lie in cases
where he acts without or in excess of his jurisdiction (section
226, Code of Civil Procedure), and it is obvious that a mere
"understanding" as to the distribution of cases for trial did not
deprive the respondent judge of the jurisdiction conferred
upon him by law. It may be noted that it is not alleged that
another judge had taken cognizance of the cases in question
or that they had been definitely assigned to trial before such
other judge.
(b) The second proposition is equally untenable.1awph!
l.net That the respondent judge took great interest and an
active part in the filing of the criminal charges against the
petitioners to the extent of appointing a deputy fiscal when
the regular provincial fiscal refused to file the proper
informations, did not disqualify him from trying the case in
question. Section 1679 of the Administrative Code provides
that "when a provincial fiscal shall be disqualified by
personal interest to act in a particular case or when for any
reason he shall be unable, or shall fail, to discharge any of
the duties of his position, the judge of the Court of First
Instance of the province shall appoint an acting provincial
fiscal, . . . ." (Emphasis ours.)
The determination of the question as to whether the fiscal
has failed to discharge his duty in the prosecution of a crime
must necessarily, to a large extent, lie within the sound
discretion of the presiding judge, and there is no allegation in
the petition that such discretion was abused in the present
instance. It is true that it is stated that the appointment of the
acting fiscal was "unjustifiable," but that is only a conclusion
of law and not an allegation of facts upon which such a
conclusion can be formed and may, therefore, be
disregarded. It follows that in appointing an acting fiscal, the
respondent judge was well within his jurisdiction.
(c) The third ground upon which the petition is based is the
most important and merits some consideration. It is well
settled that the title to the office of a judge, whether de
jure or de facto, can only be determined in a proceeding in
the nature of quo warranto and cannot be tested by
prohibition. But counsel for the petitioners maintains that the
respondent judge is neither a judge de jure nor de facto and
that, therefore, prohibition will lie. In this, counsel is
undoubtedly mistaken.
The respondent judge has been duly appointed to the office of Judge of the
Court of First Instance of Oriental Negros, but section 148 of the
Administrative Code, as amended, provides that "Judges of the Court of First
Instance and auxiliary judges shall be appointed to serve until they shall
reach the age of sixty-five years." In view of this provision and assuming, as
we must, that the allegations of the petition are true, it is evident that the
respondent is no longer a judge de jure, but we do not think that it can be
successfully disputed that he is still a judge de facto.
Briefly defined, a de facto judge is one who exercises the duties of a judicial
office under color of an appointment or election thereto (Brown vs. O'Connell,
36 Conn., 432). He differs, on the one hand, from a mere usurper who
undertakes to act officially without any color of right, and on the other hand,
from a judge de jure who is in all respects legally appointed and qualified and
whose term of office has not expired (State vs. Carroll, 38 Conn., 449; Denny
vs. Matton, 2 Allen [Mass.], 361; Van Slyke vs. Farmers' Mut. Fire Ins. Co.,
39 Wis., 390).
Apart from any constitutional or statutory regulation on the subject
there seems to be a general rule of law that an incumbent of an
office will hold over after the conclusion of his term until the elction
282
 and qualification of a successor (22 R. C. L., pp. 554-5). When a be questioned in a suit before him is generally recognized in the case of a
judge in good faith remains in office after his title has ended, he is special judge, and it is held that a party to an action before a special judge
a de facto officer (Sheehan's Case, 122 Mass., 445). may question his title to the office of a judge on the proceedings before him,
and that the judgment will be reversed on appeal, where proper exceptions
Applying the principles stated to the facts set forth in the petition before us, are taken, if the person assuming to act as special judge is not a judge de
we cannot escape the conclusion that, on the assumption that said facts are jure. The title of a de facto officer cannot be indirectly questioned in a
true, the respondent judge must be considered a judge de facto. His term of proceeding to obtain a writ of prohibition to prevent him from doing an official
office may have expired, but his successor has not been appointed, and as act nor in a suit to enjoin the collection of a judgment rendered by him.
good faith is presumed, he must be regarded as holding over in good faith. Having at least colorable right to the office his title can be determined only in
The contention of counsel for the petitioners that the auxiliary judge present a quo warranto proceeding or information in the nature of a quo warranto at
in the district must be considered the regular judge seems obviously suit of the sovereign." (15 R. C. L., pp. 519-521.)
erroneous.
The demurrer to the petition is sustained, and inasmuch as it is evident that
In these circumstances the remedy prayed for cannot be granted. "The the weakness of the petition cannot be cured by amendment the present
rightful authority of a judge, in the full exercise of his public judicial function, proceedings are hereby dismissed with the costs against the petitioners
cannot be questioned by any merely private suitor, nor by any other, jointly and severally. The preliminary injunction hereinbefore issued is
excepting in the form especially provided by law. A judge de facto assumes dissolved. So ordered.
the exercise of a part of the prerogative of sovereignty, and the legality of that
assumption is open to the attack of the sovereign power alone. Accordingly, it Avancea, C. J., Johnson, Street, Malcolm, Villamor, Romualdez, and Villa-
is a well established principle, dating from the earliest period and repeatedly Real, JJ., concur.
confirmed by an unbroken current of decisions, that the official acts of a de
facto judge are just as valid for all purposes as those of a de jure judge, so
far as the public or third persons who are interested therein are concerned.
The rule is the same in civil criminal cases. The principle is one founded in
policy and convenience, for the right of no one claiming a title or interest
under or through the proceedings of an officer having an apparent authority
to act would be safe, if it were necessary in every case to examine the
legality of the title of such officer up to its original source, and the title or
interest of such person were held to be invalidated by some accidental defect
or flaw in the appointment, election or qualification of such officer, or in the
rights of those from whom his appointment or election emanated; nor could
the supremacy of the laws be maintained, or their execution enforced, if the
acts of the judge having a colorable, but not a legal title, were to be deemed
invalid. As in the case of judges of courts of record, the acts of a justice de
facto cannot be called in question in any suit to which he is not a party. The
official acts of a de facto justice cannot b attacked collaterally. An exception
to the general rule that the title of a person assuming to act as judge cannot

283
284

G.R. No. L-21114 November 28, 1967
FEDERICO FERNANDEZ, plaintiff-appellant,
vs.
P. CUERVA and CO., defendant-appellee.
Gerardo P. Moreno, Jr. for plaintiff-appellant.
N.O. Bueno for defendant-appellee.
ZALDIVAR, J.:
This is an appeal from the order of the Court of First Instance of Manila,
dated January 29, 1963, in its Civil Case No. 52946, dismissing the
complaint upon the ground that the action in the first two causes of action
had prescribed and that it had no jurisdiction over the third cause of action.
It appears that plaintiff Federico Fernandez was employed as salesman by
defendant P. Cuerva & Co. from March, 1949 to October, 1959. After his
separation from the service, plaintiff filed a claim, on July 26, 1960, before
Regional Office No. 4 of the Department of Labor,1 docketed as L. S. Case
No. 2940, to recover unpaid salaries and commissions, and separation pay.
During the pendency of said case, or on December 17, 1962, plaintiff again
instituted a similar complaint against the same defendant with the Court of
First Instance of Manila (Civil Case No. 52946) alleging, among others, that
he was employed by defendant company as salesman in March, 1949 with a
salary of P200.00 per month that beginning June, 1955 until the termination
of his services in October, 1959, his salary was increased to, P300.00
monthly and was given, in addition, a commission of 10% on his sales; that
the increase of P100.00 a month and the 10% commission were not actually
received by him as there was a verbal understanding between him and
defendant company that the same would be retained by the latter as bond or
deposit for the goods being handled by the former; and that because plaintiff
was separated from the service in October, 1959, he sought to recover the
sum of P5,300.00 representing the P100.00 monthly deductions from his
salary; P4,770.00 corresponding to his 10% commissions that were withheld,
and P1,500.00 as separation pay, or the total sum of P11,570.00. These
three items were respectively the subject matter of the first, second and third
causes of action of the complaint.
On January 2, 1963, defendant filed a motion to dismiss the complaint upon
the grounds that the actions had prescribed and that the court had no
jurisdiction over the case. The court below, after allowing the parties to
submit their respective memorandum on the questions of prescription and
jurisdiction, dismissed the case, in an order issued on January 29, 1963,
holding that because the claim of plaintiff in the first two causes of action
amounting to P10,070.00 represented the sum total of unauthorized
deductions from his salaries and withheld commissions, under Section 10,
paragraph (f) of Republic Act No. 602, otherwise known as the Minimum
Wage Law, the action to recover the same was already barred under Section
17 of said Act inasmuch as it was not brought within three years from the
time the right of action accrued; and that because the remaining claim of
plaintiff was limited to his separation pay amounting only to P1,500.00, the
action to collect the same was not within the original jurisdiction of the court.
On February 1, 1963, plaintiff moved to reconsider the above-mentioned
order, advancing as his main argument the fact that his having filed a similar
claim with Regional Office No. 4 of the Department of Labor had suspended
the running of the prescriptive period insofar as his claim for refund of
unauthorized deductions and withheld commissions was concerned which
were the subject matters of the first and second causes of action that were
dismissed by the court. The defendant filed an opposition to the motion for
reconsideration. In an order dated February 15, 1963, the court denied
plaintiff's motion for reconsideration. Hence this appeal by the plaintiff direct
to this Court on purely questions of law.
We are in accord with the court a quo that the law applicable to the case at
bar is Republic Act 602 because the bond or deposit sought to be recovered
by appellant was actually the sum total of the unauthorized deductions from
285
his salaries and withheld commissions under Section 10 thereof. Under
Section 17 of said law, "any action . . . to enforce any cause of action under
this Act may be commenced within three years after the cause of action
accrued, and every such action shall be forever barred unless commenced
within three years after the cause of action accrued." Since a right of action
accrues only from the moment the right to commence the action comes into
existence, and prescription begins to run from that time, 2 the question to be
resolved is: When did the right of action of plaintiff accrue?
To answer the foregoing query, it is meet to recall that while the amounts
withheld by defendant were actually deductions from plaintiff's salaries and
unpaid commissions, they were, however, constituted as a bond or a deposit
to answer for any liability that he might incur in connection with the goods
handled by him. The bond and/or deposit was thus answerable for
merchandise entrusted to plaintiff during the period of his employment with
defendant. It was, therefore, not feasible for plaintiff to demand every month
or every payday, or during the period of his employment with the company
the return or refund of those amounts withheld as contended by defendant,
because the undertaking for which the bond or deposit was constituted was
still subsisting. And so the right of plaintiff to commence an action for the
return or refund of the amounts representing such bond or deposit would
accrue only when the same was no longer needed, and the time when it was
no longer needed only came in October 1959 when plaintiff was separated
from the service. Having ceased to be employed by the defendant, the bond
put up by plaintiff thereby became unnecessary or useless.
It would seem, however, that even if We count from October, 1959 in
computing the prescriptive period, plaintiff's action to recover the amount
held by defendant as bond is already barred because more than three years
had elapsed by the time plaintiff instituted the present case in the court below
on December 17, 1962. The record, however, shows that on July 26, 1960,
plaintiff filed a similar claim against the defendant with Regional Office No. 4
of the Department of Labor.
At this juncture, the question posed is: Did the filing by plaintiff of that claim
with the regional office of the Department of Labor suspend the running of
the period of prescription?
Defendant answers the question in the negative. While defendant does not
question the applicability to the case at bar of Article 1155 of the Civil Code,
which provides that the "prescription of actions is interrupted when they are
filed before the Court," nevertheless, it contends that inasmuch as plaintiff's
claim was lodged with the regional office of the Department of Labor, which is
not a court, the same could not be considered a judicial demand that would
suspend the running of the prescriptive period.
We do not agree with defendant. It is true that the claim filed by plaintiff with
the regional office of the Department of Labor is not a judicial demand in the
same sense of the term "judicial demand" because the same was not
instituted in a court of justice. Judicial notice, however, should be taken that
on December 10, 1956, Reorganization Plan No. 20-A was promulgated
pursuant to Republic Act 997, and under Section 25 of said reorganization
plan each regional office of the Department of Labor was vested with original
and exclusive jurisdiction over all cases affecting all money claims arising
from violations of labor standards on working conditions such as unpaid
wages, underpayment, overtime and separation pay, etc., to the exclusion of
courts.3Consequently, when plaintiff wanted to enforce his claim after his
dismissal from the service in October, 1959, he had no choice but to file the
same with Regional Office No. 4 of the Department of Labor which was the
agency then empowered to take cognizance of the claim. He could not
institute the action to recover his claim in the court of justice because of the
provisions of Reorganization Plan No. 20-A. At least it may be said that on
July 26, 1960, when plaintiff filed his claim with Regional Office. No. 4 of the
Department of Labor, he acted in accordance with the procedure that was
then prescribed under authority of law. Under the circumstances, We believe
that the filing by plaintiff of his claim before the regional office of the
Department of Labor had the attributes of a judicial demand. And We say this
because under the provisions of Section 25 of Reorganization Plan No. 20-A
each regional office of the Department of Labor was invested with
jurisdiction, similar to that of a court, to receive, determine, and adjudicate
claims arising out of employer-employee relations as specified in said
section. We quote Section 25 of Reorganization Plan No. 20-A:
Each Regional Office shall have original and exclusive jurisdiction
over all cases affecting all money claims arising from violations of
286
 labor standards on working conditions, including but not restrictive to:
unpaid wages, underpayment, overtime, separation pay, and
maternity leave of employees/laborers and unpaid wages, overtime,
separation pay, vacation pay, and payment for medical services of
domestic held. (Emphasis supplied)
It can be gathered from a reading of the above-quoted Section 25 of
Reorganization Plan No. 20-A that some sort of judicial powers was
conferred upon the regional offices of the Department of Labor over money
claims mentioned in said section. Certainly, it can be considered that filing a
money claim before a regional office of the Department of Labor pursuant to
Section 25 of Reorganization Plan No. 20-A is like filing a complaint in court
to enforce said money claim. We believe that the filing of a claim before an
administrative agency which is vested with authority to decide said claim
would produce the effect of a judicial demand for the purpose of interrupting
the running of the period of prescription. The purpose of the law on
prescription and the statute of limitations is to protect the person who is
diligent and vigilant in asserting his right, and conversely to punish the
person who sleeps on his right. 4 Indeed, it cannot be said that in the case
before Us the plaintiff had slept on his right, because shortly after he was
separated from the service by the defendant he filed his claim before the
agency of the government that was at the time clothed with exclusive
authority to pass upon his claim.
We have taken note of the fact that on June 30, 1961, Section 25 of
Reorganization Plan No. 20-A had been declared unconstitutional by this
Court in the case of Corominas, et al. v. The Labor Standards Commission,
et al., supra. It appears, however, that the plaintiff had filed his claim before
Regional Office No. 4 of the Department of Labor on July 26, 1960, or about
one year before said Section 25 had been declared unconstitutional. The
circumstance that Section 25 of Reorganization Plan No. 20-A had been
declared unconstitutional should not be counted against the defendant in the
present case. In the case of Manila Motor Co., Inc. v. Flores, 99 Phil., 738,
this Court upheld the right of a party under the Moratorium Law which had
accrued in his favor before said law was declared unconstitutional by this
Court in the case of Rutter v. Esteban, 93 Phil., 68. This Court, in its decision
in the Manila Motor case, quoted the following doctrine:
[t]here are several instances wherein courts, out of equity, have
relaxed its operation (cf. note in Cooley's Constitutional Limitations
8th ed., p. 383 and Notes 53 A.L.R., 273) or qualified its effects
"since the actual existence of a statute prior to such declaration is an
operative fact, and may have consequences which cannot justly be
ignored" (Chicot County vs. Baster, 308 U.S., 371) and a realistic
approach is eroding the general doctrine (Warring vs. Colpoys 136
Am. Law Rep., 1025, 1030).
We believe that it is only fair and just that the foregoing doctrine should be
applied in favor of the plaintiff in the present case.
We have noted in the record that it was precisely because Section 25 of
Reorganization Plan No. 20-A was declared unconstitutional by this Court on
June 30, 1961 that the plaintiff, without awaiting the action of Regional Office
No. 4 of the Department of Labor on the claim that he filed on July 26, 1960,
instituted his action in the present case in the court below on December 17,
1962. The move of plaintiff was precisely intended to protect his right of
action from the adverse effect of the decision of this Court. The Regional
Office No. 4 of the Department of Labor dismissed plaintiff's claim on January
16, 1963 upon the ground that it had no more jurisdiction to pass upon the
claim as a result of the ruling of this Court in the Corominas case.
Considering that from October, 1959 when plaintiff was separated from the
service up to July 26, 1960 when he filed his claim with Regional Office No. 4
of the Department of Labor only eight months had elapsed, and that since
July 26, 1960 until the filing of the complaint in the court below on December
17, 1962 the running of prescriptive period was deemed interrupted, it is
clear that plaintiff's action to enforce his claim was not yet barred by the
statute of limitations when he filed his complaint in the court below. Plaintiff's
action may be considered as brought before the court still within the period of
three years from the time his right of action accrued in accordance with the
provisions of Section 17 of Republic Act 602 (Minimum Wage Law). Only
about nine months of the three-year period provided in Section 17 of
Republic Act 602 may be considered as having lapsed when plaintiff
commenced his action in the court below. And considering further that the
amount sought to be recovered in the complaint is more than P10,000.00, it
287
follows that the court a quo has the exclusive and original jurisdiction to
entertain the action of the plaintiff. The lower court, therefore, erred when it
dismissed plaintiff's complaint.

WHEREFORE, the order appealed from is set aside, and this case is
remanded to the court below for further proceedings, with costs against the
defendant-appellee. It is so ordered.

Dizon, Makalintal, Bengzon, J.P., Sanchez, Castro and Angeles, JJ., concur.
Concepcion, C.J., and Reyes, J.B.L., J., took no part.

288
 (2) Immediately after the execution of said articles of incorporation, the
corporation proceeded to do business with the adoption of by-laws and the
election of its officers.

(3) On December 2, 1947, the said articles of incorporation were filed in the
office of the Securities and Exchange Commissioner, for the issuance of the
corresponding certificate of incorporation.

G.R. No. L-2598 June 29, 1950 (4) On March 22, 1948, pending action on the articles of incorporation by the
aforesaid governmental office, the respondents Fred Brown, Emma Brown,
Hipolita D. Chapman and Ceferino S. Abella filed before the Court of First
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
Instance of Leyte the civil case numbered 381, entitled "Fred Brown et al. vs.
vs.
Arnold C. Hall et al.", alleging among other things that the Far Eastern
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte,
Lumber and Commercial Co. was an unregistered partnership; that they
FRED BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity
wished to have it dissolved because of bitter dissension among the
as receiver of the Far Eastern Lumber and Commercial Co.,
members, mismanagement and fraud by the managers and heavy financial
Inc.,respondents.
losses.

Claro M. Recto for petitioners.

Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No. 381 of
the Court of First Instance of Leyte and to enjoin the respondent judge from
further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall,
and the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S. Abella, signed and acknowledged in Leyte, the article of
incorporation of the Far Eastern Lumber and Commercial Co., Inc.,
organized to engage in a general lumber business to carry on as general
contractors, operators and managers, etc. Attached to the article was an
affidavit of the treasurer stating that 23,428 shares of stock had been
subscribed and fully paid with certain properties transferred to the
corporation described in a list appended thereto.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall,
filed a motion to dismiss, contesting the court's jurisdiction and the sufficiently
of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the
dissolution of the company; and at the request of plaintiffs, appointed of the
properties thereof, upon the filing of a P20,000 bond.
(7) The defendants therein (petitioners herein) offered to file a counter-bond
for the discharge of the receiver, but the respondent judge refused to accept
the offer and to discharge the receiver. Whereupon, the present special civil
action was instituted in this court. It is based upon two main propositions, to
wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the
dissolution of the company, because it being a de facto corporation,
dissolution thereof may only be ordered in a quo warranto proceeding
instituted in accordance with section 19 of the Corporation Law.

289
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the
article of incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties
are informed that the Securities and Exchange Commission has not, so far,
issued the corresponding certificate of incorporation. All of them know, or
sought to know, that the personality of a corporation begins to exist only from
the moment such certificate is issued not before (sec. 11, Corporation
Law). The complaining associates have not represented to the others that
they were incorporated any more than the latter had made similar
representations to them. And as nobody was led to believe anything to his
prejudice and damage, the principle of estoppel does not apply. Obviously
this is not an instance requiring the enforcement of contracts with the
corporation through the rule of estoppel.
The first proposition above stated is premised on the theory that, inasmuch
as the Far Eastern Lumber and Commercial Co., is a de facto corporation,
section 19 of the Corporation Law applies, and therefore the court had not
jurisdiction to take cognizance of said civil case number 381. Section 19
reads as follows:
. . . The due incorporation of any corporations claiming in good faith
to be a corporation under this Act and its right to exercise corporate
powers shall not be inquired into collaterally in any private suit to
which the corporation may be a party, but such inquiry may be had at
the suit of the Insular Government on information of the Attorney-
General.
There are least two reasons why this section does not govern the situation.
Not having obtained the certificate of incorporation, the Far Eastern Lumber
and Commercial Co. even its stockholders may not probably claim "in
good faith" to be a corporation.
Under our statue it is to be noted (Corporation Law, sec. 11) that it is
the issuance of a certificate of incorporation by the Director of the
Bureau of Commerce and Industry which calls a corporation into
being. The immunity if collateral attack is granted to corporations
"claiming in good faith to be a corporation under this act." Such a
claim is compatible with the existence of errors and irregularities; but
not with a total or substantial disregard of the law. Unless there has
been an evident attempt to comply with the law the claim to be a
corporation "under this act" could not be made "in good faith." (Fisher
on the Philippine Law of Stock Corporations, p. 75. See
also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which the corporation is a party. This is a litigation
between stockholders of the alleged corporation, for the purpose of obtaining
its dissolution. Even the existence of a de jure corporation may be terminated
in a private suit for its dissolution between stockholders, without the
intervention of the state.
There might be room for argument on the right of minority stockholders to
sue for dissolution;1 but that question does not affect the court's jurisdiction,
and is a matter for decision by the judge, subject to review on appeal. Whkch
brings us to one principal reason why this petition may not prosper, namely:
the petitioners have their remedy by appealing the order of dissolution at the
proper time.
There is a secondary issue in connection with the appointment of a receiver.
But it must be admitted that receivership is proper in proceedings for
dissolution of a company or corporation, and it was no error to reject the
counter-bond, the court having declared the dissolution. As to the amount of
the bond to be demanded of the receiver, much depends upon the discretion
of the trial court, which in this instance we do not believe has been clearly
abused.
Judgment: The petition will, therefore, be dismissed, with costs. The
preliminary injunction heretofore issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.
290
291
 Charles C. De Selms for appellant.
Gibbs & McDonough and Roman Ozaeta for appellee.

OSTRAND, J.:

This action is brought to recover the sum of P24,736.47, the balance due on
the following promissory note:

P37,757.22

MANILA, P. I., Nov. 28, 1921.

MANILA, P. I., Nov. 28, 1921.

On demand, after date we promise to pay to the Asia Banking

Corporation, or order, the sum of thirty-seven thousand seven
hundred fifty-seven and 22/100 pesos at their office in Manila, for
value received, together with interest at the rate of ten per cent per
annum.

No. ________ Due __________

THE STANDARD PRODUCTS CO., INC.

By (Sgd.) GEORGE H. SEAVER
G.R. No. 22106 September 11, 1924

ASIA BANKING CORPORATION, plaintiff-appellee,

vs. By President
STANDARD PRODUCTS, CO., INC., defendant-appellant.

292
The court below rendered judgment in favor of the plaintiff for the sum
demanded in the complaint, with interest on the sum of P24,147.34 from
November 1, 1923, at the rate of 10 per cent per annum, and the costs. From
this judgment the defendant appeals to this court.
G.R. No. L-11442 May 23, 1958
At the trial of the case the plaintiff failed to prove affirmatively the corporate
existence of the parties and the appellant insists that under these MANUELA T. VDA. DE SALVATIERRA, petitioner,
circumstances the court erred in finding that the parties were corporations vs.
with juridical personality and assigns same as reversible error. HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of
First Instance of Leyte, Branch II, and SEGUNDINO
There is no merit whatever in the appellant's contention. The general rule is REFUERZO, respondents.
that in the absence of fraud a person who has contracted or otherwise dealt
with an association in such a way as to recognize and in effect admit its legal Jimenez, Tantuico, Jr. and Tolete for petitioner.
existence as a corporate body is thereby estopped to deny its corporate Francisco Astilla for respondent Segundino Refuerzo.
existence in any action leading out of or involving such contract or dealing,
unless its existence is attacked for cause which have arisen since making the
FELIX, J.:
contract or other dealing relied on as an estoppel and this applies to foreign
as well as to domestic corporations. (14 C. J., 227; Chinese Chamber of
Commerce vs. Pua Te Ching, 14 Phil., 222.) This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking
to nullify the order of the Court of First Instance of Leyte in Civil Case No.
1912, dated March 21, 1956, relieving Segundino Refuerzo of liability for the
The defendant having recognized the corporate existence of the plaintiff by
contract entered into between the former and the Philippine Fibers Producers
making a promissory note in its favor and making partial payments on the
Co., Inc., of which Refuerzo is the president. The facts of the case are as
same is therefore estopped to deny said plaintiff's corporate existence. It is,
follows:
of course, also estopped from denying its own corporate existence. Under
these circumstances it was unnecessary for the plaintiff to present other
evidence of the corporate existence of either of the parties. It may be noted Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land
that there is no evidence showing circumstances taking the case out of the located at Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said
rules stated. landholder entered into a contract of lease with the Philippine Fibers
Producers Co., Inc., allegedly a corporation "duly organized and existing
under the laws of the Philippines, domiciled at Burauen, Leyte, Philippines,
The judgment appealed from is affirmed, with the costs against the appellant.
and with business address therein, represented in this instance by Mr.
So ordered.
Segundino Q. Refuerzo, the President". It was provided in said contract,
among other things, that the lifetime of the lease would be for a period of 10
Street, Malcolm, Avancea, Villamor and Romualdez, JJ., concur. years; that the land would be planted to kenaf, ramie or other crops suitable
to the soil; that the lessor would be entitled to 30 per cent of the net income
accruing from the harvest of any, crop without being responsible for the cost
of production thereof; and that after every harvest, the lessee was bound to

293
declare at the earliest possible time the income derived therefrom and to
deliver the corresponding share due the lessor.
Apparently, the aforementioned obligations imposed on the alleged
corporation were not complied with because on April 5, 1955, Alanuela T.
Vda, de Salvatierra filed with the Court of First Instance of Leyte a complaint
against the Philippine Fibers Producers Co., Inc., and Segundino Q.
Refuerzo, for accounting, rescission and damages (Civil Case No. 1912).
She averred that sometime in April, 1954, defendants planted kenaf on 3
hectares of the leased property which crop was, at the time of the
commencement of the action, already harvested, processed and sold by
defendants; that notwithstanding that fact, defendants refused to render an
accounting of the income derived therefrom and to deliver the lessor's share;
that the estimated gross income was P4,500, and the deductible expenses
amounted to P1,000; that as defendants' refusal to undertake such task was
in violation of the terms of the covenant entered into between the plaintiff and
defendant corporation, a rescission was but proper.
As defendants apparently failed to file their answer to the complaint, of which
they were allegedly notified, the Court declared them in default and
proceeded to receive plaintiff's evidence. On June 8, 1955, the lower Court
rendered judgment granting plaintiff's prayer, and required defendants to
render a complete accounting of the harvest of the land subject of the
proceeding within 15 days from receipt of the decision and to deliver 30 per
cent of the net income realized from the last harvest to plaintiff, with legal
interest from the date defendants received payment for said crop. It was
further provide that upon defendants' failure to abide by the said requirement,
the gross income would be fixed at P4,200 or a net income of P3,200 after
deducting the expenses for production, 30 per cent of which or P960 was
held to be due the plaintiff pursuant to the aforementioned contract of lease,
which was declared rescinded.
No appeal therefrom having been perfected within the reglementary period,
the Court, upon motion of plaintiff, issued a writ of execution, in virtue of
which the Provincial Sheriff of Leyte caused the attachment of 3 parcels of
land registered in the name of Segundino Refuerzo. No property of the
Philippine Fibers Producers Co., Inc., was found available for attachment. On
January 31, 1956, defendant Segundino Refuerzo filed a motion claiming
that the decision rendered in said Civil Case No. 1912 was null and void with
respect to him, there being no allegation in the complaint pointing to his
personal liability and thus prayed that an order be issued limiting such liability
to defendant corporation. Over plaintiff's opposition, the Court a quo granted
the same and ordered the Provincial Sheriff of Leyte to release all properties
belonging to the movant that might have already been attached, after finding
that the evidence on record made no mention or referred to any fact which
might hold movant personally liable therein. As plaintiff's petition for relief
from said order was denied, Manuela T. Vda. de Salvatierra instituted the
instant action asserting that the trial Judge in issuing the order complained
of, acted with grave abuse of discretion and prayed that same be declared a
nullity.
From the foregoing narration of facts, it is clear that the order sought to be
nullified was issued by tile respondent Judge upon motion of defendant
Refuerzo, obviously pursuant to Rule 38 of the Rules of Court. Section 3 of
said Rule, however, in providing for the period within which such a motion
may be filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND
VERIFICATION. A petition provided for in either of the preceding
sections of this rule must be verified, filed within sixty days after the
petitioner learns of the judgment, order, or other proceeding to be set
aside, and not more than six months after such judgment or order
was entered, or such proceeding was taken; and must be must be
accompanied with affidavit showing the fraud, accident, mistake, or
excusable negligence relied upon, and the facts constituting the
petitioner is good and substantial cause of action or defense, as the
case may be, which he may prove if his petition be granted". (Rule
38)
The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner
learns of the judgment, and not more than 6 months after the judgment or
order was rendered, both of which must be satisfied. As the decision in the
case at bar was under date of June 8, 1955, whereas the motion filed by
respondent Refuerzo was dated January 31, 1956, or after the lapse of 7
294
months and 23 days, the filing of the aforementioned motion was clearly
made beyond the prescriptive period provided for by the rules. The remedy
allowed by Rule 38 to a party adversely affected by a decision or order is
certainly an alert of grace or benevolence intended to afford said litigant a
penultimate opportunity to protect his interest. Considering the nature of such
relief and the purpose behind it, the periods fixed by said rule are non-
extendible and never interrupted; nor could it be subjected to any condition or
contingency because it is of itself devised to meet a condition or contingency
(Palomares vs. Jimenez,* G.R. No. L-4513, January 31, 1952). On this score
alone, therefore, the petition for a writ of certiorari filed herein may be
granted. However, taking note of the question presented by the motion for
relief involved herein, We deem it wise to delve in and pass upon the merit of
the same.
Refuerzo, in praying for his exoneration from any liability resulting from the
non-fulfillment of the obligation imposed on defendant Philippine Fibers
Producers Co., Inc., interposed the defense that the complaint filed with the
lower court contained no allegation which would hold him liable personally,
for while it was stated therein that he was a signatory to the lease contract,
he did so in his capacity as president of the corporation. And this allegation
was found by the Court a quo to be supported by the records. Plaintiff on the
other hand tried to refute this averment by contending that her failure to
specify defendant's personal liability was due to the fact that all the time she
was under the impression that the Philippine Fibers Producers Co., Inc.,
represented by Refuerzo was a duly registered corporation as appearing in
the contract, but a subsequent inquiry from the Securities and Exchange
Commission yielded otherwise. While as a general rule a person who has
contracted or dealt with an association in such a way as to recognize its
existence as a corporate body is estopped from denying the same in an
action arising out of such transaction or dealing, (Asia Banking Corporation
vs. Standard Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs.
Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship Pompey, 49 Phil.,
117), yet this doctrine may not be held to be applicable where fraud takes a
part in the said transaction. In the instant case, on plaintiff's charge that she
was unaware of the fact that the Philippine Fibers Producers Co., Inc., had
no juridical personality, defendant Refuerzo gave no confirmation or denial
and the circumstances surrounding the execution of the contract lead to the
inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was
really made to believe that such corporation was duly organized in
accordance with law.
There can be no question that a corporation with registered has a juridical
personality separate and distinct from its component members or
stockholders and officers such that a corporation cannot be held liable for the
personal indebtedness of a stockholder even if he should be its president
(Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a
stockholder or member cannot be held personally liable for any financial
obligation be, the corporation in excess of his unpaid subscription. But this
rule is understood to refer merely to registered corporations and cannot be
made applicable to the liability of members of an unincorporated association.
The reason behind this doctrine is obvious-since an organization which
before the law is non-existent has no personality and would be incompetent
to act and appropriate for itself the powers and attribute of a corporation as
provided by law; it cannot create agents or confer authority on another to act
in its behalf; thus, those who act or purport to act as its representatives or
agents do so without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as an agent without
authority or without a principal is himself regarded as the principal,
possessed of all the rights and subject to all the liabilities of a principal, a
person acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and obligations and comes
personally liable for contracts entered into or for other acts performed as
such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's
Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Considering that
defendant Refuerzo, as president of the unregistered corporation Philippine
Fibers Producers Co., Inc., was the moving spirit behind the consummation
of the lease agreement by acting as its representative, his liability cannot be
limited or restricted that imposed upon corporate shareholders. In acting on
behalf of a corporation which he knew to be unregistered, he assumed the
risk of reaping the consequential damages or resultant rights, if any, arising
out of such transaction.
Wherefore, the order of the lower Court of March 21, 1956, amending its
previous decision on this matter and ordering the Provincial Sheriff of Leyte
295
to release any and all properties of movant therein which might have been
attached in the execution of such judgment, is hereby set aside and nullified
as if it had never been issued. With costs against respondent Segundino
Refuerzo. It is so ordered.

Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador,

Concepcion, Reyes, J.B.L., and Endencia, JJ., concur.

G.R. No. L-19118 January 30, 1965

MARIANO A. ALBERT, plaintiff-appellant,

vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.

Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.

Aruego, Mamaril & Associates for defendant-appellees.

BENGZON, J.P., J.:

No less than three times have the parties here appealed to this Court.

In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found
plaintiff entitled to damages (for breach of contract) but reduced the amount
from P23,000.00 to P15,000.00.

Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960,
we held that the judgment for P15,000.00 which had become final and
executory, should be executed to its full amount, since in fixing it, payment
already made had been considered.

296
Now we are asked whether the judgment may be executed against Jose M.
Aruego, supposed President of University Publishing Co., Inc., as the real
defendant.
Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University
Publishing Co., Inc. Plaintiff alleged inter alia that defendant was a
corporation duly organized and existing under the laws of the Philippines;
that on July 19, 1948, defendant, through Jose M. Aruego, its President,
entered into a contract with plaintifif; that defendant had thereby agreed to
pay plaintiff P30,000.00 for the exclusive right to publish his revised
Commentaries on the Revised Penal Code and for his share in previous
sales of the book's first edition; that defendant had undertaken to pay in eight
quarterly installments of P3,750.00 starting July 15, 1948; that per contract
failure to pay one installment would render the rest due; and that defendant
had failed to pay the second installment.
Defendant admitted plaintiff's allegation of defendant's corporate existence;
admitted the execution and terms of the contract dated July 19, 1948; but
alleged that it was plaintiff who breached their contract by failing to deliver his
manuscript. Furthermore, defendant counterclaimed for
damages.1wph1.t
Plaintiff died before trial and Justo R. Albert, his estate's administrator, was
substituted for him.
The Court of First Instance of Manila, after trial, rendered decision on April
26, 1954, stating in the dispositive portion
IN VIEW OF ALL THE FOREGOING, the Court renders judgment in
favor of the plaintiff and against the defendant the University
Publishing Co., Inc., ordering the defendant to pay the administrator
Justo R. Albert, the sum of P23,000.00 with legal [rate] of interest
from the date of the filing of this complaint until the whole amount
shall have been fully paid. The defendant shall also pay the costs.
The counterclaim of the defendant is hereby dismissed for lack of
evidence.
As aforesaid, we reduced the amount of damages to P15,000.00, to be
executed in full. Thereafter, on July 22, 1961, the court a quo ordered
issuance of an execution writ against University Publishing Co., Inc. Plaintiff,
however, on August 10, 1961, petitioned for a writ of execution against Jose
M. Aruego, as the real defendant, stating, "plaintiff's counsel and the Sheriff
of Manila discovered that there is no such entity as University Publishing
Co., Inc." Plaintiff annexed to his petition a certification from the securities
and Exchange Commission dated July 31, 1961, attesting: "The records of
this Commission do not show the registration of UNIVERSITY PUBLISHING
CO., INC., either as a corporation or partnership." "University Publishing Co.,
Inc." countered by filing, through counsel (Jose M. Aruego's own law firm), a
"manifestation" stating that "Jose M. Aruego is not a party to this case," and
that, therefore, plaintiff's petition should be denied.
Parenthetically, it is not hard to decipher why "University Publishing Co.,
Inc.," through counsel, would not want Jose M. Aruego to be considered a
party to the present case: should a separate action be now instituted against
Jose M. Aruego, the plaintiff will have to reckon with the statute of limitations.
The court a quo denied the petition by order of September 9, 1961, and from
this, plaintiff has appealed.
The fact of non-registration of University Publishing Co., Inc. in the Securities
and Exchange Commission has not been disputed. Defendant would only
raise the point that "University Publishing Co., Inc.," and not Jose M. Aruego,
is the party defendant; thereby assuming that "University Publishing Co.,
Inc." is an existing corporation with an independent juridical personality.
Precisely, however, on account of the non-registration it cannot be
considered a corporation, not even a corporation de facto (Hall vs. Piccio, 86
Phil. 603). It has therefore no personality separate from Jose M. Aruego; it
cannot be sued independently.
The corporation-by-estoppel doctrine has not been invoked. At any rate, the
same is inapplicable here. Aruego represented a non-existent entity and
induced not only the plaintiff but even the court to believe in such
representation. He signed the contract as "President" of "University
297
Publishing Co., Inc.," stating that this was "a corporation duly organized and
existing under the laws of the Philippines," and obviously misled plaintiff
(Mariano A. Albert) into believing the same. One who has induced another to
act upon his wilful misrepresentation that a corporation was duly organized
and existing under the law, cannot thereafter set up against his victim the
principle of corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).
"University Publishing Co., Inc." purported to come to court, answering the
complaint and litigating upon the merits. But as stated, "University Publishing
Co., Inc." has no independent personality; it is just a name. Jose M. Aruego
was, in reality, the one who answered and litigated, through his own law firm
as counsel. He was in fact, if not, in name, the defendant.
Even with regard to corporations duly organized and existing under the law,
we have in many a case pierced the veil of corporate fiction to administer the
ends of justice. * And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A
person acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts performed as
such agent." Had Jose M. Aruego been named as party defendant instead of,
or together with, "University Publishing Co., Inc.," there would be no room for
debate as to his personal liability. Since he was not so named, the matters of
"day in court" and "due process" have arisen.
In this connection, it must be realized that parties to a suit are "persons who
have a right to control the proceedings, to make defense, to adduce and
cross-examine witnesses, and to appeal from a decision" (67 C.J.S. 887)
and Aruego was, in reality, the person who had and exercised these rights.
Clearly, then, Aruego had his day in court as the real defendant; and due
process of law has been substantially observed.
By "due process of law" we mean " "a law which hears before it condemns;
which proceeds upon inquiry, and renders judgment only after trial. ... ." (4
Wheaton, U.S. 518, 581.)"; or, as this Court has said, " "Due process of law"
contemplates notice and opportunity to be heard before judgment is
rendered, affecting one's person or property" (Lopez vs. Director of Lands,
47 Phil. 23, 32)." (Sicat vs. Reyes, L-11023, Dec. 14, 1956.) And it may not
be amiss to mention here also that the "due process" clause of the
Constitution is designed to secure justice as a living reality; not to sacrifice it
by paying undue homage to formality. For substance must prevail over form.
It may now be trite, but none the less apt, to quote what long ago we said
in Alonso vs. Villamor, 16 Phil. 315, 321-322:
A litigation is not a game of technicalities in which one, more deeply
schooled and skilled in the subtle art of movement and position,
entraps and destroys the other. It is, rather, a contest in which each
contending party fully and fairly lays before the court the facts in
issue and then, brushing side as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that
Justice be done upon the merits. Lawsuits, unlike duels, are not to
be won by a rapier's thrust. Technicality, when it deserts its proper
office as an aid to justice and becomes its great hindrance and chief
enemy, deserves scant consideration from courts. There should be
no vested rights in technicalities.
The evidence is patently clear that Jose M. Aruego, acting as representative
of a non-existent principal, was the real party to the contract sued upon; that
he was the one who reaped the benefits resulting from it, so much so that
partial payments of the consideration were made by him; that he violated its
terms, thereby precipitating the suit in question; and that in the litigation he
was the real defendant. Perforce, in line with the ends of justice,
responsibility under the judgment falls on him.
We need hardly state that should there be persons who under the law are
liable to Aruego for reimbursement or contribution with respect to the
payment he makes under the judgment in question, he may, of course,
proceed against them through proper remedial measures.
PREMISES CONSIDERED, the order appealed from is hereby set aside and
the case remanded ordering the lower court to hold supplementary
proceedings for the purpose of carrying the judgment into effect against
University Publishing Co., Inc. and/or Jose M. Aruego. So ordered.
298
Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala,
Makalintal and Zaldivar, JJ., concur.
Bautista Angelo, J., took no part. G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,

vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow

money to pursue a business and to divide the profits or losses that may arise
therefrom, even if it is shown that they have not contributed any capital of
their own to a "common fund." Their contribution may be in the form of credit
or industry, not necessarily cash or fixed assets. Being partner, they are all
liable for debts incurred by or on behalf of the partnership. The liability for a
contract entered into on behalf of an unincorporated association or ostensible
corporation may lie in a person who may not have directly transacted on its
behalf, but reaped benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the
November 26, 1998 Decision of the Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:

WHEREFORE, [there being] no reversible error in the

appealed decision, the same is hereby affirmed. 2

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling,
which was affirmed by the CA, reads as follows:

WHEREFORE, the Court rules:

299
1. That plaintiff is entitled to the writ of preliminary
attachment issued by this Court on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the
following amounts, subject to the modifications as
hereinafter made by reason of the special and unique facts
and circumstances and the proceedings that transpired
during the trial of this case;
a. P532,045.00 representing [the] unpaid
purchase price of the fishing nets covered
by the Agreement plus P68,000.00
representing the unpaid price of the floats
not covered by said Agreement;
b. 12% interest per annum counted from
date of plaintiff's invoices and computed on
their respective amounts as follows:
i. Accrued interest of
P73,221.00 on Invoice No.
14407 for P385,377.80
dated February 9, 1990;
ii. Accrued interest for
P27,904.02 on Invoice No.
14413 for P146,868.00
dated February 13, 1990;
iii. Accrued interest of
P12,920.00 on Invoice No.
14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for attorney's fees,
plus P8,500.00 representing P500.00 per
appearance in court;
d. P65,000.00 representing P5,000.00
monthly rental for storage charges on the
nets counted from September 20, 1990
(date of attachment) to September 12, 1991
(date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the
principal obligation or for the unpaid price of nets
and floats in the amount of P532,045.00 and
P68,000.00, respectively, or for the total amount
P600,045.00, this Court noted that these items were
attached to guarantee any judgment that may be
rendered in favor of the plaintiff but, upon agreement
of the parties, and, to avoid further deterioration of
the nets during the pendency of this case, it was
ordered sold at public auction for not less than
P900,000.00 for which the plaintiff was the sole and
winning bidder. The proceeds of the sale paid for by
plaintiff was deposited in court. In effect, the amount
of P900,000.00 replaced the attached property as a
guaranty for any judgment that plaintiff may be able
to secure in this case with the ownership and
possession of the nets and floats awarded and
delivered by the sheriff to plaintiff as the highest
bidder in the public auction sale. It has also been
noted that ownership of the nets [was] retained by
the plaintiff until full payment [was] made as
stipulated in the invoices; hence, in effect, the
plaintiff attached its own properties. It [was] for this
reason also that this Court earlier ordered the
attachment bond filed by plaintiff to guaranty
300
 damages to defendants to be cancelled and for the
P900,000.00 cash bidded and paid for by plaintiff to
serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that
whatever judgment the plaintiff may be entitled to in
this case will have to be satisfied from the amount of
P900,000.00 as this amount replaced the attached
nets and floats. Considering, however, that the total
judgment obligation as computed above would
amount to only P840,216.92, it would be inequitable,
unfair and unjust to award the excess to the
defendants who are not entitled to damages and
who did not put up a single centavo to raise the
amount of P900,000.00 aside from the fact that they
are not the owners of the nets and floats. For this
reason, the defendants are hereby relieved from any
and all liabilities arising from the monetary judgment
obligation enumerated above and for plaintiff to
retain possession and ownership of the nets and
floats and for the reimbursement of the P900,000.00
deposited by it with the Clerk of Court.
SO ORDERED. 3
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter
Yao entered into a Contract dated February 7, 1990, for the purchase of
fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc.
(herein respondent). They claimed that they were engaged in a business
venture with Petitioner Lim Tong Lim, who however was not a signatory to
the agreement. The total price of the nets amounted to P532,045. Four
hundred pieces of floats worth P68,000 were also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence,
private respondents filed a collection suit against Chua, Yao and Petitioner
Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was
brought against the three in their capacities as general partners, on the
allegation that "Ocean Quest Fishing Corporation" was a nonexistent
corporation as shown by a Certification from the Securities and Exchange
Commission. 5 On September 20, 1990, the lower court issued a Writ of
Preliminary Attachment, which the sheriff enforced by attaching the fishing
nets on board F/B Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his
liability and requesting a reasonable time within which to pay. He also turned
over to respondent some of the nets which were in his possession. Peter Yao
filed an Answer, after which he was deemed to have waived his right to
cross-examine witnesses and to present evidence on his behalf, because of
his failure to appear in subsequent hearings. Lim Tong Lim, on the other
hand, filed an Answer with Counterclaim and Crossclaim and moved for the
lifting of the Writ of Attachment. 6 The trial court maintained the Writ, and
upon motion of private respondent, ordered the sale of the fishing nets at a
public auction. Philippine Fishing Gear Industries won the bidding and
deposited with the said court the sales proceeds of P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling that
Philippine Fishing Gear Industries was entitled to the Writ of Attachment and
that Chua, Yao and Lim, as general partners, were jointly liable to pay
respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao existed
based (1) on the testimonies of the witnesses presented and (2) on a
Compromise Agreement executed by the three 9 in Civil Case No. 1492-MN
which Chua and Yao had brought against Lim in the RTC of Malabon, Branch
72, for (a) a declaration of nullity of commercial documents; (b) a reformation
of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction
and (e) damages. 10 The Compromise Agreement provided:
301
 a) That the parties plaintiffs & Lim Tong Lim
agree to have the four (4) vessels sold in the
amount of P5,750,000.00 including the
fishing net. This P5,750,000.00 shall be
applied as full payment for P3,250,000.00 in
favor of JL Holdings Corporation and/or Lim
Tong Lim;
b) If the four (4) vessel[s] and the fishing net
will be sold at a higher price than
P5,750,000.00 whatever will be the excess
will be divided into 3: 1/3 Lim Tong Lim; 1/3
Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will
be less than P5,750,000.00 whatever the
deficiency shall be shouldered and paid to
JL Holding Corporation by 1/3 Lim Tong Lim;
1/3 Antonio Chua; 1/3 Peter Yao. 11
The trial court noted that the Compromise Agreement was silent as to the
nature of their obligations, but that joint liability could be presumed from the
equal distribution of the profit and loss. 21
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed
the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua
and Yao in a fishing business and may thus be held liable as a such for the
fishing nets and floats purchased by and for the use of the partnership. The
appellate court ruled:
The evidence establishes that all the defendants including
herein appellant Lim Tong Lim undertook a partnership for a
specific undertaking, that is for commercial fishing . . . .
Oviously, the ultimate undertaking of the defendants was to
divide the profits among themselves which is what a
partnership essentially is . . . . By a contract of partnership,
two or more persons bind themselves to contribute money,
property or industry to a common fund with the intention of
dividing the profits among themselves (Article 1767, New
Civil Code). 13
14
Hence, petitioner brought this recourse before this Court.
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed
Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED
ON A COMPROMISE AGREEMENT THAT CHUA, YAO AND
PETITIONER LIM ENTERED INTO IN A SEPARATE CASE,
THAT A PARTNERSHIP AGREEMENT EXISTED AMONG
THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT
HE WAS ACTING FOR OCEAN QUEST FISHING
CORPORATION WHEN HE BOUGHT THE NETS FROM
PHILIPPINE FISHING, THE COURT OF APPEALS WAS
UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER
LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE
SEIZURE AND ATTACHMENT OF PETITIONER LIM'S
GOODS.
In determining whether petitioner may be held liable for the fishing nets and
floats from respondent, the Court must resolve this key issue: whether by
302
their acts, Lim, Chua and Yao could be deemed to have entered into a
partnership.
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership
and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from
respondent, petitioner controverts the CA finding that a partnership existed
between him, Peter Yao and Antonio Chua. He asserts that the CA based its
finding on the Compromise Agreement alone. Furthermore, he disclaims any
direct participation in the purchase of the nets, alleging that the negotiations
were conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he
was a lessor, not a partner, of Chua and Yao, for the "Contract of Lease "
dated February 1, 1990, showed that he had merely leased to the two the
main asset of the purported partnership the fishing boat F/B Lourdes. The
lease was for six months, with a monthly rental of P37,500 plus 25 percent of
the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by
the two lower courts clearly showed that there existed a partnership among
Chua, Yao and him, pursuant to Article 1767 of the Civil Code which
provides:
Art. 1767 By the contract of partnership, two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the
profits among themselves.
Specifically, both lower courts ruled that a partnership among the three
existed based on the following factual findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who
was engaged in commercial fishing to join him, while Antonio
Chua was already Yao's partner;
(2) That after convening for a few times, Lim, Chua, and Yao
verbally agreed to acquire two fishing boats, the FB
Lourdes and the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother
of Petitioner Lim Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing
Corporation, which executed a Deed of Sale over these two
(2) boats in favor of Petitioner Lim Tong Lim only to serve as
security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-
equipping, repairing, dry docking and other expenses for the
boats would be shouldered by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim
again extended a loan to the partnership in the amount of P1
million secured by a check, because of which, Yao and Chua
entrusted the ownership papers of two other boats,
Chua's FB Lady Anne Mel and Yao's FB Tracy to Lim Tong
Lim.
(7) That in pursuance of the business agreement, Peter Yao
and Antonio Chua bought nets from Respondent Philippine
Fishing Gear, in behalf of "Ocean Quest Fishing
Corporation," their purported business name.
303
 (8) That subsequently, Civil Case No. 1492-MN was filed in
the Malabon RTC, Branch 72 by Antonio Chua and Peter
Yao against Lim Tong Lim for (a) declaration of nullity of
commercial documents; (b) reformation of contracts; (c)
declaration of ownership of fishing boats; (4) injunction; and
(e) damages.
(9) That the case was amicably settled through a
Compromise Agreement executed between the parties-
litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and
Lim had decided to engage in a fishing business, which they started by
buying boats worth P3.35 million, financed by a loan secured from Jesus Lim
who was petitioner's brother. In their Compromise Agreement, they
subsequently revealed their intention to pay the loan with the proceeds of the
sale of the boats, and to divide equally among them the excess or loss.
These boats, the purchase and the repair of which were financed with
borrowed money, fell under the term "common fund" under Article 1767. The
contribution to such fund need not be cash or fixed assets; it could be an
intangible like credit or industry. That the parties agreed that any loss or profit
from the sale and operation of the boats would be divided equally among
them also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of
the boat, but also to that of the nets and the floats. The fishing nets and the
floats, both essential to fishing, were obviously acquired in furtherance of
their business. It would have been inconceivable for Lim to involve himself so
much in buying the boat but not in the acquisition of the aforesaid equipment,
without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua
and Yao, a partnership engaged in the fishing business. They purchased the
boats, which constituted the main assets of the partnership, and they agreed
that the proceeds from the sales and operations thereof would be divided
among them.
We stress that under Rule 45, a petition for review like the present case
should involve only questions of law. Thus, the foregoing factual findings of
the RTC and the CA are binding on this Court, absent any cogent proof that
the present action is embraced by one of the exceptions to the rule. 16 In
assailing the factual findings of the two lower courts, petitioner effectively
goes beyond the bounds of a petition for review under Rule 45.
Compromise Agreement
Not the Sole Basis of Partnership
Petitioner argues that the appellate court's sole basis for assuming the
existence of a partnership was the Compromise Agreement. He also claims
that the settlement was entered into only to end the dispute among them, but
not to adjudicate their preexisting rights and obligations. His arguments are
baseless. The Agreement was but an embodiment of the relationship extant
among the parties prior to its execution.
A proper adjudication of claimants' rights mandates that courts must review
and thoroughly appraise all relevant facts. Both lower courts have done so
and have found, correctly, a preexisting partnership among the parties. In
implying that the lower courts have decided on the basis of one piece of
document alone, petitioner fails to appreciate that the CA and the RTC
delved into the history of the document and explored all the possible
consequential combinations in harmony with law, logic and fairness. Verily,
the two lower courts' factual findings mentioned above nullified petitioner's
argument that the existence of a partnership was based only on the
Compromise Agreement.
Petitioner Was a Partner,
Not a Lessor
We are not convinced by petitioner's argument that he was merely the lessor
of the boats to Chua and Yao, not a partner in the fishing venture. His
argument allegedly finds support in the Contract of Lease and the registration
304
papers showing that he was the owner of the boats, including F/B
Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he
consented to the sale of his own boats to pay a debt of Chua and Yao, with
the excess of the proceeds to be divided among the three of them. No lessor
would do what petitioner did. Indeed, his consent to the sale proved that
there was a preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business
agreement with Chua and Yao, in which debts were undertaken in order to
finance the acquisition and the upgrading of the vessels which would be used
in their fishing business. The sale of the boats, as well as the division among
the three of the balance remaining after the payment of their loans, proves
beyond cavil that F/B Lourdes, though registered in his name, was not his
own property but an asset of the partnership. It is not uncommon to register
the properties acquired from a loan in the name of the person the lender
trusts, who in this case is the petitioner himself. After all, he is the brother of
the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd for petitioner to
sell his property to pay a debt he did not incur, if the relationship among the
three of them was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability
can be imputed only to Chua and Yao, and not to him. Again, we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. All persons who
assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result
thereof: Provided however, That when any such ostensible
corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not
be allowed to use as a defense its lack of corporate
personality.
One who assumes an obligation to an ostensible corporation
as such, cannot resist performance thereof on the ground
that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally
nonexistent, a party may be estopped from denying its corporate existence.
"The reason behind this doctrine is obvious an unincorporated association
has no personality and would be incompetent to act and appropriate for itself
the power and attributes of a corporation as provided by law; it cannot create
agents or confer authority on another to act in its behalf; thus, those who act
or purport to act as its representatives or agents do so without authority and
at their own risk. And as it is an elementary principle of law that a person who
acts as an agent without authority or without a principal is himself regarded
as the principal, possessed of all the right and subject to all the liabilities of a
principal, a person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other acts
performed as such agent. 17
The doctrine of corporation by estoppel may apply to the alleged corporation
and to a third party. In the first instance, an unincorporated association,
which represented itself to be a corporation, will be estopped from denying its
corporate capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality to be sued to
evade its responsibility for a contract it entered into and by virtue of which it
received advantages and benefits.
On the other hand, a third party who, knowing an association to be
unincorporated, nonetheless treated it as a corporation and received benefits
from it, may be barred from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who benefited from
305
the transaction made by the ostensible corporation, despite knowledge of its
legal defects, may be held liable for contracts they impliedly assented to or
took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is
entitled to be paid for the nets it sold. The only question here is whether
petitioner should be held jointly 18 liable with Chua and Yao. Petitioner
contests such liability, insisting that only those who dealt in the name of the
ostensible corporation should be held liable. Since his name does not appear
on any of the contracts and since he never directly transacted with the
respondent corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found
inside F/B Lourdes, the boat which has earlier been proven to be an asset of
the partnership. He in fact questions the attachment of the nets, because the
Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao
decided to form a corporation. Although it was never legally formed for
unknown reasons, this fact alone does not preclude the liabilities of the three
as contracting parties in representation of it. Clearly, under the law on
estoppel, those acting on behalf of a corporation and those benefited by it,
knowing it to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract entered into
by persons with whom he previously had an existing relationship, he is
deemed to be part of said association and is covered by the scope of the
doctrine of corporation by estoppel. We reiterate the ruling of the Court
in Alonso v. Villamor: 19
A litigation is not a game of technicalities in which one, more
deeply schooled and skilled in the subtle art of movement
and position, entraps and destroys the other. It is, rather, a
contest in which each contending party fully and fairly lays
before the court the facts in issue and then, brushing aside
as wholly trivial and indecisive all imperfections of form and
technicalities of procedure, asks that justice be done upon
the merits. Lawsuits, unlike duels, are not to be won by a
rapier's thrust. Technicality, when it deserts its proper office
as an aid to justice and becomes its great hindrance and
chief enemy, deserves scant consideration from courts.
There should be no vested rights in technicalities.
Third Issue:
Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly issued
against the nets. We agree with the Court of Appeals that this issue is now
moot and academic. As previously discussed, F/B Lourdes was an asset of
the partnership and that it was placed in the name of petitioner, only to
assure payment of the debt he and his partners owed. The nets and the
floats were specifically manufactured and tailor-made according to their own
design, and were bought and used in the fishing venture they agreed upon.
Hence, the issuance of the Writ to assure the payment of the price stipulated
in the invoices is proper. Besides, by specific agreement, ownership of the
nets remained with Respondent Philippine Fishing Gear, until full payment
thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.
SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., pls. see concurring opinion.
306
307
 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 rendered-

1) 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:

G.R. No. 89561 September 13, 1990

a) To defendant-appellant PM Parts: (i)
damages consisting of the value of the fruits
BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. in the subject parcels of land of which they
CASTILLO, BERTILLA C. RADA, MARIETTA C. ABAEZ, LEOVINA C. were deprived in the sum of P26,000.00 and
JALBUENA and SANTIAGO M. RIVERA, petitioners, (ii) attorney's fees of P15,000.00
vs.
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY
b) To defendant-appellant Bormaheco: (i)
PARTS MANUFACTURING CO., INC., respondents.
expenses of litigation in the amount of
P5,000.00 and (ii) attorney's fees of
Edmundo T. Zepeda for petitioners. P15,000.00.

Martin M. De Guzman for respondent BORMAHECO, Inc. SO ORDERED.

Renato J. Robles for P.M. Parts Manufacturing Co., Inc.

308
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
309
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.
310
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;
311
 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 D-7 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)].
312
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 T-23708 (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:
313
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. 4
As earlier stated, respondent court reversed the aforequoted decision of the
trial court and rendered the judgment subject of this petition-
Petitioners 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
314
 4. In reversing the decision of the lower court of affirming the
same 5
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
315
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
316
 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 Counter-Guaranty 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
317
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
318
bearing on the good faith or bad faith of private respondent PM Parts. It must SO ORDERED.
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 Melencio-Herrera (Chairman), Paras and Padilla, JJ., concur.
PM Parts had no knowledge of the aforesaid several transactions executed
between Bormaheco and petitioners. In addition, Atty. Martin de Guzman, Sarmiento, J., is on leave.
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, T-24848 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. T-24846, 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.

319
G.R. No. L-47673 October 10, 1946
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
320
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, I-2 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, I-2 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
321
plaintiff when said engines were disposed of. Plaintiff honored the refuses, notwithstanding demands by plaintiff, to return to the plaintiff
draft and debited the said sum of $16,508.32 to merchandise said sum of P64,122.51 or any part thereof.
account. The engines were left stored at Stockholm, Sweden. On
April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, xxx xxx xxx
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 That the parties hereby reserve the right to present
Hongkong and a draft for $21,000 was drawn by Koppel Industrial additional evidence in support of their respective
Car and Equipment Company on Mr. Cesar Barrios. After the draft contentions.
was fully paid by Mr. Barrios, Koppel Industrial Car and Equipment
Company reimbursed plaintiff with cost price of $16,508.32 and
Manila, Philippines, December 26, 1939
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. (Sgd.) ROMAN OZAETA
Solicitor General
VII. That plaintiff's share in the profits realized out of these
transactions described in paragraphs IV, V and VI hereof totaling (Sgd.) ANTONIO CAIZARES
P3,772,403.82, amounts to P132,201.30; and that plaintiff within the Assistant Attorney
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 (Sgd.) E. P. REVILLA
thereon the sum P5,288.05 as such tax. Attorney for the Plaintiff
3rd Floor, Perez Samanillo Bldg., Manila
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 Both parties adduced some oral evidence in clarification of or
P3,772,403.82, representing the total gross value of the sales addition to their agreed statement of facts. A preponderance of
mentioned in paragraphs IV, V and VI hereof, including the 25 per evidence has established, besides the facts thus stipulated, the
cent surcharge for the late payment of the said tax, which tax and following:
surcharge were determined after the amount of P5,288.05
mentioned in paragraph VI hereof was deducted. (a) The shares of stock of plaintiff corporation were and are
all owned by Koppel Industries Car and Equipment
IX. That plaintiff, on October 30, 1936, paid under protest said sum of Company of Pennsylvania, U. S. A., exceptive which were
P64,122.51 in order to avoid further penalties, levy and distraint necessary to qualify the Board of Directors of said plaintiff
proceedings. corporation;

X. That defendant, on November 10, 1936, overruled plaintiff's (b) In the transactions involved herein the plaintiff
protest, and defendant has failed and refused and still fails and 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

322
 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
323
 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
324
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.
325
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.
326
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 (non-payment 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,
327
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
328
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.)
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.

(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.

329
G.R. No. L-13119 September 22, 1959

RICARDO TANTONGCO, Petitioner, vs. KAISAHAN NG MGA

MANGGAGAWA SA LA CAMPAN (KKM) AND THE HONORABLE COURT
OF INDUSTRIAL RELATIONS,Respondents.

Ernesto C. Estrella for petition for petitioner.

Carlos E. Santiago for respondent Union.
Pedro M. Ligaya for respondent CIR.

MONTEMAYOR, J.: chanrobles virtual law library

This is a petition for certiorari and prohibition with prayer for issuance
of a writ of preliminary injunction to prohibit respondent Court of Industrial
Relations from proceeding with the hearing of the contempt proceedings for
which petitioner Ricardo Tantongco was cited to appear the present his
evidence. The contempt proceedings which petitioner seeks to stop are
based on the order of the Court of Industrial Relations, dated September 30,
1957, which reads as follows:

It appearing that the Order of this Court, in the above-entitled case,

dated February 18, 1957 (folios 134-166), has become final and executory
and the respondents have failed to comply with the same, the said

330
respondents, namely, the La Campana Starch and Coffee Factory or its
manager or the person who has charge of the management, and the
administrator of the Estate of Ramon Tantongco are hereby ordered to
comply with said order, within five days from receipt hereof, particularly the
following, to wit:
(a) To reinstate the persons named in the said Order of February 18,
1957;chanrobles virtual law library
(b) To deposit the amount of P65,534.01 with this Court.
With respect to possible back wages from August 28, 1957 as
mentioned in the petition for contempt of August 30, 1957, the same shall
first be determined.chanroblesvirtualawlibrary chanrobles virtual law library
Failure to comply with this Order shall be directly dealt with
accordingly.
It would appear that petitioner Ricardo Tantongco failed to comply with
said order and so, as already stated, he was cited to appear and to adduce
evidence on his behalf to show why he should not be punished for indirect
contempt.chanroblesvirtualawlibrary chanrobles virtual law library
The facts in this case may be briefly narrated thus: Sometime in June,
1951, members of the Kaisahan ng mga Manggagawa sa La Campana, a
labor union to which were affiliated workers in the La Campana Starch
Factory and La Campana Coffee Factory, two separate entities but under the
one management, presented demands for higher wages, and more privileges
and benefits in connection with their work. When the management failed and
refused to grant the demands, the Department of Labor intervened; but
failing to settle the controversy, it certified the dispute to the Court of
Industrial Relations on July 17, 1951, where it was docketed as Case No.
584-V. On the theory that the laborers presenting the demands were only the
ones working in the coffee factory, said company filed through the
management a motion to dismiss claiming that inasmuch as there were only
14 of them in said factory, the Court of Industrial Relations had no jurisdiction
to entertain and decide the case. The motion was denied by the Court of
Industrial Relations, which said:
. . . There was only management for the business of gawgaw and
coffee with whom the laborers are dealing regarding their work. Hence, the
filing of action against the La Campana Starch and Coffee Factory is proper
and justified.
The order of denial was appealed to this Tribunal
through certiorari under G.R. No. L-5677. In disposing of the case, we held:
As to the first ground, petitioners obviously do not question the fact that
the number of employees of the La Campana Gaugau Packing involved in
the case is more than the jurisdictional number (31) required by law, but they
contend that the industrial court has no jurisdiction to try case against La
Campana Coffee Factory Co. Inc. because the latter has allegedly only 14
laborers and only five of these are members of respondent Kaisahan. This
contention loses force when it is noted that, as found by the industrial court -
and this finding is conclusive upon us - La Campana Gaugau Packing and La
Campana Coffee Factory Co. Inc., are operating under one single
management, that is, one business though with two trade names. True, the
coffee factory is a corporation , and, by legal fiction, an entity existing
separate and part from the persons composing it, that is, Tan Tong and his
family. But is settled this fiction of law, which has been introduced as a matter
of convenience and to subserve the ends of justice cannot be invoke to
further an end subversive of that
purpose.chanroblesvirtualawlibrary chanrobles virtual law library
... The attempt to make the two factories appear as two separate
business, when in reality, they are but one is but a device to defeat the ends
of the law (the Act governing capital and labor relations) and should not be
permitted to prevail. (La Campana Coffee Factory, et al., vs. Kaisahan ng
mga Manggagawa, etc. et al., 93 Phil., 160; 49 Off. Gaz., [6] 2300.)
Upon the return of the case to the Court of Industrial Relations, the
latter proceeded with the hearing. In the meantime incidental cases involving
331
the same parties came up and were filed before the Court of Industrial
Relations in the following cases:
Case No. 584-V(1) - petition for contempt against the La Campana
Starch and Coffee Factory for having employed 21 new laborers in violation
of the order of July 21, 1951, filed on July 25, 1951;chanrobles virtual law
library
Case No. 584-V(2) - petition of La Campana for authority for authority
to dismiss Loreto Bernabe, filed on July 25, 19651;chanrobles virtual law
library
Case No. 584-V(3) - petition of Union to reinstate Bonifacio Calderon
with backpay, filed on August 3, 1951;chanrobles virtual law library
Case No. 584-V(5) - petition of Union to reinstate Marcelo Estrada and
Exequiel Rapiz with back pay and to punish officials of the company for
contempt, filed on February 13, 1952; and chanrobles virtual law library
Case No. 584-V(6) - petition of union for reinstatement of Ibardolaza
and seven other member-laborers and to punish the officers of the company
for contempt, filed on July 15, 1953.
These five cases were heard jointly. In the meantime Ramon
Tantongco supposed to be the owner and manager of the La Campana
Starch Factory and the person in charge of the La Campana Coffee Factory
died on May 16, 1956. On motion of the labor union, the Court of Industrial
Relations order the inclusion as party respondent of the administrator of the
estate of Ramon Tantongco who was Ricardo
Tantongco.chanroblesvirtualawlibrary chanrobles virtual law library
Ricardo Tantongco, as administrator, under a special appearance filed
a motion to dismiss all the cases including the main case, that is to say,
Cases No. 584-(V) to 584-V(6), on the ground that said cases involved
claims for sums of money and consequently should be filed before the
probate court having jurisdiction over the estate, pursuant to the provisions of
Rule 3, Section 21, and Rule 88, Section 1 of the Rules of Court. On August
23, 1956, the Court of Industrial Relations denied the motion to dismiss and
proceed to hear the incidental cases against the La Campana
entities.chanroblesvirtualawlibrary chanrobles virtual law library
On June 12, 1956, a partial decision was rendered in the main case
No. 584-V, which partial decision was elevated to us and is still pending
appeal. On February 18, 1957, the Court of Industrial Relations issued an
order in incidental Cases No. 584-V(1), V(2), V(5) and V(6), directing the
"management of the respondent company and or the administrator of the
Estate of Ramon Tantongco", to reinstate the dismissed laborers mentioned
therein with back wages. This order of February 18, 1957, as well as the
order directing the inclusion of the administrator of the estate of Ramon
Tantongco as additional respondent in the incidental cases, and the order
denying the petition of the administrator to dismiss said incidental cases were
appealed to this tribunal though certiorari. The appeal, however, was
summarily dismissed by this Court in its resolution of June 12, 1957, as
follows:
This Court, deliberating upon the allegations of the petition filed in case
l-12355 (La Campana Starch Coffee Factory et al. vs. Kaisahan ng Mga
Manggagawa sa la Campana, KKM, et al) for review, on certiorari of the
decision of the Court of Industrial Relations referred to therein, and finding
that there is no merit in the petition, RESOLVE TO DISMISS the same.
The CIR order of February 18, ,1957, in the incidental cases Nos. 584-
V to V(6), having become final and executory , the laborers involved reported
for work on August 28, 1957, but they were not admitted by the management.
Consequently, the union filed a petition dated August 30, 1957, to hold
respondents in said cases for contempt. After hearing the CIR issued the
order of September 30, 1957, subject of this petition, ordering "the La
Campana Starch and Coffee Factory or its manager or the person who has
charge of its management and the administrator of the estate of Ramon
Tantongco" to "reinstate the persons named in the order of February 18,
1957" and "to deposit the amount of P65,534.01." For refusal or failure to
comply with said order, petitioner Ricardo Tantongco was required to appear
before the attorney of the CIR in contempt proceedings. Petitioner now seeks
332
to prohibit the CIR from proceeding with the trial for contempt and to enjoin
respondent CIR from enforcing its order of September 30,
1957.chanroblesvirtualawlibrary chanrobles virtual law library
Petitioner contends that upon the death of Ramon Tantongco, the
claims of the laborers should have been dismissed and that said claims
should have been filed with the probate court having jurisdiction over the
administration proceedings of the estate of Ramon Tantongco, pursuant to
the provisions of Rule 3, Section 21 of the Rules of Court and that the failure
to file claims with the administrator forever barred said claims as provided in
Rule 87, Section 5 of the Rules of Court, especially after the assets of the
estate had been distributed among the heirs, and petitioner had ceased to be
the administrator of the estate. As already stated this same question was
raised by petitioner in G.R. No. L-12355, entitled "La Campana Starch and
Coffee Factory and Ricardo Tantongco, etc. vs. Kaisahan ng mga
Manggagawa sa La Campana (KKM)," which, as already stated, was
summarily dismissed by this Court in a resolution dated June 12, 1957.
Consequently, said question may not again be raised in the present case.
Furthermore, it may be recalled that both in the main case in the incidental
cases No. 584-V to 584-V(6), Ramon Tantongco was never a party. The party
there was the La Campana Starch and Coffee Factory by which name it was
sought to designate the two entities La Campana Starch Packing and the La
Campana Coffee Factory. Naturally, the claims contained in said cases were
not the claims contemplated by law to be submitted before the administrator.
In other words the death of Ramon Tantongco did not deprive the CIR of its
jurisdiction over the cases aforementioned. Moreover, the money claims of
the laborers were merely incidental to their demands for reinstatement for
having been unjustly dismissed, and for better working
conditions.chanroblesvirtualawlibrary chanrobles virtual law library
Petitioner, however, contends that in G.R. No. L-5677, we "pierced the
veil of corporate existence", and held that the La Campana Starch and
Coffee Factory and its owner, Ramon Tantongco, were one; so that with the
death of Ramon, the La Campana entities ceased to exist, resulting in the
loss of jurisdiction of the CIR to enforce its order against said entities. The
reason we applied the so-called "piercing the veil of corporate existence" in
G.R. No. L-5677 was to avoid the technicality therein advanced in order to
defeat the jurisdiction of the CIR. We there found that although there were
ostensibly two separate companies or entities, they were managed by the
same person or persons and the workers in both were used interchangeably
so that in order to determine whether or not the CIR had jurisdiction, the
number of workers in both entitles, not in only one, was to be considered.
However, we still believe that although the family of Ramon Tantongco was
practically the owner of both the coffee factory and the starch factory,
nevertheless these entities are separate from the personality of Ramon. The
coffee factory is a stock corporation and the shares are owned not only by
Ramon but also by others, such as petitioner Ricardo who not only is a
stockholder and director and treasurer but also the management of the same
Furthermore, petitioner is now estopped from claiming that the two entities in
question and Ramon are one. Thus in Annex 3-CIR (par. 1 thereof) which is a
complaint for injunction filed by La Campana Food Products, et al and La
Campana Starch Packing against the consolidated Labor Organization of the
Philippines, in civil Case No. P-25482 in the Court of First Instance of Rizal,
petitioner admitted the existence and operation of said entities; in Annex 4-
CIR where petitioner appeared as General Manager representing the two
entities in its agreement with the La Campana Workers Union to resolve the
dispute between the two entities and the laborers in case Nos. 1072-V and
1371-ULP, the existence of the two entities appears to have been admitted;
and in Annex 5-A-CIR, an answer to the complaint of La Campana Workers
Union in case No. 1471-ULP (Annex 5-CIR), petitioner admitted the
allegation that said two factories were in existence and doing business with
petitioner as manager of the same.chanroblesvirtualawlibrary chanrobles
virtual law library
In relation to the order of the CIR requiring petitioner to appear in the
contempt proceedings instituted against him, petitioner contends that after he
ceased to be the administrator of the estate of Ramon Tantongco, he may
not now be compelled to comply with the order of the court. In answer, it is
enough to bear in mind the jurisdiction and authority of the CIR as to
compliance with and violations of its orders under section 6, Commonwealth
Act No. 143, which we quote below:
. . . The Court or any Judge thereof shall have furthermore, all the
inherent powers of a court of justice provided in paragraph 5 of Rule 124 of
333
the Supreme Court, as well as the power to punish direct and indirect
contempt as provided in Rule 64 of the same Court, under the same
procedure and penalties provided
therein.chanroblesvirtualawlibrary chanrobles virtual law library

Any violation of any order, award, or decision of the Court of Industrial

Relations shall, after such order, award or decision has become final,
conclusive, and executory, constitute contempt of court: . .
.chanroblesvirtualawlibrary chanrobles virtual law library
G.R. No. 110358 November 9, 1994

In case the employer (or landlord) committing any such violation or

QUINTIN ROBLEDO, MARIO SINLAO, LEONARDO SAAVEDRA,
contempt is an association or corporation, the manager or the person who
VICENTE SECAPURI, DANIEL AUSTRIA, ET AL., petitioners,
has the charge of the management of the business of the association or
vs.
corporation and the officers of directors thereof who have ordered or
THE NATIONAL LABOR RELATIONS COMMISSION, BACANI SECURITY
authorized the violation of contempt shall be liable. . . .
AND ALLIED SERVICES CO., INC., AND BACANI SECURITY AND
PROTECTIVE AGENCY AND/OR ALICIA BACANI, respondents.
In conclusion, we find and hold that the La Campana Starch and Food
Products Company which stands for the La Campana Starch and Coffee
Benjamin C. Pineda for petitioners.
Factory are entities distinct from the personality of Ramon Tantongco; that
after the death of Ramon these two entities continued to exist and to operate
under the management of petitioner and that consequently he is the proper Villanueva, Ebora & Caa for private respondents.
person and official to which the orders of the CIR are addressed and who is
in duty bound to comply with the same. We further find that the CIR acted
with in its jurisdiction in issuing its order of September 30, 1957 and in
requiring petitioner to appear to give his evidence if any in relation with the MENDOZA, J.:
contempt proceedings instituted against
him.chanroblesvirtualawlibrary chanrobles virtual law library This is a petition for review of the decision of the First Division 1 of the
National Labor Relations Commission, setting aside the decision of the Labor
In view of the foregoing, the petition for certiorari is .hereby denied and Arbiter which held private respondents jointly and severally liable to the
the writ of preliminary injunction dissolved, with costs. petitioners for overtime and legal holiday pay.

Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Concepcion,
Endencia and Barrera, JJ., concur.
The facts of this case are as follows:
Petitioners were former employees of Bacani Security and Protective Agency
(BSPA, for brevity). They were employed as security guards at different times
during the period 1969 to December 1989 when BSPA ceased to operate.

334
BSPA was a single proprietorship owned, managed and operated by the late
Felipe Bacani. It was registered with the Bureau of Trade and Industry as a
business name in 1957. Upon its expiration, the registration was renewed on
July 1, 1987 for a term of five (5) years ending 1992.
On December 31, 1989, Felipe Bacani retired the business name and BSPA
ceased to operate effective on that day. At that time, respondent Alicia
Bacani, daughter of Felipe Bacani, was BSPA's Executive Directress.
On January 15, 1990 Felipe Bacani died. An intestate proceeding was
instituted for the settlement of his estate before the Regional Trial Court,
National Capital Region, Branch 155, Pasig, Metro Manila.
Earlier, on October 26, 1989, respondent Bacani Security and Allied Services
Co., Inc. (BASEC, for brevity) had been organized and registered as a
corporation with the Securities and Exchange Commission. The following
were the incorporators with their respective shareholdings:
ALICIA BACANI 25,250 shares
LYDIA BACANI 25,250 shares
AMADO P. ELEDA 25,250 shares
VICTORIA B. AURIGUE 25,250 shares
FELIPE BACANI 20,000 shares
The primary purpose of the corporation was to "engage in the business of
providing security" to persons and entities. This was the same line of
business that BSPA was engaged in. Most of the petitioners, after losing their
jobs in BSPA, were employed in BASEC.
On July 5, 1990, some of the petitioners filed a complaint with
the Department of Labor and Employment, National Capital Region, for
underpayment of wages and nonpayment of overtime pay, legal holiday pay,
separation pay and/or retirement/resignation benefits, and for the return of
their cash bond which they posted with BSPA. Made respondents were BSPA
and BASEC. Petitioners were subsequently joined by the rest of the
petitioners herein who filed supplementary complaints.
On March 1, 1992, the Labor Arbiter rendered a decision upholding the right
of the petitioners. The dispositive portion of his decision reads:
CONFORMABLY WITH THE FOREGOING, the judgment is
hereby rendered finding complainants entitled to their money
claims as herein above computed and to be paid by all the
respondents herein in solidum except BSPA which has
already been retired from business.
Respondents are further ordered to pay attorney's fees
equivalent to five (5) percent of the awarded money claims.
All other claims are hereby dismissed for lack of merit.
SO ORDERED.
On appeal the National Labor Relations Commission reversed. In a decision
dated March 30, 1993, the NLRC's First Division declared the Labor Arbiter
without jurisdiction and instead suggested that petitioners file their claims
with the Regional Trial Court, Branch 155, Pasig, Metro Manila, where an
intestate proceeding for the settlement of Bacani's estate was pending.
Petitioners moved for a reconsideration but their motion was denied for lack
of merit. Hence this petition for review.
No appeal lies to review decisions of the NLRC. Nonetheless the petition in
this case was treated as a special civil action of certiorari to determine
whether the NLRC did not commit a grave abuse of its discretion in reversing
the Labor Arbiter's decision.
The issues in this case are two fold: first, whether Bacani Security and Allied
Services Co. Inc. (BASEC) and Alicia Bacani can be held liable for claims of
petitioners against Bacani Security and Protective Agency (BSPA)
and, second, if the claims were the personal liability of the late Felipe Bacani,
as owner of BSPA, whether the Labor Arbiter had jurisdiction to decide the
claims.
335
Petitioners contend that public respondent erred in setting aside the Labor
Arbiter's judgment on the ground that BASEC is the same entity as BSPA the
latter being owned and controlled by one and the same family, namely the
Bacani family. For this reason they urge that the corporate fiction should be
disregarded and BASEC should be held liable for the obligations of the
defunct BSPA.
We find the petition to be without merit.
As correctly found by the NLRC, BASEC is an entity separate and distinct
from that of BSPA. BSPA is a single proprietorship owned and operated by
Felipe Bacani. Hence its debts and obligations were the personal obligations
of its owner. Petitioners' claim which are based on these debts and personal
obligations, did not survive the death of Felipe Bacani on January 15, 1990
and should have been filed instead in the intestate proceedings involving his
estate.
Indeed, the rule is settled that unless expressly assumed labor contracts are
not enforceable against the transferee of an enterprise. The reason for this is
that labor contracts are in personam. 2 Consequently, it has been held that
claims for backwages earned from the former employer cannot be filed
against the new owners of an enterprise. 3Nor is the new operator of a
business liable for claims for retirement pay of employees. 4
Petitioners claim, however, that BSPA was intentionally retired in order to
allow expansion of its business and even perhaps an increase in its
capitalization for credit purpose. According to them, the Bacani family merely
continued the operation of BSPA by creating BASEC in order to avoid the
obligations of the former. Petitioners anchor their claim on the fact that Felipe
Bacani, after having ceased to operate BSPA, became an incorporator of
BASEC together with his wife and daughter. Petitioners urge piercing the veil
of corporate entity in order to hold BASEC liable for BSPA's obligations.
The doctrine of piercing the veil of corporate entity is used whenever a court
finds that the corporate fiction is being used to defeat public convenience,
justify wrong, protect fraud, or defend crime, or to confuse legitimate issues,
or that 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. 5 It is apparent, therefore, that the doctrine has no
application to this case where the purpose is not to hold the individual
stockholders liable for the obligations of the corporation but, on the contrary,
to hold the corporation liable for the obligations of a stockholder or
stockholders. Piercing the veil of corporate entity means looking through the
corporate form to the individual stockholders composing it. Here there is no
reason to pierce the veil of corporate entity because there is no question that
petitioners' claims, assuming them to be valid, are the personal liability of the
late Felipe Bacani. It is immaterial that he was also a stockholder of BASEC.
Indeed, the doctrine is stood on its head when what is sought is to make a
corporation liable for the obligations of a stockholder. But there are several
reasons why BASEC is not liable for the personal obligations of Felipe
Bacani. For one, BASEC came into existence before BSPA was retired as a
business concern. BASEC was incorporated on October 26, 1989 and its
license to operate was released on May 28, 1990, while BSPA ceased to
operate on December 31, 1989. Before, BSPA was retired, BASEC was
already existing. It is, therefore, not true that BASEC is a mere continuity of
BSPA.
Second, Felipe Bacani was only one of the five (5) incorporators of BASEC.
He owned the least number of shares in BASEC, which included among its
incorporators persons who are not members of his family. That his wife Lydia
and daughter Alicia were also incorporators of the same company is not
sufficient to warrant the conclusion that they hold their shares in his behalf.
Third, there is no evidence to show that the assets of BSPA were transferred
to BASEC. If BASEC was a mere continuation of BSPA, all or at least a
substantial part of the latter's assets should have found their way to BASEC.
Neither can respondent Alicia Bacani be held liable for BSPA's obligations.
Although she was Executive Directress of BSPA, she was merely an
employee of the BSPA, which was a single proprietorship.
336
Now, the claims of petitioners are actually money claims against the estate of
Felipe Bacani. They must be filed against his estate in accordance with Sec.
5 of Rule 86 which provides in part:

Sec. 5. Claims which must be filed under the notice. If not

filed, barred; exceptions. All claims for money against the
decedent, arising from contract, express or implied, whether
the same be due, not due, or contingent, all claims for
funeral expenses and expenses for the last sickness of the
decedent, and judgment for money against the decedent,
must be filed within the time limited in the notice; otherwise
they are barred forever, except that they may be set forth as
counterclaims in any action that the executor or
administrator may bring against the claimants . . .

The rationale for the rule is that upon the death of the defendant, a testate or
intestate proceeding shall be instituted in the proper court wherein all his
creditors must appear and file their claims which shall be paid proportionately
out of the property left by the deceased. The objective is to avoid duplicity of
procedure. Hence the ordinary actions must be taken out from the ordinary
courts. 6 Under Art. 110 of the Labor Code, money claims of laborers enjoy
preference over claims of other creditors in case of bankruptcy or liquidation
of the employer's business.

WHEREFORE, the petition for certiorari is DISMISSED.

SO ORDERED.

Narvasa, C.J., Regalado and Puno, JJ., concur.

337
338
G.R. No. L-2886 August 22, 1952

GREGORIO ARANETA, INC., plaintiff-appellant,

vs.
PAZ TUASON DE PATERNO and JOSE VIDAL, defendants-appellants.

Araneta and Araneta for appellant.

Ramirez and Ortigas for defendants-appellants.
Perkins, Ponce Enrile and Contreras And La O and Feria for appellee.

TUASON, J.:

This is a three-cornered contest between the purchasers, the seller, and the
mortgagee of certain portions (approximately 40,703 square meters) of a big
block of residential land in the district of Santa Mesa, Manila. The plaintiff,
which is the purchaser, and the mortgagee elevated this appeal. Though not
an appellant, the seller and mortgagor has made assignments of error in her
brief, some to strengthen the judgment and others for the purpose of new
trial.

The case is extremely complicated and multiple issues were raised.

The salient facts in so far as they are not controverted are these. Paz Tuason
de Paterno is the registered owner of the aforesaid land, which was
subdivided into city lots. Most of these lots were occupied by lessees who
had contracts of lease which were to expire on December 31,1952, and
carried a stipulation to the effect that in the event the owner and lessor
should decide to sell the property the lessees were to be given priority over
other buyers if they should desire to buy their leaseholds, all things being
equal. Smaller lots were occupied by tenants without formal contract.

339
In 1940 and 1941 Paz Tuason obtained from Jose Vidal several loans
totalling P90,098 and constituted a first mortgage on the aforesaid property
to secure the debt. In January and April, 1943, she obtained additional loans
of P30,000 and P20,000 upon the same security. On each of the last-
mentioned occasions the previous contract of mortgage was renewed and
the amounts received were consolidated. In the first novated contract the
time of payment was fixed at two years and in the second and last at four
years. New conditions not relevant here were also incorporated into the new
contracts.
There was, besides, a separate written agreement entitled "Penalidad del
Documento de Novacion de Esta Fecha" which, unlike the principal
contracts, was not registered. The tenor of this separate agreement, all
copies, of which were alleged to have been destroyed or lost, was in dispute
and became the subject of conflicting evidence. The lower court did not make
categorical findings on this point, however, and it will be our task to do so at
the appropriate place in this decision.
In 1943 Paz Tuason decided to sell the entire property for the net amount of
P400,000 and entered into negotiations with Gregorio Araneta, Inc. for this
purpose. The result of the negotiations was the execution on October 19,
1943, of a contract called "Promesa de Compra y Venta" and identified as
Exhibit "1." This contract provided that subject to the preferred right of the
lessees and that of Jose Vidal as mortgagee, Paz Tuason would sell to
Gregorio Araneta, Inc. and the latter would buy for the said amount of
P400,000 the entire estate under these terms.
El precio sera pagado como sigue: un 40 por ciento juntamente con
la carta de aceptacion del arrendatario, un 20 por ciento delprecio al
otorgarse la escritura de compromiso de venta, y el remanente 40
por ciento al otorgarse la escritura de venta definitiva, la cual sera
otorgada despues de que se habiese canceladola hipoteca a favor
de Jose Vidal que pesa sobre dichos lotes. Lacomision del 5 por
ciento que corresponde a Jose Araneta serapagada al otorgarse la
escritura de compromiso de venta.
Paz Tuason se obliga a entregar mediante un propio las cartasque
dirigira a este efecto a los arrendatarios, de conformidad con el
formulario adjunto, que se marca como Apendice A.
Expirado el plazo arriba mencionado, Paz Tuason otorgara las
escrituras correspondientes de venta a los arrendatarios que hayan
decidido comprar sus respectivos lotes.
9. Los alquieres correspondientes a este ao se prorratearan entre
la vendedora y el comprador, correspondiendo al comprador los
alquileres correspondientes a Noviembre y Diciembre de este ao y
asimismo sera por cuenta del comprador el amillaramiento
correspondiente a dichos meses.
10. Paz Tuason, reconoce haver recibido en este acto de Gregorio
Araneta, Inc., la suma de Ciento Noventa Mil Pesos (P190,000)como
adelanto del precio de venta que Gregorio Araneta, Inc., tuviere que
pagar a Paz Tuason.
La cantidad que Paz Tuason recibe en este acto sera aplicadapor
ella a saldar su deuda con Jose Vidal, los amillaramientos, sobre el
utilizado por Paz Tuason para otros fines.
11. Una vez determinados los lotes que Paz Tuason podra vendera
Gregorio Araneta, Inc., Paz Tuason otorgara una escritura deventa
definitiva sobre dichos lotes a favor de Gregorio Araneta, Inc.
Gregorio Araneta, Inc., pagara el precio de venta como sigue: 90 por
ciento del mismo al otorgarse la escritura de venta definitiva
descontandose de la cantidad que entonces se tenga que pagar de
adelanto de P190,000 que se entrega en virtud de esta escritura. El
10 por ciento remanente se pagara a Paz Tuazon, una vez se haya
cancelado la hipoteca que pesa actualmente sobre el terreno.
No obstante la dispuesto en el parrafo 8, cualquier arrendatario que
decida comprar el lote que occupa con contrato de arrendamiento
340
 podra optar por pedir el otorgamiento inmediato a su favor el acto de
la escritura de venta definitiva pagando en el acto el 50 por ciento
del precio (ademas del 40 por ciento que debio incluir en su carta de
aceptacion) y el remanente de 10 por ciento inmediatemente
despues de cancelarse la hipoteca que pesa sobre el terreno.
12. Si la mencionada cantidad de P190,000 excediere del 90 por
ciento de la cantidad que Gregorio Araneta, Inc., tuviere que vender
a dicho comprador, el saldo sera pagado inmediatamente por Paz
Tuazon, tomandolo de las cantidades que reciba de los
arrendatarios como precio de venta.
In furtherance of this promise to buy and sell, letters were sent the lessees
giving them until August 31, 1943, an option to buy the lots they occupied at
the price and terms stated in said letters. Most of the tenants who held
contracts of lease took advantage of the opportunity thus extended and after
making the stipulated payments were giving their deeds of conveyance.
These sales, as far as the record would show, have been respected by the
seller.
With the elimination of the lots sold or be sold to the tenants there remained
unencumbered, except for the mortgage to Jose Vidal, Lots 1, 8-16 and 18
which have an aggregate area of 14,810.20 square meters; and on
December 2, 1943, Paz Tuason and Gregorio Araneta, Inc. executed with
regard to these lots an absolute deed of sale, the terms of which, except in
two respects, were similar to those of the sale to the lessees. This deed,
copy of which is attached to the plaintiff's complaint as Exhibit A, provided,
among other things, as follows:
(P125,174.99), the Vendor acknowledges to have received by virtue
of the advance of One Hundred Ninety Thousand (P190,000) Pesos
made by the Vendee to the Vendor upon the execution of the
aforesaid contract entitled "Promesa de Compra y Venta". The
balance of Sixty-Four Thousand Eight Hundred Twenty-five Pesos
and One centavo (P64,825.01) between the sum of P125,174.99,
has been returned by the Vendor to the Vendee, which amount the
Vendee acknowledges to have received by these presents;
The aforesaid sum of P190,000 was delivered by the Vendee to the
Vendor by virtue of four checks issued by the Vendee against the
Bank of the Philippine Islands, as follows:
No. C-286445 in favor of Paz Tuason de P13,476.62
Paterno
No. C-286444 in favor of the City Treasurer, 3,373.38
Manila
No. C-286443 in favor of Jose Vidal 30,000.00
No. C-286442 in favor of Jose Vidal 143,150.00

The aforesaid lots are being sold by he Vendor to the Vendee

separately at the prices mentioned in paragraph (6) of the aforesaid
contract entitled "Promesa de Compra y Venta," making a total sum Total P190,000.00
of One Hundred Thirty-Nine Thousand Eighty-three pesos and
Thirty-two centavos (P139,083.32), ninety (90%) per cent of which
amount, i.e., the sum of One Hundred Twenty-five Thousand One The return of the sum of P64,825.01 was made by the Vendor to the
Hundred Seventy-four Pesos and Ninety-nine centavos Vendee in a liquidation which reads as follows:

341
Hemos recibido de Da. Paz Tuason de Paterno la
cantidad de Sesenta y Cuatro mil Ochocientos Veinticinco
Pesos y un centimo (P64,825.01) enconcepto de
devolucion que nos hace del excesode lo pagadoa ella
de P190,000.00 P68,563.21

Menos el 90% de P139,083.32, importe de los lotes que

vamos a comprar 125,174.99

Menos las comisiones de 5 % recibidas de

Exceso 64,825.01 Josefina de Pabalan P538.60

L.E. Dumas 1,084.43

Cheque BIF No. D-442988 de Simplicio del Rosario 21,984.20 Angela S. Tuason 1,621.94 3,244.97

Cheque PNB No. 177863-K de L.E. Dumas 21,688.60 P65,318.24

Cheque PNB No. 267682-K de Alfonso Sycip 20,000.00 Menos cheque BIF No. C-288642 a favor de
Da. Paz Tuason de Paterno que le entregamos
como exceso 493.23

Cheque PNB No. 83940 de Josefina de Pabalan 4,847.96

P64,825.01

Billetes recibidos de Alfonso Sycip 42.96

342
Manila, Noviembre 2, 1943 that this sale is being executed free from any option or right on the
part of the lessees to purchase the lots respectively leased by them.

It is therefore clearly understood that the Vendor will pay the existing
GREGORIO ARANETA, INCORPORATED mortgage on her property in favor of Jose Vidal.
Por;
(Fdo.) "JOSE ARANETA
The liquidation of the amounts respectively due between the Vendor
Presidente
and the Vendee in connection with the rents and real estate taxes as
stipulated in paragraph (9) of the contract entitled "Promesa de
Compara y Venta" will be adjusted between the parties in a separate
Recibido cheque No. C-288642 BIF-P493.23 document.

Should any of the aforesaid lessees of lots Nos. 2, 3, 4, 5, 6, 7, 9 and

17 fail to carry out their respective obligations under the option to
Por: purchase exercised by them so that the rights of the lessee to
(Fdo.) "M.J. GONZALEZ purchase the respective property leased by him is cancelled, the
Vendor shall be bound to sell the same to the herein Vendee,
Gregorio Araneta, Incorporated, in conformity with the terms and
conditions provided in the aforesaid contract of "Promesa de Compra
In view of the foregoing liquidation, the vendor acknowledges fully y Venta";
and unconditionally, having received the sum of P125,174.99 of the
present legal currency and hereby expressly declares that she will
The documentary stamps to be affixed to this deed will be for the
not hold the Vendee responsible for any loss that she might suffer
account of the Vendor while the expenses for the registration of this
due to the fact that two of the checks paid to her by the Vendee were
document will be for the account of the Vendee.
issued in favor of Jose Vidal and the latter has, up to the present
time, not yet collected the same.
The remaining area of the property of the Vendor subject to Transfer
Certificates of Title Nos. 60471 and 60472, are lots Nos. 2, 3, 4, 5, 6,
The ten (10%) per cent balance of the purchase price not yet paid in
7, 9, and 17, all of the Consolidation of lots Nos. 20 and 117 of plan
the total sum of P13,908.33 will be paid by the Vendee to the Vendor
II-4755, G.L.R.O. Record No. 7680.
when the existing mortgage over the property sold by the Vendor to
the Vendee is duly cancelled in the office of the Register of Deeds, or
sooner at the option of the Vendee. Before the execution of the above deed, that is, on October 20, 1943, the day
immediately following the signing of the agreement to buy and sell, Paz
Tuason had offered to Vidal the check for P143,150 mentioned in Exhibit A,
This Deed of Sale is executed by the Vendor free from all liens and
in full settlement of her mortgage obligation, but the mortgagee had refused
encumbrances, with the only exception of the existing lease
to receive that check or to cancel the mortgage, contending that by the
contracts on parcels Nos. 1, 10, 11, and 16, which lease contracts
will expire on December 31, 1953, with the understanding, however,

343
separate agreement before mentioned payment of the mortgage was not to
be effected totally or partially before the end of four years from April, 1943.
Because of this refusal of Vidal's Paz Tuason, through Atty. Alfonso Ponce
Enrile, commenced an action against the mortgagee in October or the early
paret of November 1943. the record of that case was destroyed and no copy
of the complaint was presented in evidence. Attached to the complaint or
deposited with the clerk of court by Attorney Ponce Enrile simultaneously
with the docketing of the suit were the check for P143,150 previously turned
down by Vidal, another certified check for P12,932.61, also drawn by
Gregorio Araneta, Inc., in favor of Vidal, and one ordinary check for P30,000
issued by Paz Tuazon. These three checks were supposed to cover the
whole indebtedness to Vidal including the principal and interest up to that
time and the penalty provided in the separate agreement.
But the action against Vidal never came on for trial and the record and the
checks were destroyed during the war operations in January or February,
1945; and neither was the case reconstituted afterward. This failure of the
suit for the cancellation of Vidal's mortgage, coupled with the destruction of
the checks tendered to the mortgagee, the nullification of the bank deposit on
which those checks had been drawn, and the tremendous rise of real estate
value following the termination of the war, gave occasion to the breaking off
the schemes outlined in Exhibits 1 and A; Paz Tuason after liberation
repudiated them for the reasons to be hereafter set forth. The instant action
was the offshoot, begun by Gregorio Araneta, Inc. to compel Paz Tuason to
deliver to the plaintiff a clear title to the lots described in Exhibit A free from
all liens and encumbrances, and a deed of cancellation of the mortgage to
Vidal. Vidal came into the case in virtue of a summon issued by order of the
court, and filed a cross-claim against Paz Tuazon to foreclose his mortgage.
It should be stated that the outset that all the parties are in agreement that
Vidal's loans are still outstanding. Paz Tuason's counsel concede that the
tender of payment to Vidal was legally defective and did not operate to
discharge the mortgage, while the plaintiff is apparently uninterested in this
feature of the case considering the matter one largely between the mortgagor
and the mortgagee, although to a certain degree this notion is incorrect. At
any rate, the points of discord between Paz Tuason and Vidal concern only
the accrual of interest on the loans, Vidal's claim to attorney's fees, and the
application of the debt moratorium law which the debtor now invokes. These
matters will be taken up in the discussion of the controversy between Paz
Tuason and Jose Vidal.
The principal bone of contention between Gregorio Araneta, Inc., and Paz
Tuason was the validity of the deed of sale of Exhibit A on which the suit was
predicated. The lower court's judgment was that this contract was invalid and
was so declared, "sin per juicio de que la demandada Paz Tuason de
Paterno pague a la entidad demandante todas las cantidades que habia
estado recibiendo de lareferida entidad demandante, en concepto de pago
de losterrenos, en moneda corriente, segun el cambio que debiaregir al
tiempo de otorgarse la escritura segun la escalade "Ballentine",
descontando, sin embargo, de dichas cantidades cualesquiera que la
demandante haya estadorecibiendo como alquileres de los terrenos
supuestamentevendidos a ella." The court based its opinion that Exhibit 1.
His Honor, Judge Sotero Rodas, agreedwith the defendant that under
paragraph 8 of Exhibit 1 there was to be no absolute sale to Gregorio
Araneta, Inc., unless Vidal's mortgage was cancelled.
In our opinion the trial court was in error in its interpretation of Exhibit 1. The
contemplated execution of an absolute deed of sale was not contingent on
the cancellation of Vidal's mortgage. What Exhibit 1 did provide (eleventh
paragraph) was that such deed of absolute sale should be executed "una vez
determinado los lotes que Paz Tuason podra vender a Gregorio Araneta,
Inc." The lots which could be sold to Gregorio Araneta, Inc. were definitely
known by October 31, 1943, which was the expiry of the tenants' option to
buy, and the lots included in the absolute of which the occupants' option to
buy lapsed unconditionally. Such deed as Exhibit A was then in a condition to
be made.
Vidal's mortgage was not an obstacle to the sale. An amount had been set
aside to take care of it, and the parties, it would appear, were confident that
the suit against the mortgagee would succeed. The only doubt in their minds
was in the amount to which Vidal was entitled. The failure of the court to try
and decide that the case was not foreseen either.
344
This refutes, were think, the charge that there was undue rush on the part of
the plaintiff to push across the sale. The fact that simultaneously with Exhibit
A similar deeds were given the lessees who had elected to buy their
leaseholds, which comprise an area about twice as big as the lots described
in Exhibit A, and the further fact that the sale to the lessees have never been
questioned and the proceeds thereof have been received by the defendant,
should add to dispel any suspicion of bad faith on the part of the plaintiff. If
anyone was in a hurry it could have been the defendant. The clear
preponderance of the evidence that Paz Tuason was pressed for cash and
that the payment of the mortgage was only an incident, or a necessary
means to effectuate the sale. Otherwise she could have settled her mortgage
obligation merely by selling a portion of her estate, say, some of the lots
leased to tenants who, except two who were in concentration camps, were
only too anxious to buy and own the lots on which their houses were built.
Whatever the terms of Exhibit 1, the plaintiff and the defendant were at
perfect liberty to make a new agreement different from or even contrary to
the provisions of that document. The validity of the subsequent sale must of
necessity depend on what it said and not on the provisions of the promise to
buy and sell.
It is as possible proof or fraud that the discrepancies between the two
documents bear some attention. It was alleged that Attorneys Salvador
Araneta and J. Antonio Araneta who the defendant said had been her
attorneys and had drawn Exhibit A, and not informed or had misinformed her
about its contents; that being English, she had not read the deed of sale; that
if she had not trusted the said attorneys she would not have been so foolish
as to affix her signature to a contract so one-sided.
The evidence does not support the defendant. Except in two particulars,
Exhibit A was a substantial compliance with Exhibit 1 in furtherance of which
Exhibit A was made. One departure was the proviso that 10 per cent of the
purchase price should be paid only after Vidal's mortgage should have been
cancelled. This provisional deduction was not onerous or unusual. It was not
onerous or unusual that the vendee should withhold a relatively small portion
of the purchase price before all the impediments to the final consummation of
the sale had been removed. The tenants who had bought their lots had been
granted the privilege to deduct as much as 40 per cent of the stipulated price
pending discharge of the mortgage, although his percentage was later
reduced to 10 as in the case of Gregorio Araneta, Inc. It has also been that
the validity of the sales to the tenants has not been contested; that these
sales embraced in the aggregate 24,245.40 square meters for P260,916.68
as compared to 14,811.20 square meters sold to Gregorio Araneta, Inc. for
P139,083.32; that the seller has already received from the tenant purchasers
90 per cent of the purchase money.
There is good reason to believe that had Gregorio Araneta, Inc. not insisted
on charging to the defendant the loss of the checks deposited with the court,
the sale in question would have gone the smooth way of the sales to the
tenants. Thus Dindo Gonzales, defendant's son, declared:
P. Despues de haberse presentado esta demanda, recuerda usted
haber tenido conversacion con Salvador Araneta acerca de este
asunto?
R. Si Seor.
P. Usted fue quien se acerco al seor Salvador Araneta?
R. Si, seor.
P. Quiero usted decir al Honorable Juzgado que era lo que usted dijo
al seor Salvador Araneta?
R. No creo que es propio que yo diga, por tratarse de mi madre.
P. En otras palabras, usted quiere decir que no quiere usted que se
vuelva decir o repetir ante este Honorable Juzgado lo que usted dijo
al seor Salvador Araneta, pues, se trata de su madre?
R. No, seor.
345
 P. Puede usted decirnos que quiso usted decir cuando que no
quisiera decir?
R. Voy a decir lo que Salvador Araneta, yo me acerque a Don
Salvador Araneta, y yo le dije que es una verguenza de que
nosotros, en la familia tengamos que ir a la Corte por este, y tambien
dije que mi madre de por si quiere vender el terreno a ellos, porque
mi madre quiere pagar al seor Vidal, y que es una verguenza,
siendo entre parientes, tener que venir por este; era lo que yo dije al
seor Salvador Araneta.
xxx xxx xxx
P. No recuerda usted tambien dijo al seor Salvador Araneta que
usted no comulgaba con ella (su madre) en este asunto?
R. Si, Seor; porque yo creia que mi madre solamente queria anular
esta venta, pero cuando me dijo el seor La O y sus abogados
que, encima de quitar la propiedad, todavia tendria ella que pagar al
seor Vidal, este no veso claro.
xxx xxx xxx
P. Ahora bien; de tal suerte que, tal como nosotros desperendemos
de su testimonio, tanto, usted como, su madre, esteban muy
conformes en la venta, es asi?
R. Si, seor.
The other stipulation embodied in Exhibit A which had no counterpart in
Exhibit 1 was that by which Gregorio Araneta Inc. would hold Paz Tuason
liable for the lost checks and which, as stated, appeared to be at the root of
the whole trouble between the plaintiff and the defendant.
The stipulation reads:
In view of the foregoing liquidation, the Vendor acknowledges fully
and unconditionally, having received the sum of P125,174.99 of the
present legal currency and hereby expressly declares that she will
not hold the Vendee responsible for any loss that she might suffer
due to the fact that two of the checks paid to her by the Vendee were
used in favor of Jose Vidal and the latter has, up to the present time,
not yet collected the same.
It was argued that no person in his or her right senses would knowingly have
agreed to a covenant so iniquitous and unreasonable.
In the light of all the circumstances, it is difficult to believe that the defendant
was deceived into signing Exhibit A, in spite of the provision of which she and
her son complaint. Intelligent and well educated who had been managing her
affairs, she had an able attorney who was assisting her in the suit against
Vidal, a case which was instituted precisely to carry into effect Exhibit A or
Exhibit 1, and a son who is leading citizen and a business-man and knew the
English language very well if she did not. Dindo Gonzalez took active part in,
if he was not the initiator of the negotiations that led to the execution of
Exhibit 1, of which he was an attesting witness besides. If the defendant
signed Exhibit A without being apprised of its import, it can hardly be
conceived that she did not have her attorney or her son read it to her
afterward. The transaction involved the alienation of property then already
worth a fortune and now assessed by the defendant at several times higher.
Doubts in defendant's veracity are enhanced by the fact that she denied or at
least pretended in her answer to be ignorant of the existence of Exhibit A,
and that only after she was confronted with the signed copy of the document
on the witness did she spring up the defense of fraud. It would look as if she
gambled on the chance that no signed copy of the deed had been saved
from the war. She could not have forgotten having signed so important a
document even if she had not understood some of its provisions.
From the unreasonableness and inequity of the aforequoted Exhibit A it is not
to be presumed that the defendant did not understand it. It was highly
possible that she did not attach much importance to it, convinced that Vidal
could be forced to accept the checks and not foreseeing the fate that lay in
store for the case against the mortgagee.
346
Technical objections are made against the deed of sale.
First of these is that Jose Araneta, since deceased, was defendant's agent
and at the same time the president of Gregorio Araneta, Inc.
The trial court found that Jose Araneta was not Paz Tuason's agent or broker.
This finding is contrary to the clear weight of the evidence, although the point
would be irrelevant, if the court were right in its holding that Exhibit A was
void on another ground, i.e., it was inconsistent with Exhibit 1.
Without taking into account defendant's Exhibit 7 and 8, which the court
rejected and which, in our opinion, should have been admitted, Exhibit 1 is
decisive of the defendant's assertion. In paragraph 8 of Exhibit 1 Jose
Araneta was referred to as defendant's agent or broker "who acts in this
transaction" and who as such was to receive a commission of 5 per cent,
although the commission was to be charged to the purchasers, while in
paragraph 13 the defendant promised, in consideration of Jose Araneta's
services rendered to her, to assign to him all her right, title and interest to and
in certain lots not embraced in the sales to Gregorio Araneta, Inc. or the
tenants.
However, the trial court hypothetically admitting the existence of the relation
of principal and agent between Paz Tuason and Jose Araneta, pointed out
that not Jose Araneta but Gregorio Araneta, Inc. was the purchaser, and cited
the well-known distinction between the corporation and its stockholders. In
other words, the court opined that the sale to Gregorio Araneta, Inc. was not
a sale to Jose Araneta the agent or broker.
The defendant would have the court ignore this distinction and apply to this
case the other well-known principle which is thus stated in 18 C.J.S. 380:
"The courts, at law and in equity, will disregard the fiction of corporate entity
apart from the members of the corporation when it is attempted to be used as
a means of accomplishing a fraud or an illegal act.".
It will at once be noted that this principle does not fit in with the facts of the
case at bar. Gregorio Araneta, Inc. had long been organized and engaged in
real estate business. The corporate entity was not used to circumvent the law
or perpetrate deception. There is no denying that Gregorio Araneta, Inc.
entered into the contract for itself and for its benefit as a corporation. The
contract and the roles of the parties who participated therein were exactly as
they purported to be and were fully revealed to the seller. There is no
pretense, nor is there reason to suppose, that if Paz Tuason had known Jose
Araneta to Gregorio Araneta, Inc's president, which she knew, she would not
have gone ahead with the deal. From her point of view and from the point of
view of public interest, it would have made no difference, except for the
brokerage fee, whether Gregorio Araneta, Inc. or Jose Araneta was the
purchaser. Under these circumstances the result of the suggested disregard
of a technicality would be, not to stop the commission of deceit by the
purchaser but to pave the way for the evasion of a legitimate and binding
commitment buy the seller. The principle invoked by the defendant is
resorted to by the courts as a measure or protection against deceit and not to
open the door to deceit. "The courts," it has been said, "will not ignore the
corporate entity in order to further the perpetration of a fraud." (18 C.J.S.
381.)
The corporate theory aside, and granting for the nonce that Jose Araneta and
Gregorio Araneta, Inc. were identical and that the acts of one where the acts
of the other, the relation between the defendant and Jose Araneta did not fall
within the purview of article 1459 of the Spanish Civil Code. 1
Agency is defined in article 1709 in broad term, and we have not come
across any commentary or decision dealing directly with the precise meaning
of agency as employed in article 1459. But in the opinion of Manresa(10
Manresa 4th ed. 100), agent in the sense there used is one who accepts
another's representation to perform in his name certain acts of more or less
transcendency, while Scaevola (Vol. 23, p. 403) says that the agent's in
capacity to buy his principal's property rests in the fact that the agent and the
principal form one juridicial person. In this connection Scaevola observes that
the fear that greed might get the better of the sentiments of loyalty and
disinterestedness which should animate an administrator or agent, is the
reason underlying various classes of incapacity enumerated in article 1459.
And as American courts commenting on similar prohibition at common law
347
put it, the law does not trust human nature to resist the temptations likely to
arise of antogonism between the interest of the seller and the buyer.
So the ban of paragraph 2 of article 1459 connotes the idea of trust and
confidence; and so where the relationship does not involve considerations of
good faith and integrity the prohibition should not and does not apply. To
come under the prohibition, the agent must be in a fiduciary with his principal.
Tested by this standard, Jose Araneta was not an agent within the meaning
of article 1459. By Exhibits 7 and 8 he was to be nothing more than a go-
between or middleman between the defendant and the purchaser, bringing
them together to make the contract themselves. There was no confidence to
be betrayed. Jose Araneta was not authorize to make a binding contract for
the defendant. He was not to sell and he did not sell the defendant's property.
He was to look for a buyer and the owner herself was to make, and did
make, the sale. He was not to fix the price of the sale because the price had
been already fixed in his commission. He was not to make the terms of
payment because these, too, were clearly specified in his commission. In
fine, Jose Araneta was left no power or discretion whatsoever, which he
could abuse to his advantage and to the owner's prejudice.
Defendant's other ground for repudiating Exhibit A is that the law firm of
Araneta & Araneta who handled the preparation of that deed and
represented by Gregorio Araneta, Inc. were her attorneys also. On this point
the trial court's opinion is likewise against the defendant.
Since attorney Ponce Enrile was the defendant's lawyer in the suit against
Vidal, it was not likely that she employed Atty. Salvador Araneta and J.
Antonio Araneta as her attorneys in her dealings with Gregorio Araneta, Inc.,
knowing, as she did, their identity with the buyer. If she had needed legal
counsels, in this transaction it seems certain that she would have availed
herself of the services of Mr. Ponce Enrile who was allegedly representing
her in another case to pave the way for the sale.
The fact that Attys. Salvador and Araneta and J. Antonio Araneta drew
Exhibits 1 and A, undertook to write the letters to the tenants and the deeds
of sale to the latter, and charged the defendant the corresponding fees for all
this work, did not themselves prove that they were the seller's attorneys.
These letters and documents were wrapped up with the contemplated sale in
which Gregorio Araneta, Inc. was interested, and could very well have been
written by Attorneys Araneta and Araneta in furtherance of Gregorio Araneta's
own interest. In collecting the fees from the defendant they did what any
other buyer could have appropriately done since all such expenses normally
were to be defrayed by the seller.
Granting that Attorney Araneta and Araneta were attorneys for the defendant,
yet they were not forbidden to buy the property in question. Attorneys are
only prohibited from buying their client's property which is the subject of
litigation. (Art. 1459, No. 5, Spanish Civil Code.) The questioned sale was
effected before the subject thereof became involved in the present action.
There was already at the time of the sale a litigation over this property
between the defendant and Vidal, but Attys. Salvador Araneta and J. Antonio
Araneta were not her attorneys in that case.
From the pronouncement that Exhibit A is valid, however, it does not follow
that the defendant should be held liable for the loss of the certified checks
attached to the complaint against Vidal or deposited with the court, or of the
funds against which they had been issued. The matter of who should bear
this loss does not depend upon the validity of the sale but on the extent and
scope of the clause hereinbefore quoted as applied to the facts of the
present case.
The law and the evidence on this branch of the case revealed these facts, of
some of which passing mention has already been made.
The aforesaid checks, one for P143,150 and one for P12,932.61, were
issued by Gregorio Araneta, Inc. and payable to Vidal, and were drawn
against the Bank of the Philippines with which Gregorio Araneta, Inc. had a
deposit in the certification stated that they were to be "void if not presented
for payment date of acceptance" office (Bank) within 90 days from date of
acceptance."
348
Under banking laws and practice, by the clarification" the funds represented
by the check were transferred from the credit of the maker to that of the
payee or holder, and, for all intents and purposes, the latter became the
depositor of the drawee bank, with rights and duties of one such relation."
But the transfer of the corresponding funds from the credit of the depositor to
that of that of the payee had to be co-extensive with the life of the checks,
which in the case was 90 days. If the checks were not presented for payment
within that period they became invalid and the funds were automatically
restored to the credit of the drawer though not as a current deposit but as
special deposit. This is the consensus of the evidence for both parties which
does not materially differ on this proposition.
The checks were never collected and the account against which they were
drawn was not used or claimed by Gregorio Araneta, Inc.; and since that
account "was opened during the Japanese occupation and in Japanese
currency," the checks "became obsolete as the account subject thereto is
considered null and void in accordance with Executive Order No. 49 of the
President of the Philippines", according to the Bank.
Whether the Bank of the Philippines could lawfully limit the negotiability of
certified checks to a period less than the period provided by the Statute of
Limitations does not seem material. The limitation imposed by the Bank as to
time would adversely affect the payee, Jose Vidal, who is not trying to
recover on the instruments but on the contrary rejected them from the outset,
insisting that the payment was premature. As far as Vidal was concerned, it
was of no importance whether the certification was or was not restricted. On
the other hand, neither the plaintiff nor the defendant now insists that Vidal
should present, or should have presented, the checks for collection. They in
fact agree that the offer of those checks to Vidal did not, for technical reason,
work to wipe out the mortgage.
But as to Gregorio Araneta and Paz Tuason, the conditions specified in the
certification and the prevailing regulations of the Bank were the law of the
case. Not only this, but they were aware of and abided by those regulations
and practice, as instanced by the fact that the parties presented testimony to
prove those regulations and practice. And that Gregorio Araneta, Inc. knew
that Vidal had not cashed the checks within 90 days is not, and could not
successfully be denied.
In these circumstances, the stipulation in Exhibit A that the defendant or
seller "shall not hold the vendee responsible for any loss of these checks"
was unconscionable, void and unenforceable in so far as the said stipulation
would stretch the defendant's liability for this checks beyond 90 days. It was
not in accord with law, equity or good conscience to hold a party responsible
for something he or she had no access to and could not make use of but
which was under the absolute control and disposition of the other party. To
make Paz Tuason responsible for those checks after they expired and when
they were absolutely useless would be like holding an obligor to answer for
the loss or destruction of something which the obligee kept in its safe with no
power given the obligor to protect it or interfere with the obligee's possession.
To the extent that the contract Exhibit A would hold the vendor responsible for
those checks after they had lapsed, the said contract was without
consideration. The checks having become obsolete, the benefit in exchange
for which the defendant had consented to be responsible for them had
vanished. The sole motivation on her part for the stipulation was the fact that
by the checks the mortgage might or was to be released. After 90 days the
defendant stood to gain absolutely nothing by them, which had become
veritable scraps of paper, while the ownership of the deposit had reverted to
the plaintiff which alone could withdraw and make use of it.
What the plaintiff could and should have done if the disputed stipulation was
to be kept alive was to keep the funds accessible for the purpose of paying
the mortgage, by writing new checks either to Vidal or to the defendant, as
was done with the check for P30,000, or placing the deposit at the
defendant's disposal. The check for P30,000 intended for the penalty
previously had been issued in the name of Vidal and certified, too, but by
mutual agreement it was changed to an ordinary check payable to Paz
349
Tuason. Although that check was also deposited with the court and lost, its
loss undoubtedly was imputable to the defendant's account, and she did not
seem to disown her liability for it.
Let it be remembered that the idea of certifying the lost checks was all the
plaintiff's. The plaintiff would not trust the defendant and studiously so
arranged matters that she could not by any possibility put a finger on the
money. For all the practical intents and purposes the plaintiff dealt directly
with the mortgagee and excluded the defendant from meddling in the manner
of payment to Vidal. And let it also be kept in mind that Gregorio Araneta, Inc.
was not a mere accommodator in writing these checks. It was as much
interested in the cancellation of the mortgage as Paz Tuason.
Coming down to Vidal's cross-claim Judge Rodas rendered no judgment
other than declaring that the mortgage remained intact and subsisting. The
amount to be paid Vidal was not named and the question whether interest
and attorney's fees were due was not passed upon. The motion for
reconsideration of the decision by Vidal's attorney's praying that Paz Tuason
be sentenced to pay the creditor P244,917.90 plus interest at the rate of 1
percent monthly from September 10, 1948 and that the mortgaged property
be ordered sold in case of default within 90 days, and another motion by the
defendant seeking specification of the amount she had to pay the mortgagee
were summarily denied by Judge Potenciano Pecson, to whom the motions
were submitted, Judge Rodas by that time having been appointed to the
Court of Appeals.
All the facts and evidence on this subject are on the record, however, and we
may just as well determine from these facts and evidence the amount to
which the mortgagee is entitled, instead of remanding the case for new trial,
if only to avoid further delay if the disposition of this case.
It is obvious that Vidal had a right to judgment for his credit and to foreclose
the mortgage if the credit was not paid.
There is no dispute as to the amount of the principal and there is agreement
that the loans made in 1943, in Japanese war notes, should be computed
under the Ballantyne conversion table. As has been said, where the parties
do not see eye-to-eye was in regard to the mortgagee's claim to attorney's
fees and interest from October, 1943, which was reached a considerable
amount. It was contended that, having offered to pay Vidal her debt in that
month, the defendant was relieved thereafter from paying such interest.
It is to be recalled that Paz Tuason deposited with the court three checks
which were intended to cover the principal and interest up to October, 1943,
plus the penalty provided in the instrument "Penalidad del Documento de
Novacion de Esta Fecha." The mortgagor maintains that although these
checks may not have constituted a valid payment for the purpose of
discharging the debt, yet they did for the purpose of stopping the running of
interest. The defendant draws attention to the following citations:
An offer in writing to pay a particular sum of money or to deliver a
written instrument or specific personal property is, if rejected,
equivalent to the actual production and tender of the money,
instrument or property. (Sec. 24, Rule 123.)
It is not accord with either the letter or the spirit of the law to impose
upon the person affecting a redemption of property, in addition to 12
per cent interest per annum up to the time of the offer to redeem, a
further payment of 6 per cent per annum from the date of the officer
to redeem. (Fabros vs. Villa Agustin, 18 Phil., 336.)
A tender by the debtor of the amount of this debt, if made in the
proper manner, will suspend the running of interest on the debt for
the time of such tender. (30 Am. Jur., 42.)
350
In the case of Fabrosa vs. Villa Agustin, supra, a parcel of land had been
sold on execution to one Tabliga. Within the period of redemption Fabros, to
whom the land had been mortgaged by the execution debtor, had offered to
redeem the land from the execution creditor and purchaser at public auction.
The trial court ruled that the redemptioner was not obliged to pay the
stipulated interest of 12 per cent after he offered to redeem the property;
nevertheless he was sentenced to pay 6 per cent interest from the date of
the offer.
This court on appeal held that "there is no reason for this other (6 per cent)
interest, which appears to be a penalty for delinquency while there was no
delinquency." The court cited an earlier decision, Martinez vs. Campbell, 10
Phil., 626, where this doctrine was laid down: "When the right of redemption
is exercised within the term fixed by section 465 of the Code of Civil
Procedure, and an offer is made of the amount due for the repurchase of the
property to which said right refers, it is neither reasonable nor just that the
repurchaser should pay interest on the redemption money after the time
when he offered to repurchase and tendered the money therefor."
In the light of these decisions and law, the next query is; Did the mortgagor
have the right under the contract to pay the mortgage on October 20, 1943?
The answer to this question requires an inquiry into the provision of the
"Penalidad del Documento de Novacion de Esta Fecha."
Vidal introduced oral evidence to the effect that he reserved unto himself in
that agreement the right "to accept or refuse the total payment of the loan
outstanding . . ., if at the time of such offer of payment he considered it
advantageous to his interest." This was gist of Vidal's testimony and that of
Lucio M. Tiangco, one of Vidal's former attorneys who, as notary public, had
authenticated the document. Vidal's above testimony was ordered stricken
out as hearsay, for Vidal was blind and, according to him, only had his other
lawyer read the document to him.
We are of the opinion that the court erred in excluding Vidal's statement.
There is no reason to suspect that Vidal's attorney did not correctly read the
paper to him. The reading was a contemporaneous incident of the writing
and the circumstances under which the document was read precluded every
possibility of design, premeditation, or fabrication.
Nevertheless, Vidal's testimony, like the testimony of Lucio M. Tiangco's, was
based on recollection which, with the lapse of time, was for from infallible. By
contrast, the testimony of Attorneys Ponce Enrile, Salvador Araneta, and J.
Antonio Araneta does not suffer from such weakness and is entitled to full
faith and credit. The document was the subject of a close and concerted
study on their part with the object of finding the rights and obligations of the
mortgagee and the mortgagor in the premises and mapping out the course to
be pursued. And the results of their study and deliberation were translated
into concrete action and embodied in a letter which has been preserved. In
line with the results of their study, action was instituted in court to compel
acceptance by Vidal of the checks consigned with the complaint, and before
the suit was commenced, and with the document before him, Atty. Ponce
Enrile, in behalf of his client, wrote Vidal demanding that he accept the
payment and execute a deed of cancellation of the mortgage. In his letter
Atty. Ponce Enrile reminded Vidal that the recital in the "Penalidad del
Documento de Novacion de Esta Fecha" was "to the effect that should the
debtor wish to pay the debt before the expiration of the period the reinstated
(two years) such debtor would have to pay, in addition to interest due, the
penalty of P30,000 this is in addition to the penalty clause of 10 per cent
of the total amount due inserted in the document of mortgage of January 20,
1943."
Atty. Ponce Enrile's concept of the agreement, formed after mature and
careful reading of it, jibes with the only possible reason for the insertion of the
penalty provision. There was no reason for the penalty unless it was for
defendant's paying her debt before the end of the agreed period. It was to
Vidal's interest that the mortgage be not settled in the near future, first,
because his money was earning good interest and was guaranteed by a solid
security, and second, which was more important, he, in all probability, shared
the common belief that Japanese war notes were headed for a crash and
351
that four years thence, judging by the trends of the war, the hostilities would
be over.
To say, as Vidal says, that the debtor could not pay the mortgage within four
years and, at the same time, that there would be penalty if she paid after that
period, would be a contradiction. Moreover, adequate remedy was provided
for failure to pay or after the expiration of the mortgage: increased rate or
interest, foreclosure of the mortgage, and attorney's fees.
It is therefore to be concluded that the defendant's offer to pay Vidal in
October, 1943, was in accordance with the parties' contract and terminated
the debtor's obligation to pay interest. The technical defects of the
consignation had to do with the discharge of the mortgage, which is
conceded on all sides to be still in force because of the defects. But the
matter of the suspension of the running of interest on the loan stands of a
different footing and is governed by different principles. These principles
regard reality rather than technicality, substance rather than form. Good faith
of the offer or and ability to make good the offer should in simple justice
excuse the debtor from paying interest after the offer was rejected. A debtor
can not be considered delinquent who offered checks backed by sufficient
deposit or ready to pay cash if the creditor chose that means of payment.
Technical defects of the offer cannot be adduced to destroy its effects when
the objection to accept the payment was based on entirely different grounds.
If the creditor had told the debtor that he wanted cash or an ordinary check,
which Vidal now seems to think Paz Tuason should have tendered, certainly
Vidal's wishes would have been fulfilled, gladly.
The plain truth was that the mortgagee bent all his efforts to put off the
payment, and thanks to the defects which he now, with obvious
inconsistency, points out, the mortgage has not perished with the checks.
Falling within the reasons for the stoppage of interest are attorney's fees. In
fact there is less merit in the claim for attorney's fees than in the claim for
interest; for the creditor it was who by his refusal brought upon himself this
litigation, refusal which, as just shown, resulted greatly to his benefit.
Vidal, however, is entitled to the penalty, a point which the debtor seems to a
grant. The suspension of the running of the interest is premised on the thesis
that the debt was considered paid as of the date the offer to pay the principal
was made. It is precisely the mortgagor's contention that he was to pay said
penalty if and when she paid the mortgage before the expiration of the four-
year period provided in the mortgage contract. This penalty was designed to
take the place of the interest which the creditor would be entitled to collect if
the duration of the mortgage had not been cut short and from which interest
the debtor has been relieved. "In obligations with a penalty clause the penalty
shall substitute indemnity for damages and the payment of interest. . ." (Art.
1152, Civil Code of Spain.).
To summarize, the following are our findings and decision:
The contract of sale Exhibit A was valid and enforceable, but the loss of the
checks for P143,150 and P12,932.61 and invalidation of the corresponding
deposit is to be borne by the buyer. Gregorio Araneta, Inc. the value of these
checks as well as the several payments made by Paz Tuason to Gregorio
Araneta, Inc. shall be deducted from the sum of P190,000 which the buyer
advanced to the seller on the execution of Exhibit 1.
The buyer shall be entitled to the rents on the land which was the subject of
the sale, rents which may have been collected by Paz Tuason after the date
of the sale.
Paz Tuason shall pay Jose Vidal the amount of the mortgage and the
stipulated interest up to October 20,1943, plus the penalty of P30,000,
provided that the loans obtained during the Japanese occupation shall be
reduced according to the Ballantyne scale of payment, and provided that the
date basis of the computation as to the penalty is the date of the filing of the
suit against Vidal.
Paz Tuason shall pay the amount that shall have been found due under the
contracts of mortgage within 90 days from the time the court's judgment upon
the liquidation shall have become final, otherwise the property mortgaged
shall be ordered sold provided by law.
352
Vidal's mortgage is superior to the purchaser's right under Exhibit A, which is
hereby declared subject to said mortgage. Should Gregorio Araneta, Inc. be
forced to pay the mortgage, it will be subrogated to the right of the
mortgagee.
G.R. No. L-15121 August 31, 1962
This case will be remanded to the court of origin with instruction to hold a
rehearing for the purpose of liquidation as herein provided. The court also GREGORIO PALACIO, in his own behalf and in behalf of his minor
shall hear and decide all other controversies relative to the liquidation which child,
may have been overlooked at this decision, in a manner not inconsistent with MARIO PALACIO, plaintiffs-appellants,
the above findings and judgment. vs.
FELY TRANSPORTATION COMPANY, defendant-appellee.
The mortgagor is not entitled to suspension of payment under the debt
moratorium law or orders. Among other reasons: the bulk of the debt was a Antonio A. Saba for plaintiffs-appellants.
pre-war obligation and the moratorium as to such obligations has been Mercado, Ver and Reyes for defendant-appellee.
abrogated unless the debtor has suffered war damages and has filed claim
for them; there is no allegation or proof that she has. In the second place, the
REGALA, J.:
debtor herself caused her creditor to be brought into the case which resulted
in the filing of the cross-claim to foreclose the mortgage. In the third place,
prompt settlement of the mortgage is necessary to the settlement of the This is an appeal by the plaintiffs from the decision of the Court of First
dispute and liquidation between Gregorio Araneta, Inc. and Paz Tuason. If for Instance of Manila which dismissed their complaint.
no other reason, Paz Tuason would do well to forego the benefits of the
moratorium law. Originally taken to the Court of Appeals, this appeal was certified to this
Court on the ground that it raises purely questions of law.
There shall be no special judgments as to costs of either instance.
The parties in this case adopt the following findings of fact of the lower court:

In their complaint filed with this Court on May 15, 1954, plaintiffs
allege, among other things, "that about December, 1952, the
defendant company hired Alfredo Carillo as driver of AC-787 (687) (a
registration for 1952) owned and operated by the said defendant
company; that on December 24, 1952, at about 11:30 a.m., while the
driver Alfonso (Alfredo) Carillo was driving AC-687 at Halcon Street,
Quezon City, wilfully, unlawfully and feloniously and in a negligent,
reckless and imprudent manner, run over a child Mario Palacio of the
herein plaintiff Gregorio Palacio; that on account of the aforesaid
injuries, Mario Palacio suffered a simple fracture of the right tenor
(sic), complete third, thereby hospitalizing him at the Philippine

353
Orthopedic Hospital from December 24, 1952, up to January 8,
1953, and continued to be treated for a period of five months
thereafter; that the plaintiff Gregorio Palacio herein is a welder by
occupation and owner of a small welding shop and because of the
injuries of his child he has abandoned his shop where he derives
income of P10.00 a day for the support of his big family; that during
the period that the plaintiff's (Gregorio Palacio's) child was in the
hospital and who said child was under treatment for five months in
order to meet the needs of his big family, he was forced to sell one
air compressor (heavy duty) and one heavy duty electric drill, for a
sacrifice sale of P150.00 which could easily sell at P350.00; that as a
consequence of the negligent and reckless act of the driver Alfredo
Carillo of the herein defendant company, the herein plaintiffs were
forced to litigate this case in Court for an agreed amount of P300.00
for attorney's fee; that the herein plaintiffs have now incurred the
amount of P500.00 actual expenses for transportation,
representation and similar expenses for gathering evidence and
witnesses; and that because of the nature of the injuries of plaintiff
Mario Palacio and the fear that the child might become a useless
invalid, the herein plaintiff Gregorio Palacio has suffered moral
damages which could be conservatively estimated at P1,200.00.
On May 23, 1956, defendant Fely Transportation Co., filed a Motion
to Dismiss on the grounds (1) that there is no cause of action against
the defendant company, and (2) that the cause of action is barred by
prior judgment..
In its Order, dated June 8, 1956, this Court deferred the
determination of the grounds alleged in the Motion to Dismiss until
the trial of this case.
On June 20, 1956, defendant filed its answer. By way of affirmative
defenses, it alleges (1) that complaint states no cause of action
against defendant, and (2) that the sale and transfer of the jeep AC-
687 by Isabelo Calingasan to the Fely Transportation was made on
December 24, 1955, long after the driver Alfredo Carillo of said jeep
had been convicted and had served his sentence in Criminal Case
No. Q-1084 of the Court of First Instance of Quezon City, in which
both the civil and criminal cases were simultaneously tried by
agreement of the parties in said case. In the Counterclaim of the
Answer, defendant alleges that in view of the filing of this complaint
which is a clearly unfounded civil action merely to harass the
defendant, it was compelled to engage the services of a lawyer for
an agreed amount of P500.00.
During the trial, plaintiffs presented the transcript of the stenographic
notes of the trial of the case of "People of the Philippines vs. Alfredo
Carillo, Criminal Case No. Q-1084," in the Court of First Instance of
Rizal, Quezon City (Branch IV), as Exhibit "A".1wph1.t
It appears from Exhibit "A" that Gregorio Palacio, one of the herein
plaintiffs, testified that Mario Palacio, the other plaintiff, is his son;
that as a result of the reckless driving of accused Alfredo Carillo, his
child Mario was injured and hospitalized from December 24, 1952, to
January 8, 1953; that during all the time that his child was in the
hospital, he watched him during the night and his wife during the
day; that during that period of time he could not work as he slept
during the day; that before his child was injured, he used to earn
P10.00 a day on ordinary days and on Sundays from P20 to P50 a
Sunday; that to meet his expenses he had to sell his compressor and
electric drill for P150 only; and that they could have been sold for
P300 at the lowest price.
During the trial of the criminal case against the driver of the jeep in
the Court of First Instance of Quezon City (Criminal Case No. Q-
1084) an attempt was unsuccessfully made by the prosecution to
prove moral damages allegedly suffered by herein plaintiff Gregorio
Palacio. Likewise an attempt was made in vain by the private
prosecutor in that case to prove the agreed attorney's fees between
him and plaintiff Gregorio Palacio and the expenses allegedly
incurred by the herein plaintiffs in connection with that case. During
the trial of this case, plaintiff Gregorio Palacio testified substantially
to the same facts.
354
 The Court of First Instance of Quezon City in its decision in Criminal
Case No. 1084 (Exhibit "2") determined and thoroughly discussed
the civil liability of the accused in that case. The dispositive part
thereof reads as follows:
IN VIEW OF THE FOREGOING, the Court finds the accused Alfredo
Carillo y Damaso guilty beyond reasonable doubt of the crime
charged in the information and he is hereby sentenced to suffer
imprisonment for a period of Two Months & One Day of Arresto
Mayor; to indemnify the offended party, by way of consequential
damages, in the sum of P500.00 which the Court deems reasonable;
with subsidiary imprisonment in case of insolvency but not to exceed
/3 of the principal penalty imposed; and to pay the costs.
On the basis of these facts, the lower court held action is barred by the
judgment in the criminal case and, that under Article 103 of the Revised
Penal Code, the person subsidiarily liable to pay damages is Isabel
Calingasan, the employer, and not the defendant corporation.
Against that decision the plaintiffs appealed, contending that:
THE LOWER COURT ERRED IN NOT SUSTAINING THAT THE
DEFENDANT-APPELLEE IS SUBSIDIARILY LIABLE FOR
DAMAGES AS A RESULT OF CRIMINAL CASE NO. Q-1084 OF
THE COURT OF FIRST INSTANCE OF QUEZON CITY FOR THE
REASON THAT THE INCORPORATORS OF THE FELY
TRANSPORTATION COMPANY, THE DEFENDANT-APPELLEE
HEREIN, ARE ISABELO CALINGASAN HIMSELF, HIS SON AND
DAUGHTERS;
THE LOWER COURT ERRED IN NOT CONSIDERING THAT THE
INTENTION OF ISABELO CALINGASAN IN INCORPORATING THE
FELY TRANSPORTATION COMPANY, THE DEFENDANT-
APPELLEE HEREIN, WAS TO EVADE HIS CIVIL LIABILITY AS A
RESULT OF THE CONVICTION OF HIS DRIVER OF VEHICLE AC-
687 THEN OWNED BY HIM:
THE LOWER COURT ERRED IN HOLDING THAT THE CAUSE OF
ACTION OF THE PLAINTIFFS-APPELLANTS IS BARRED BY
PRIOR JUDGMENT.
With respect to the first and second assignments of errors, plaintiffs contend
that the defendant corporate should be made subsidiarily liable for damages
in the criminal case because the sale to it of the jeep in question, after the
conviction of Alfred Carillo in Criminal Case No. Q-1084 of the Court of First
Instance of Quezon City was merely an attempt on the part of Isabelo
Calingasan its president and general manager, to evade his subsidiary civil
liability.
The Court agrees with this contention of the plaintiffs. Isabelo Calingasan
and defendant Fely Transportation may be regarded as one and the same
person. It is evident that Isabelo Calingasan's main purpose in forming the
corporation was to evade his subsidiary civil liability1 resulting from the
conviction of his driver, Alfredo Carillo. This conclusion is borne out by the
fact that the incorporators of the Fely Transportation are Isabelo Calingasan,
his wife, his son, Dr. Calingasan, and his two daughters. We believe that this
is one case where the defendant corporation should not be heard to say that
it has a personality separate and distinct from its members when to allow it to
do so would be to sanction the use of the fiction of corporate entity as a
shield to further an end subversive of justice. (La Campana Coffee Factory,
et al. v. Kaisahan ng mga Manggagawa, etc., et al., G.R. No. L-5677, May
25, 1953) Furthermore, the failure of the defendant corporation to prove that
it has other property than the jeep (AC-687) strengthens the conviction that
its formation was for the purpose above indicated.
And while it is true that Isabelo Calingasan is not a party in this case, yet, is
held in the case of Alonso v. Villamor, 16 Phil. 315, this Court can substitute
him in place of the defendant corporation as to the real party in interest. This
is so in order to avoid multiplicity of suits and thereby save the parties
unnecessary expenses and delay. (Sec. 2, Rule 17, Rules of Court; Cuyugan
v. Dizon. 79 Phil. 80; Quison v. Salud, 12 Phil. 109.)
355
Accordingly, defendants Fely Transportation and Isabelo Calingasan should
be held subsidiarily liable for P500.00 which Alfredo Carillo was ordered to
pay in the criminal case and which amount he could not pay on account of
insolvency.

We also sustain plaintiffs' third assignment of error and hold that the present
action is not barred by the judgment of the Court of First Instance of Quezon
City in the criminal case. While there seems to be some confusion on part of
the plaintiffs as to the theory on which the is based whether ex-delito or
quasi ex-delito (culpa aquiliana) We are convinced, from the discussion
prayer in the brief on appeal, that they are insisting the subsidiary civil liability
of the defendant. As a matter of fact, the record shows that plaintiffs merely
presented the transcript of the stenographic notes (Exhibit "A") taken at the
hearing of the criminal case, which Gregorio Palacio corroborated, in support
of their claim for damages. This rules out the defense of res judicata,
because such liability proceeds precisely from the judgment in the criminal
action, where the accused was found guilty and ordered to pay an indemnity
in the sum P500.00.

WHEREFORE, the decision of the lower court is hereby reversed and

defendants Fely Transportation and Isabelo Calingasan are ordered to pay,
jointly and severally, the plaintiffs the amount of P500.00 and the costs.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera,

Paredes, Dizon and Makalintal, concur.
Reyes, J.B.L., J., took no part.

356
357
 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.

G.R. No. L-56076 September 21, 1983 Respondent Dumpit paid the downpayment and several installments
amounting to P13,722.50. The last payment was made on December 5, 1967
PALAY, INC. and ALBERT ONSTOTT, petitioner, for installments up to September 1967.
vs.
JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL On May 10, 1973, or almost six (6) years later, private respondent wrote
HOUSING AUTHORITY and NAZARIO DUMPIT respondents. petitioner offering to update all his overdue accounts with interest, and
seeking its written consent to the assignment of his rights to a certain
Santos, Calcetas-Santos & Geronimo Law Office for petitioner. 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
Wilfredo E. Dizon for private respondent.
contract, and that the lot had already been resold.

Questioning the validity of the rescission of the contract, respondent filed a

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,
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

358
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 provides-
6. 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
359
 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:
360
 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. 7
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
361
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.
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.

We come now to the third and fourth issues regarding the personal liability of No costs.
petitioner Onstott who was made jointly and severally liable with petitioner
corporation for refund to private respondent of the total amount the latter had SO ORDERED.
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.

362
363
 provisions of Batas Pambansa Blg. 130. Complainants demanded
reinstatement with full backwages, living allowance, 13th month pay and
other benefits under existing laws and/or separation pay.

On October 21, 1987, PIF, through its General Manager, was notified about
the complaint and summons for the hearing set for November 6, 1987. The
hearing was re-set for November 27, 1987 for failure of respondents to
appear. On November 30, 1987 respondents (petitioners herein) moved for
the cancellation of the hearing scheduled on November 6, 1987 so that they
could engage a counsel to properly represent them preferably on November
17, 1987.
G.R. No. 89879 April 20, 1990
On December 10, 1987 both parties were directed to submit their respective
JAIME PABALAN AND EDUARDO LAGDAMEO, petitioners, position papers within ten (10) days. By mutual agreement the hearing was
vs. re-set on December 21, 1987 but on said date respondents and/or counsel
NATIONAL LABOR RELATIONS COMMISSION, LABOR ARBITER failed to appear. The hearing was re-set on January 14, 1988 on which date
AMBROSIO B. SISON, ELIZABETH RODEROS, ET AL., and THE respondents were given a deadline to submit their position paper.
SHERIFF OF THE NATIONAL LABOR RELATIONS
COMMISSION, respondents.
On January 4, 1988 complainants filed their position paper. On January 14,
1988 counsel for respondents moved that he be given until January 22, 1988
Sofronio A. Larcia and Conrado Abriol Padilla for petitioners. to file their position paper. The labor arbiter granted the motion. The PIF filed
Apolinario N. Lomabao, Jr. for private respondents. its position paper on January 22, 1988. The heating for February 17, 1988
was re-set to March 9, 1988 and on March 29, 1988 on which dates
respondents failed to appear.

GANCAYCO, J.:
Once again the parameters of the liability of the officers of a corporation as to
unpaid wages and other claims of the employees of a corporation which has
a separate and distinct personality are brought to fore in this case.
On May 5, 1988, with leave of the labor arbiter, complainants filed their
supplemental position paper impleading the petitioners as officers of the PIF
in the complaint for their illegal transfer to a new firm.
On July 13, 1988 a decision was rendered by the labor arbiter the dispositive
part of which reads as follows:

On October 20, 1987, eighty-four (84) workers of the Philippine Inter- IN VIEW OF THE FOREGOING CONSIDERATION, respondent
Fashion, Inc. (PIF) filed a complaint against the latter for illegal transfer Philippine Inter-Fashion and its officers Mr. Jaime Pabalan and Mr.
simultaneous with illegal dismissal without justifiable cause and in violation of Eduardo Lagdameo are hereby ordered to:
the provision of the Labor Code on security of tenure as well as the

364
 1. reinstate the sixty two (62) complainants to their former or
equivalent position without loss of seniority rights and privileges;
2. to pay, jointly and severally, their backwages and other benefits
from the time they were dismissed up to the time they are actually
reinstated, the computation to be based from the latest minimum
wage law at the time of their dismissal. (See attached Annex "A" of
complainants' position paper.)
SO ORDERED. 1
Not satisfied therewith petitioners filed a motion for reconsideration in the
First Division of the public respondent, National Labor Relations Commission
(NLRC), which nevertheless, affirmed the appealed decision and dismissed
the appeal for lack of merit in a resolution dated June 30, 1989. Petitioners
were ordered to pay the appeal fee in accordance with law.
Hence the herein petition for certiorari with prayer for the issuance of a
temporary restraining order wherein the petitioners raised the following
issues:
A
THE ARBITER AND THE NLRC DID NOT ACQUIRE JURISDICTION
OVER THE PERSONS OF THE PETITIONERS AND, THEREFORE,
THE DECISION AND THE RESOLUTION, UNDER DISPUTE, ARE
NULL AND VOID.
B due process.
THE DECISION AND THE NLRC RESOLUTION SUFFER FROM A
LEGAL AND CONSTITUTIONAL INFIRMITY BECAUSE THEY
SANCTION A DEPRIVATION OF PETITIONERS' PROPERTIES
WITHOUT DUE PROCESS OF LAW.
C
THE ARBITER AND THE NLRC COMMITTED A GRAVE ABUSE OF
DISCRETION IN ADJUDGING PETITIONERS HEREIN AS JOINTLY
AND SEVERALLY LIABLE WITH PHILIPPINE INTER-FASHION,
INC. TO PAY THE JUDGMENT DEBT.
On September 25, 1989 this Court dismissed the petition for insufficiency in
form and substance, having failed to comply with the Rules of Court and
Administrative Circular No. 1-88 requiting the verification of the petition. A
motion for reconsideration filed by the petitioners of the said resolution was
denied on October 16, 1989 for failure to raise any substantial arguments to
warrant a modification thereof. However, acting on an urgent motion to
include the motion for reconsideration of the resolution of September 25,
1989 in the court's calendar which the Court granted, on November 30, 1989
the Court resolved to set aside said resolutions of September 25, 1989 and
October 16, 1989, and to require respondents to comment thereon within ten
(10) days from notice thereof. A temporary restraining order was issued
enjoining respondents from enforcing or implementing the questioned
decision of the labor arbiter affirmed by the NLRC upon a bond to be filed by
petitioners in the amount of P100,000.00. However, on February 7, 1990 for
failure of petitioner to file the required bond despite extensions of time
granted them, the Court resolved to lift the temporary restraining order issued
on November 13, 1989.
Now to the merit of the petition.
Petitioners do not question the merits of the decision insofar as PIF is
concerned in this proceeding.1wphi1 The first two issues they raised are to
the effect that the public respondents never acquired jurisdiction over them
as they have not been served with summons and thus they were deprived
The Court finds these grounds to be devoid of merit. As the record shows
while originally it was PIF which was impleaded as respondent before the
labor arbiter, petitioners also appeared in their behalf through counsel.
Thereafter when the supplemental position paper was filed by complainants,
petitioners were impleaded as respondents to which they filed an opposition
365
inasmuch as they filed their own supplemental position papers. They were
therefore properly served with summons and they were not deprived of due
process.
Petitioners contend however that under the circumstances of the case as
officers of the corporation PIF they could not be jointly and severally held
liable with the corporation for its liability in this case.
The settled rule is that the corporation is vested by law with a personality
separate and distinct from the persons composing it, including its officers as
well as from that of any other legal entity to which it may be related. Thus, a
company manager acting in good faith within the scope of his authority in
terminating the services of certain employees cannot be held personally
liable for damages. 2 Mere ownership by a single stockholder or by another
corporation of all or nearly all capital stocks of the corporation is not by itself
sufficient ground for disregarding the separate corporate personality. 3
As a general rule, officers of a corporation are not personally liable for their
official acts unless it is shown that they have exceeded their
authority. 4 However, the legal fiction that a corporation has a personality
separate and distinct from stockholders and members may be disregarded
as follows:
This finding does not ignore the legal fiction that a corporation has a
personality separate and distinct from its stockholders and members,
for, as this Court had held "where the incorporators and directors
belong to a single family, the corporation and its members can be
considered as one in order to avoid its being used as an instrument
to commit injustice," or to further an end subversive of justice. In the
case of Claparols vs. CIR involving almost similar facts as in this
case, it was also held that the shield of corporate fiction should be
pierced when it is deliberately and maliciously designed to evade
financial obligations to employees.
To the same effect . . . (are) this Court's rulings in still other cases:
When the notion of legal entity is used as a means to perpetrate
fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, and or (to) confuse
legitimate issues the veil which protects the corporation will be
lifted. 5
In this particular case complainants did not allege or show that petitioners, as
officers of the corporation deliberately and maliciously designed to evade the
financial obligation of the corporation to its employees, or used the transfer of
the employees as a means to perpetrate an illegal act or as a vehicle for the
evasion of existing obligations, the circumvention of statutes, or to confuse
the legitimate issues.
Indeed, in the questioned resolution of the NLRC dated June 30, 1989 there
is no finding as to why petitioners were being held jointly and severally liable
for the liability and obligation of the corporation except as to invocation of the
ruling of this Court in A.C. Ransom Labor Union-CCLU vs. NLRC 6 in that the
liability in the cases of illegal termination of employees extends not only to
the corporation as a corporate entity but also to its responsible officers acting
in the interest of the corporation or employer.
It must be noted, however, that A.C. Ransom Labor Union-CCLU
vs. NLRC the corporation was a family corporation and that during the strike
the members of the family organized another corporation which was the
Rosario Industrial Corporation to which all the assets of the A.C. Ransom
Corporation were transferred to continue its business which acts of such
officers and agents of A.C. Ransom Corporation were intended to avoid
payment of its obligations to its employees. In such case this Court
considered the president of the corporation to be personally liable together
with the corporation for the satisfaction of the claim of the employees. 7
Not one of the above circumstances has been shown to be present. Hence
petitioners can not be held jointly and severally liable with the PIF corporation
under the questioned decision and resolution of the public respondent.
366
WHEREFORE, the petition is GRANTED and the questioned resolution of
the public respondent dated June 30, 1989 is hereby modified by relieving
petitioners of any liability as officers of the PIF and holding that the liability
shall be solely that of Philippine Inter-Fashion, Inc. No costs.

SO ORDERED.

Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.

367
368

G.R. No. 85416 July 24, 1990
FRANCISCO V. DEL ROSARIO, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and LEONARDO V.
ATIENZA, respondents.
Jardeleza, Sobrevias, Diaz, Hayudini & Bodegon Law Offices for petitioner.
Lourdes T. Pagayatan for private respondent.
CORTES, J.:
In POEA Case No. 85-06-0394, the Philippine Overseas Employment
Administration (POEA) promulgated a decision on February 4, 1986
dismissing the complaint for money claims for lack of merit. The decision was
appealed to the National Labor Relations Commission (NLRC), which on
April 30, 1987 reversed the POEA decision and ordered Philsa Construction
and Trading Co., Inc. (the recruiter) and Arieb Enterprises (the foreign
employer) to jointly and severally pay private respondent the peso equivalent
of $16,039.00, as salary differentials, and $2,420.03, as vacation leave
benefits. The case was elevated to the Supreme Court, but the petition was
dismissed on August 31, 1987 and entry of judgment was made on
September 24, 1987.
A writ of execution was issued by the POEA but it was returned unsatisfied
as Philsa was no longer operating and was financially incapable of satisfying
the judgment. Private respondent moved for the issuance of an alias writ
against the officers of Philsa. This motion was opposed by the officers, led by
petitioner, the president and general manager of the corporation.
On February 12, 1988, the POEA issued a resolution, the dispositive portion
of which read:
WHEREFORE, premises considered, let an alias writ of
Execution be issued and the handling sheriff is ordered to
execute against the properties of Mr. Francisco V. del
-Rosario and if insufficient, against the cash and/or surety
bond of Bonding Company concerned for the full satisfaction
of the judgment awarded.
Petitioner appealed to the NLRC. On September 23, 1988, the NLRC
dismissed the appeal. On October 21, 1988, petitioner's motion for
reconsideration was denied.
Thus, this petition was filed on October 28, 1988, alleging that the NLRC
gravely abused its discretion. On November 10, 1988 the Court issued a
temporary restraining order enjoining the enforcement of the NLRC's
decision dated September 23, 1988 and resolution dated October 21, 1988.
The petition was given due course on June 14, 1989.
After considering the undisputed facts and the arguments raised in the
pleadings, the Court finds grave abuse of discretion on the part of the NLRC.
The action of the NLRC affirming the issuance of an alias writ of execution
against petitioner, on the theory that the corporate personality of Philsa
should be disregarded, was founded primarily on the following findings of the
POEA
xxx xxx xxx
6. Per the certification issued by the Licensing Division of
this Office, it appears that Philsa Construction & Trading Co.,
369
 Inc., with office address at 126 Pioneer St., Mandaluyong,
Metro Manila, represented by Mr. Francisco V. del Rosario,
President and General Manager, was formerly a registered
construction contractor whose authority was originally issued
on July 21, 1978 but was already delisted from the list of
agencies/entities on August 15, 1986 for inactivity;
7. Per another certification issued by the Licensing Division
of this Office, it also appears that another corporation, Philsa
International Placement & Services Corp., composed of
practically the same set of incorporators/stockholders, was
registered as a licensed private employment agency whose
license was issued on November 5, 1981, represented by
the same Mr. Francisco V. del Rosario as its President/
General Manager.
and an application of the ruling of the Court in A.C. Ransom Labor Union-
CCLU v. NLRC, G.R. No. 69494, June 10, 1986, 142 SCRA 269.
However, we find that the NLRC's reliance on the findings of the POEA and
the ruling in A. C. Ransom is totally misplaced.
1. Under the law a corporation is bestowed juridical personality, separate and
distinct from its stockholders [Civil Code, Art. 44; Corporation Code, sec. 2].
But when the juridical personality of the corporation is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the corporation
shall be considered as a mere association of persons [Koppel (Phil.), Inc. v.
Yatco, 77 Phil. 496 (1946), citing 1 Fletcher, Cyclopedia of Corporations,
135-136; see also Palay, Inc. v. Clave, G.R. No. 56076, September 21, 1983,
124 SCRA 638], and its responsible officers and/or stockholders shall be held
individually liable [Namarco v. Associated Finance Co., Inc., G.R. No. L-
20886, April 27, 1967, 19 SCRA 962]. For the same reasons, a corporation
shall be liable for the obligations of a stockholder [Palacio v. Fely
Transportation Company, G.R. No. L-15121, August 31, 1962, 5 SCRA 1011;
Emilio Cano Enterprises, Inc. v. Court of Industrial Relations, G.R. No. L-
20502, February 26, 1965, 13 SCRA 290], or a corporation and its
successor-in-interest shall be considered as one and the liability of the
former shall attach to the latter [Koppel v. Yatco, supra; Liddell & Co. v.
Collector of Internal Revenue, G.R. No. L-9687, June 30, 1961, 2 SCRA
632].
But for the separate juridical personality of a corporation to be disregarded,
the wrongdoing must be clearly and convincingly established. It cannot be
presumed.
In this regard we find the NLRC's decision wanting. The conclusion that
Philsa allowed its license to expire so as to evade payment of private
respondent's claim is not supported by the facts. Philsa's corporate
personality therefore remains inviolable.
Consider the following undisputed facts:
(1) Private respondent filed his complaint with the POEA on
June 4, 1985;
(2) The last renewal of Philsa's license expired on October
12, 1985;
(3) The POEA dismissed private respondent's complaint on
February 4, 1986;
(4) Philsa was delisted for inactivity on August 15, 1986; *
(5) The dismissal of the complaint was appealed to the
NLRC and it was only on April 30, 1987 that the judgment
awarding differentials and benefits to private respondent was
rendered.
Thus, at the time Philsa allowed its license to lapse in 1985 and even at the
time it was delisted in 1986, there was yet no judgment in favor of private
respondent. An intent to evade payment of his claims cannot therefore be
implied from the expiration of Philsa's license and its delisting.
370
Neither will the organization of Philsa International Placement and Services
Corp. and its registration with the POEA as a private employment agency
imply fraud since it was organized and registered in 1981, several years
before private respondent filed his complaint with the POEA in 1985. The
creation of the second corporation could not therefore have been in
anticipation of private respondent's money claims and the consequent
adverse judgment against Philsa
Likewise, substantial identity of the incorporators of the two corporations
does not necessarily imply fraud.
The circumstances of this case distinguish it from those in earlier decisions of
the Court in labor cases where the veil of corporate fiction was pierced.
In La Campana Coffee Factory, Inc. v. Kaisahan ng Manggagawa 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 gaugaufactory and the coffee factory were
also interchangeable, i.e., the workers in one factory worked also in the other
factory.
In Claparols v. Court of Industrial Relations, G.R. No. L-30822, July 31, 1975,
65 SCRA 613, the Claparols Steel and Nail Plant, which was ordered to pay
its workers backwages, ceased operations on June 30, 1957 and was
succeeded on the 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.
2. As earlier stated, we also find that, contrary to the NLRC'S holding, the
ruling in A. C. Ransom is inapplicable to this case. In A. C. Ransom, the
Court said:
... In the instant case, it would appear that RANSOM, in
1969, foreseeing the possibility or probability of payment of
back wages to the 22 strikers, organized ROSARIO to
replace RANSOM, with the latter to be eventually phased out
if the 22 strikers win their case. RANSOM actually ceased
operations on May 1, 1973, after the December 19, 1972
Decision of the Court of Industrial Relations was
promulgated against RANSOM. [At p. 274.]
The distinguishing marks of fraud were therefore clearly apparent in A. C.
Ransom. A new corporation was created, owned by the same family,
engaging in the same business and operating in the same compound.
Thus, considering that the non-payment of the workers was a continuing
situation, the Court adjudged its President, the "responsible officer" of the
corporation, personally liable for the backwages awarded, he being the chief
operation officer or "manager" who could be held criminally liable for
violations of Republic Act No. 602 (the old Minimum Wage Law.)
In the case now before us, not only has there been a failure to establish
fraud, but it has also not been shown that petitioner is the corporate officer
responsible for private respondent's predicament. It must be emphasized that
the claim for differentials and benefits was actually directed against the
foreign employer. Philsa became liable only because of its undertaking to be
jointly and severally bound with the foreign employer, an undertaking
required by the rules of the POEA [Rule II, sec. 1(d) (3)], together with the
filing of cash and surety bonds [Rule 11, sec. 4], in order to ensure that
overseas workers shall find satisfaction for awards in their favor.
At this juncture, the Court finds it appropriate to point out that a judgment
against a recruiter should initially be enforced against the cash and surety
bonds filed with the POEA. As provided in the POEA Rules and Regulations
... The bonds shall answer for all valid and legal claims
arising from violations of the conditions for the grant and use
of the license or authority and contracts of employment. The
bonds shall likewise guarantee compliance with the
371
 provisions of the Labor Code and its implementing rules and
regulations relating to recruitment and placement, the rules
of the Administration and relevant issuances of the Ministry
and all liabilities which the Administration may impose. ...
[Rule II, see. 4.]

Quite evidently, these bonds do not answer for a single specific liability, but
for all sorts of liabilities of the recruiter to the worker and to the POEA.
Moreover, the obligations guaranteed by the bonds are continuing. Thus, the
bonds are subject to replenishment when they are garnished, and failure to
replenish shall cause the suspension or cancellation of the recruiter's license
[Rule II, sec. 19]. Furthermore, a cash bond shall be refunded to a recruiter
who surrenders his license only upon posting of a surety bond of similar
amount valid for three (3) years [Rule II, sec. 20]. All these, to ensure
recovery from the recruiter.

It is therefore surprising why the POEA ordered execution "against the

properties of Mr. Francisco V. del Rosario and if insufficient, against the cash
and/or surety bond of Bonding Company concerned for the till satisfaction of
the judgment awarded" in complete disregard of the scheme outlined in the
POEA Rules and Regulations. On this score alone, the NLRC should not
have affirmed the POEA.

WHEREFORE, the petition is GRANTED and the decision and resolution of

the NLRC, dated September 23, 1988 and October 21, 1988, respectively, in
POEA Case No. 85-06-0394 are SET ASIDE. The temporary restraining
order issued by the Court on November 10, 1988 is MADE PERMANENT.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

372
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.

373
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.
374
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 two certificates 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
375
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,4 together with the other
evidence on record, attests to that effect:
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?

Q. Doctor, I want to go back again to the incorporation of the Villa A. Deposit in my account.
Rey Transit, Inc. You heard the testimony presented here by the
bank regarding the initial opening deposit of ONE HUNDRED FIVE Q. Of all the money given to your wife, she did not receive any
THOUSAND PESOS, of which amount Eighty-Five Thousand Pesos check?
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 A. I do not remember.
Thousand Pesos was because you and your wife, or your wife, had
spent the money of the stockholders given to her for incorporation. Q. Is it usual for you, Doctor, to be given Fifty Thousand Pesos
Will you please tell the Honorable Court if you knew at the time your without even asking what is this?
wife was spending the money to pay debts, you personally knew she
was spending the money of the incorporators? xxx xxx xxx

A. You know my money and my wife's money are one. We never JUDGE: Reform the question.
talk about those things.

376
 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. F-50271 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, 10 as 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.12 As 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 the subpoena 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
377
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;17there 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 name22 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,27he 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
378
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.
379
The evident intention behind the restriction was to eliminate the sellers as a
competitor, and this must be, considering such factors as the good will 35 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 matter37says:
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

380
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 emptorprevailing 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
381
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
382
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.

383
384
 STATEMENT

For a number of years prior to the times alleged in the complaint, the plaintiff
was in the employ of the International Banking Corporation of Manila, and it
is conceded that he is a competent and experienced business man. July 31,
1916, C. D. Willits and I. L. Patterson were partners doing business in San
Francisco, California, under the name of Willits & Patterson. The plaintiff was
then in San Francisco, and as a result of negotiations the plaintiff and the
firm entered into a written contract, known in the record as Exhibit A, by
which the plaintiff was employed as the agent of the firm in the Philippine
Islands for certain purposes for the period of five years at a minimum salary
of $200 per month and travelling expenses. The plaintiff returned to Manila
and entered on the discharge of his duties under the contract. As a result of
plaintiff's employment and the world war conditions, the business of the firm
in the Philippines very rapidly increased and grew beyond the fondest hopes
of either party. A dispute arose between the plaintiff and the firm as to the
construction of Exhibit A as to the amount which plaintiff should receive for
his services. Meanwhile Patterson retired from the firm and Willits became
the sole owner of its assets. For convenience of operation and to serve his
own purpose, Willits organized a corporation under the laws of California with
its principal office at San Francisco, in and by which he subscribed for, and
became the exclusive owner of all the capital stock except a few shares for
organization purposes only, and the name of the firm was used as the name
of the corporation. A short time after that Willits came to Manila and
organized a corporation here known as Willits & Patterson, Ltd., in and to
which he again subscribed for all of the capital stock except the nominal
shares necessary to qualify the directors. In legal effect, the San Francisco
corporation took over and acquired all of the assets and liabilities of the
G.R. No. L-20214 March 17, 1923 Manila corporation. At the time that Willits was in Manila and while to all
intents and purposes he was the sole owner of the stock of corporations,
G. C. ARNOLD, plaintiff-appellant, there was a conference between him and the plaintiff over the disputed
vs. construction of Exhibit A. As a result of which another instrument, known in
WILLITS & PATTERSON, LTD., defendant-appellee. the record as Exhibit B, was prepared in the form of a letter which the plaintiff
addressed to Willits at Manila on November 10, 1919, the purpose of which
Fisher, DeWitt, Perkins and Brady for appellant. was to more clearly define and specify the compensation which the plaintiff
Ross and Lawrence for appellee. was to receive for his services. Willits received and confirmed this letter by
signing the name of Willits & Patterson, By C.d. Willits. At the time both

385
corporations were legally organized, and there is nothing in the corporate
minutes to show that Exhibit B was ever formally ratified or approved by
either corporation. After its organization, the Manila corporation employed a
regular accountant whose duty it was to audit the accounts of the company
and render financial statements both for the use of the local banks and the
local and parent corporations at San Francisco. From time to time and in the
ordinary course of business such statements of account were prepared by
the accountant and duly forwarded to the home office, and among other
things was a statement of July 31, 1921, showing that there was due and
owing the plaintiff under Exhibit B the sum of P106,277.50. A short time
previous to that date, the San Francisco corporation became involved in
financial trouble, and all of its assets were turned over to a "creditors'
committee." When this statement was received, the "creditors' committee"
immediately protested its allowance. An attempt was made without success
to adjust the matter on a friendly basis and without litigation. January 10,
1922, the plaintiff brought this action to recover from the defendant the sum
of P106,277.50 with legal interest and costs, and written instruments known
in the record as Exhibits A and B were attached to, and made a part of, the
complaint.
For answer, the defendant admits the formal parts of the complaint, the
execution of Exhibit A and denies each and every other allegation, except as
specifically admitted, and alleges that what is known as Exhibit B was signed
by Willits without the authority of the defendant corporation or the firm of
Willits & Patterson, and that it is not an agreement which was ever entered
into with the plaintiff by the defendant or the firm, and, as a separate defense
and counterclaim, it alleges that on the 30th of June, 1920, there was a
balance due and owing the plaintiff from the defendant under the contract
Exhibit A of the sum of P8,741.05. That his salary from June 30, 1920, to July
31, 1921, under Exhibit A was $400 per month, or a total of P10,400. That
about July 6, 1921, the plaintiff wrongfully took P30,000 from the assets of
the firm, and that he is now indebted to the firm in the sum of P10,858.95,
with interest and costs, from which it prays judgement.
The plaintiff admits that he withdrew the P30,000, but alleges that it was with
the consent and authority of the defendant, and denies all other new matter
in the answer.
Upon such issues a trial was had, and the lower court rendered judgment in
favor of the defendant as prayed for in its counterclaim, from which the
plaintiff appeals, contending that the trial court erred in not holding that the
contract between the parties is that which is embodied in Exhibits A and B,
and that the defendant assumed all partnership obligations, and in failing to
render judgment for the plaintiff, as prayed for, and in dismissing his
complaint, and denying plaintiff's motion for a new trial.
JOHNS, J.:
In their respective briefs opposing counsel agree that the important questions
involved are "what was the contract under which the plaintiff rendered
services for five years ending July 31, 1921," and "what is due the plaintiff
under that contract." Plaintiff contends that his services were performed
under Exhibits A and B, and that the defendant assumed all of the obligations
of the original partnership under Exhibit A, and is now seeking to deny its
liability under, and repudiate, Exhibit B. The defendant admits that Exhibit A
was the original contract between Arnold and the firm of Willits & Patterson
by which he came to the Philippine Islands, and that it was therein agreed
that he was to be employed for a period of five years as the agent of Willits &
Patterson in the Philippine Islands to operate a certain oil mill, and to do such
other business as might be deemed advisable for which he was to receive,
first, the travelling expenses of his wife and self from San Francisco to
Manila, second, the minimum salary of $200 per month, third, a brokerage of
1 per cent upon all purchases and sales of merchandise, except for the
account of the coconut oil mill, fourth, one-half of the profits on any
transaction in the name of the firm or himself not provided for in the
agreement. That the agreement also provided that if it be found that the
business was operated at a loss, Arnold should receive a monthly salary of
$400 during such period. That the business was operated at a loss from June
30, 1920, to July 31, 1921, and that for such reason, he was entitled to
nothing more than a salary of $400 per month, or for that period P10,400.
Adding this amount to the P8,741.05, which the defendant admits he owed
Arnold on June 30, 1920, makes a total of P19,141.05, leaving a balance due
386
the defendant as set out in the counterclaim. In other words, that the
plaintiff's compensation was measured by, and limited to, the above specified
provisions in the contract Exhibit A, and that the defendant corporation is not
bound by the terms or provisions of Exhibit B, which is as follows:
WILLITS & PATTERSON, LTD.
MANILA, P. I., Nov. 10, 1919.
CHAS. D. WILLITS, Esq.,
Present.
DEAR MR. WILLITS: My understanding of the intent of my
agreement with Willits & Patterson is as under:
Commissions. Willits & Patterson, San Francisco, pay me a
commission of one per cent on all purchases made for them in the
Philippines or sales made to them by Manila and one per cent on all
sales made for them in the Philippines, or purchases made from
them by Manila. If such purchases or sales are on an f. o. b. basis
the commission is on the f. o. b. price; if on a c. i. f. basis the
commission is computed on the c. i. f. price
These commissions are credited to me in San Francisco.
I do not participate in any profits on business transacted between
Willits & Patterson, San Francisco, and Willits & Patterson, Ltd.,
Manila.
Profits. On all business transacted between Willits & Patterson, Ltd.
and others than Willits & Patterson, San Francisco, half the profits
are to be credited to my account and half to the Profit & Loss
account of Willits & Patterson, Ltd., Manila.
On all other business, such as the Cooperative Coconut Products
Co. account, or any other business we may undertake as agents or
managers, half the profits are to be credited to my account and half
to the Profit & Loss account of Willits & Patterson, Ltd., Manila.
Where Willits & Patterson, San Francisco, or Willits & Patterson,
Ltd., Manila, have their own funds invested in the capital stock or a
corporation, I of course do not participate in the earnings of such
stock, any more than Willits & Patterson would participate in the
earnings of stock held by me on my account.
If the foregoing conforms to your understanding of our agreement,
please confirm below.
Yours faithfully,
(Sgd.) G. C. ARNOLD
Confirmed:
WILLITS & PATTERSON
By (Sgd.) CHAS. D. WILLITS
There is no dispute about any of the following facts: That at the inception
C.D. Willits and I. L. Patterson constituted the firm of Willits & Patterson
doing business in the City of San Francisco; that later Patterson retired from
the firm, and Willits acquired all of his interests and thereafter continued the
business under the name and style of Willits & Patterson; that the original
contract Exhibit A was made between the plaintiff and the old firm at San
Francisco on July 31, 1916, to cover a period of five years from that date;
that plaintiff entered upon the discharged of his duties and continued his
services in the Philippine Islands to someone for the period of five years; that
on November 10, 1919, and as a result of conferences between Willits and
the plaintiff, Exhibit B was addressed and signed in the manner and form
above stated in the City of Manila. A short time prior to that date Willits
387
organized a corporation in San Francisco, in the State of California, which
took over and acquired all of the assets of the firm's business in California
then being conducted under the name and style of Willits & Patterson; that
he subscribed for all of the capital stock of the corporation, and that in truth
and in fact he was the owner of all of its capital stock. After this was done he
caused a new corporation to be organized under the laws of the Philippine
Islands with principal office at Manila, which took over and acquired all the
business and assets of the firm of Willits & Patterson in the Philippine
Islands, in and to which, in legal effect, he subscribed for all of its capital
stock, and was the owner of all of its stock. After both corporations were
organized the above letter was drafted and signed. The plaintiff contends that
the signing of Exhibit B in the manner and under the conditions in which it
was signed, and through the subsequent acts and conduct of the parties,
was ratified and, in legal effect, became and is now binding upon the
defendant.
It will be noted that Exhibit B was executed in Manila, and that at the time it
was signed by Willits, he was to all intents and purposes the legal owner of
all the stock in both corporations. It also appears from the evidence that the
parent corporation at San Francisco took over and acquired all of the assets
and liabilities of the local corporation at Manila. That after it was organized
the Manila corporation kept separate records and account books of its own,
and that from time to time financial statements were made and forwarded to
the home office, from which it conclusively appears that plaintiff was basing
his claim for services upon Exhibit A, as it was modified by Exhibit B. That at
no time after Exhibit B was signed was there ever any dispute between
plaintiff and Willits as to the compensation for plaintiff's services. That is to
say, as between the plaintiff and Willits, Exhibit B was approved, followed
and at all times in force and effect, after it was signed November 10, 1919. It
appears from an analysis of Exhibit B that it was for the mutual interest of
both parties. From a small beginning, the business was then in a very
flourishing conditions and growing fast, and the profits were very large and
were running into big money.
Among other things, Exhibit A provided: "(a) That the net profits from said
coconut oil business shall be divided in equal shares between the said
parties hereto; (b) that Arnold should receive a brokerage of 1 per cent from
all purchases and sales of merchandise, except for the account of the
coconut mills; (c) that the net profits from all other business should be divided
in equal half shares between the parties hereto."
Under the above provisions, the plaintiff might well contend that he was
entitled to one-half of all the profits and a brokerage of 1 per cent from all
purchases and sales, except those for the account of the coconut oil mills,
which under the volume of business then existing would run into a very large
sum of money. It was for such reason and after personal conferences
between them, and to settle all disputed questions, that Exhibit B was
prepared and signed.
The record recites that "the defendant admits that from July 31, 1916 to July
31, 1921, the plaintiff faithfully performed all the duties incumbent upon him
under his contract of employment, it being understood, however, that this
admission does not include an admission that the plaintiff placed a proper
interpretation upon his right to remuneration under said contract of
employment."
It being admitted that the plaintiff worked "under his contract of employment"
for the period of five years, the question naturally arises, for whom was he
working? His contract was made with the original firm of Willits & Patterson,
and that firm was dissolved and it ceased to exist, and all of its assets were
merged in, and taken over by, the parent corporation at San Francisco. In the
very nature of things, after the corporation was formed, the plaintiff could not
and did not continue to work for the firm, and, yet, he continued his
employment for the full period of five years. For whom did he work after the
partnership was merged in the corporation and ceased to exist?
It is very apparent that, under the conditions then existing, the signing of
Exhibit B was for the mutual interests of both parties, and that if the contract
Exhibit A was to be enforced according to its terms, that Arnold might well
contend for a much larger sum of money for his services. In truth and in fact
Willits and both corporations recognized his employment and accepted the
benefits of his services. He continued his employment and rendered his
services after the corporation were organized and Exhibit B was signed just
388
the same as he did before, and both corporations recognized and accepted
his services. Although the plaintiff was president of the local corporation, the
testimony is conclusive that both of them were what is known as a one man
corporation, and Willits, as the owner of all of the stock, was the force and
dominant power which controlled them. After Exhibit B was signed it was
recognized by Willits that the plaintiff's services were to be performed and
measured by its term and provisions, and there never was any dispute
between plaintiff and Willits upon that question.
The controversy first arose after the corporation was in financial trouble and
the appointment of what is known in the record as a "creditors' committee."
There is no claim or pretense that there was any fraud or collusion between
plaintiff and Willits, and it is very apparent that Exhibit B was to the mutual
interest of both parties. It is elementary law that if Exhibit B is a binding
contract between the plaintiff and Willits and the corporations, it is equally
binding upon the creditors' committee. It would not have any higher or better
legal right than the corporation itself, and could not make any defense which
it could not make. It is very significant that the claim or defense which is now
interposed by the creditors' committee was never made or asserted at any
previous time by the defendant, and that it never was made by Willits, and it
is very apparent that if he had remained in control of the corporation, it would
never have made the defense which is now made by the creditors'
committee. The record is conclusive that at the time he signed Exhibit B,
Willits was, in legal effect, the owner and holder of all the stock in both
corporations, and that he approved it in their interest, and to protect them
from the plaintiff having and making a much larger claim under Exhibit A. As
a matter of fact, it appears from the statement of Mr. Larkin, the accountant,
in the record that if plaintiff's cause of action was now founded upon Exhibit
A, he would have a claim for more than P160,000.
Thompson on Corporations, 2d ed., vol. I, section 10, says:
The proposition that a corporation has an existence separate and
distinct from its membership has its limitations. It must be noted that
this separate existence is for particular purposes. It must also be
remembered that there can be no corporate existence without
persons to compose it; there can be no association without
associates. This separate existence is to a certain extent a legal
fiction. Whenever necessary for the interests of the public or for the
protection or enforcement of the rights of the membership, courts will
disregard this legal fiction and operate upon both the corporation and
the persons composing it.
In the same section, the author quotes from a decision in 49 Ohio State,
1371; 15 L. R. A., 145, in which the Supreme Court of Ohio says:
"So long as a proper use is made of the fiction that a corporation is
an entity apart from its shareholders, it is harmless, and, because
convenient, should not be called in question; but where it is urged to
an end subversive of its policy, or such is the issue, the fiction must
be ignored, and the question determined whether the act in question,
though done by shareholders, that is to say, by the persons
uniting in one body, was done simply as individuals, and with
respect to their individual interest as shareholders, or was done
ostensibly as such, but, as a matter of fact, to control the corporation,
and affect the transaction of its business, in the same manner as if
the act had been clothed with all the formalities of a corporate act.
This must be so, because, the stockholders having a dual capacity,
and capable of acting in either, and a possible interest to conceal
their character when acting in their corporate capacity, the absence
of the formal evidence of the character of the act cannot preclude
judicial inquiry on the subject. If it were otherwise, then in that
department of the law fraud would enjoy an immunity awarded to it in
no other."
Where the stock of a corporation is owned by one person whereby
the corporation functions only for the benefit of such individual
owner, the corporation and the individual should be deemed to be
the same. (U. S. Gypsum Co. vs. Mackay Wall Plaster Co., 199 Pac.,
249.)
Ruling Case Law, vol. 7, section 663, says:
389
While of course a corporation cannot ratify a contract which is
strictly ultra vires, and which it in the first instance could not have
made, it may by ratification render binding on it a contract, entered
into on its behalf by its officers or agents without authority. As a
general rule such ratification need not be manifested by any voted or
formal resolution of the corporation or be authenticated by the
corporate seal; no higher degree of evidence is requisite in
establishing ratification on the part of a corporation, than is requisite
in showing an antecedent authorization.
xxx xxx xxx
SEC. 666. The assent or approval of a corporation to acts done on
its account may be inferred in the same manner that the absent of a
natural person may be, and it is well settled that where a corporation
with full knowledge of the unauthorized act of its officer or agents
acquiesces in and consents to such acts, it thereby ratifies them,
especially where the acquiescence results in prejudice to a third
person.
xxx xxx xxx
SEC. 669. So, when, in the usual course of business of a
corporation, an officer has been allowed in his official capacity to
manage its affair, his authority to represent the corporation may be
inferred from the manner in which he has been permitted by the
directors to transact its business.
SEC. 656. In accordance with a well-known rule of the law of agency,
notice to corporate officers or agents within the scope or apparent
scope of their authority is attributed to the corporation.
SEC. 667. As a general rule, if a corporation with knowledge of its
agents unauthorized act received and enjoys the benefits thereof, it
impliedly ratifies the unauthorized act if it is one capable of
ratification by parol.
In its article on corporations, Corpus Juris, in section 2241 says:
Ratification by a corporation of a transaction not previously
authorized is more easily inferred where the corporation receives
and retains property under it, and as a general rule where a
corporation, through its proper officers or board, takes and retains
the benefits of the unauthorized act or contract of an officer or agent,
with full knowledge of all the material facts, it thereby ratifies and
becomes bound by such act of contract, together with all the
liabilities and burdens resulting therefrom, and in some jurisdiction
this rule is, in effect, declared by statute. Thus the corporation is
liable on the ground of ratification where, with knowledge of the facts,
it accepts the benefit of services rendered under an unauthorized
contract of employment . . . .
Applying the law to the facts.
Mr. Larkin, an experienced accountant, was employed by the local
corporation, and from time to time and in the ordinary course of business
made and prepared financial statements showing its assets and liabilities,
true copies of which were sent to the home office in San Francisco. It
appears upon their face that plaintiff's compensation was made and founded
on Exhibit B, and that such statements were made and prepared by the
accountant on the assumption that Exhibit B was in full force and effect as
between the plaintiff and the defendant. In the course of business in the early
part of 1920, plaintiff, as manager of the defendant, sold 500 tons of oil for
future delivery at P740 per ton. Due to break in the market, plaintiff was able
to purchase the oil at P380 per ton or a profit of P180,000.
It appears from Exhibit B under the heading of "Profits" that:
On all the business transacted between Willits & Patterson, Ltd. and
others than Willits & Patterson, San Francisco, half the profit are to
be credited to may account and half to the Profit & Loss account
Willits & Patterson, Ltd., Manila.
390
The purchasers paid P105,000 on the contracts and gave their notes for
P75,000, and it was agreed that all of the oil purchased should be held as
security for the full payment of the purchase price. As a result, the defendant
itself received the P105,000 in cash, P75,000 in notes, and still holds the 500
tons of oil as security for the balance of the purchase price. This transaction
was shown in the semi-annual financial statement for the period ending
December 31, 1920. That is to say, the business was transacted by and
through the plaintiff, and the defendant received and accepted all of the
profits on the deal, and the statement which was rendered gave him a credit
for P90,737.88, or half the profit as provided in the contract Exhibit B, with
interest.
Although the previous financial statements show upon their face that the
account of plaintiff was credit with several small items on the same basis, it
was not until the 23d of March, 1921, that any objection was ever made by
anyone, and objection was made for the first time by the creditors' committee
in a cable of that date.
As we analyze the facts Exhibit B was, in legal effect, ratified and approved
and is now binding upon the defendant corporation, and the plaintiff is
entitled to recover for his services on that writing as it modified the original
contract Exhibit A.
It appears from the statement prepared by accountant Larkin founded upon
Exhibit B that the plaintiff is entitled to recover P106,277.50. It is very
apparent that his statement was based upon the assumption that there was a
net profit of P180,000 on the 500 tons of oil, of which the plaintiff was entitled
to one-half.
In the absence of any other proof, we have the right to assume that the 500
tons of oil was worth the amount which the defendant paid for them at the
time of the purchase or P380 per ton, and the record shows that the
defendant took and now has the possession of all of the oil secure the
payment of the price at which it was sold. Hence, the profit on the deal to the
defendant at the time of the sale would amount to the difference between
what the defendant paid for the oil and the amount which it received for the
oil at the time it sold the oil. It appears that at the time of the sale the
defendant only received P105,000 in cash, and that it took and accepted the
promissory notes of Cruz & Tan Chong Say, the purchasers, for P75,000
more which have been collected and may never be. Hence, it must follow
that the amount evidence by the notes cannot now be deemed or treated as
profits on the deal and cannot be until such times as the notes are paid.
The judgment of the lower court is reversed, and a money judgment will be
entered here in favor of the plaintiff and against the defendant for the sum of
P68,527.50, with thereon at the rate of 6 per cent per annum from the 10th
day of January, 1922. In addition thereto, judgment will be rendered against
the defendant in substance and to the effect that the plaintiff is the owner of
an undivided one-half interest in the promissory notes for P75,000 which
were executed by Cruz & Tan Chong Say, as a part of the purchase price of
the oil, and that he is entitled to have and receive one-half of all the proceeds
from the notes or either of them, and that also he have judgment against the
defendant for costs. So ordered.
Araullo, C. J., Street, Malcolm, Avancea, Ostrand, and Romualdez, JJ.,
concur.
G.R. No. L-5677 May 25, 1953
LA CAMPANA FACTORY, INC., and TAN TONG doing business under
the trial name "LA CAMPANA GAUGAU PACKING", petitioners,
vs.
KAISAHAN NG MGA MANGGAGAWA SA LA CAMPANA (KKM) and THE
COURT OF INDUSTRIAL RELATIONS, respondents.
391
Ceferino de los Santos, R., Ceferino de los Santos, Jr. and Manuel V. Roxas
for petitioners.
Carlos E. Santiago for respondent union.
REYES, J.:
Tan Tong, one of the herein petitioners, has since 1932 been engaged in the
business of buying and selling gaugau under the trade name La Campana
Gaugau Packing with an establishment in Binondo, Manila, which was later
transferred to Espaa Extension, Quezon City. But on July 6, 1950, Tan
Tong, with himself and members of his family corporation known as La
Campana Factory Co., Inc., with its principal office located in the same place
as that of La Campana Gaugau Packing.
About a year before the formation of the corporation, or on July 11, 1949, Tan
Tong had entered into a collective bargaining agreement with the Philippine
Legion of Organized Workers, known as PLOW for short, to which the union
of Tan Tong's employees headed by Manuel E. Sadde was then affiliated.
Seceding, however, from the PLOW, Tan Tong's employees later formed their
own organization known as Kaisahan Ng Mga Manggagawa Sa La
Campana, one of the herein respondents, and applied for registration in the
Department of Labor as an independent entity. Pending consideration of this
application, the Department gave the new organization legal standing by
issuing it a permit as an affiliate to the Kalipunan Ng Mga Manggagawa.
On July 19, 1951, the Kaisahan Ng Mga Manggagawa Sa La Campana,
hereinafter to be referred to as the respondent Kaisahan, which, as of that
date, counted with 66 members workers all of them of both La Campana
Gaugau Packing and La Campana Coffee Factory Co., Inc. presented a
demand for higher wages and more privileges, the demand being addressed
to La Campana Starch and Coffee Factory, by which name they sought to
designate, so it appears, the La Campana Gaugau Packing and the La
Campana Coffee Factory Co., Inc. As the demand was not granted and an
attempt at settlement through the mediation of the Conciliation Service of the
Department of Labor had given no result, the said Department certified the
dispute to the Court of Industrial Relations on July 17, 1951, the case being
there docketed as Case No. 584-V.
With the case already pending in the industrial court, the Secretary of Labor,
on September 5, 1951, revoked the Kalipunan Ng Mga Kaisahang
Manggagawa's permit as a labor union on the strength of information
received that it was dominated by subversive elements, and, in
consequence, on the 20th of the same month, also suspended the permit of
its affiliate, the respondent Kaisahan.
We have it from the court's order of January 15, 1952, which forms one of the
annexes to the present petition, that following the revocation of the
Kaisahan's permit, "La Campana Gaugau and Coffee Factory" (obviously the
combined name of La Campana Gaugau Packing and La Campana Coffee
Factory Co., Inc,) and the PLOW, which had been allowed to intervene as a
party having an interest in the dispute, filed separate motions for the
dismissal of the case on the following grounds:
1. That the action is directed against two different entities with
distinct personalities, with "La Campana Starch Factory" and the "La
Campana Coffee Factory, Inc.";
2. That the workers of the "La Campana Coffee Factory, Inc." are
less than thirty-one;
392
 3. That the petitioning union has no legal capacity to sue, because its
registration as an organized union has been revoked by the
Department of Labor on September 5, 1951; and
4. That there is an existing valid contract between the respondent
"La Campana Gaugau Packing" and the intervenor PLOW, where-in
the petitioner's members are contracting parties bound by said
contract.
Several hearings were held on the above motions, in the course of which
ocular inspections were also made, and on the basis of the evidence
received and the facts observed in the ocular inspections, the Court of
Industrial Relations denied the said motions in its order of January 14, 1952,
because if found as a fact that:
A. While the coffee corporation is a family corporation with Mr. Tan
Tong, his wife, and children as the incorporations and stockhelders
(Exhibit 1), the La Campana Gaugau Packing is merely a business
name (Exhibit 4).
B. According to the contract of lease (Exhibit 23), Mr. Tan Tong.,
propriety and manager of the Ka Campana Gaugau Factory, leased
a space of 200 square meters in the bodega housing the gaugau
factory to his son Tan Keng Lim, manager of the La Campana Coffee
Factory. But the lease was executed only on September 1, 1951,
while the dispute between the parties was pending before the Court.
C. There is only one entity La Campana Starch and Coffee Factory,
as shown by the signboard (Exhibit 1), the advertisement in the
delivery trucks (Exhibit I-1), the packages of gaugau(Exhibit K), and
delivery forms (Exhibits J, J-1, and J-2).
D. All the laborers working in the gaugau or in the coffee factory
receive their pay from the same person, the cashier, Miss Natividad
Garcia, secretary of Mr. Tan Tong; and they are transferred from the
gaugau to the coffee and vice-versa as the management so requires.
E. There has been only one payroll for the entire La Campana
personnel and only one person preparing the same Miss
Natividad Garcia, secretary of Mr. Tan Tong. But after the case at bar
was certified to this Court on July 17, 1951, the company began
making separate payrolls for the coffee factory (Exhibits M-2 and M-
3, and for the gaugau factory (Exhibits O-2, O-3 and O-4). It is to be
noted that before July 21, 1951, the coffee payrolls all began with
number "41-Maria Villanueva" with 24 or more laborers (Exhibits M
and M-1), whereas beginning July 21, 1951, the payrolls for the
coffee factory began with No. 1-Loreta Bernabe with only 14 laborers
(Exhibits M-2 and M-3).
F. During the ocular inspection made in the factory on August 26,
1951 the Court has found the following:
In the ground floor and second floor of the gaugau factory there were
hundreds of bags of raw coffee behind the pile of gaugau sacks.
There were also women employees working paper wrappers for
gaugau, and, in the same place there were about 3,000 cans to be
used as containers for coffee.
The Court found out also that there were 16 trucks used both for the
delivery of coffee and gaugau. To show that those trucks carried both
coffee and gaugau, the union president invited the Court to examine
the contents of delivery truck No. T-582 parked in a garage between
the gaugau building and the coffee factory, and upon examination,
there were found inside the said truck boxes of gaugau and cans of
coffee,
and held that:
. . . there is only one management for the business of gaugau and
coffee with whom the laborers are dealing regarding their work.
Hence, the filing of action against the Ka Campana Starch and
Coffee Factory is proper and justified.
393
 With regards to the alleged lack of personality, it is to be noted that
before the certification of the case to this Court on July 17, 1951, the
petitioner Kaisahan Ng Mga Manggagawa Sa La Campana, had a
separate permit from the Department of Labor. This permit was
suspended on September 30, 1951. (Exhibit M-Intervenor, page 55,
of the record). It is not true that, on July 17, 1951, when this case
forwarded to this Court, the petitioner's permit, as an independent
union, had not yet been issued, for the very Exhibit MM-Intervenor
regarding the permit, conclusively shows the preexistence of said
permit. (Annex G.)
Their motion for reconsideration of the above order having been denied, Tan
Tong and La Campana Coffee Factory, Inc. (same as La Campana Coffee
Factory Co., Inc.), later joined by the PLOW, filed the present petition for
certiorari on the grounds that the Court of Industrial Relations had no
jurisdiction to take cognizance of the case, for the reason, according to them,
"(1) that the petitioner La Campana Coffee Factory, Inc. has only 14
employees, only 5 of whom are members of the respondent union and
therefore the absence of the jurisdictional number (30) as provided by
sections 1 and 4 of Commonwealth Act No. 103; and, (2) that the suspension
of respondent union's permit by the Secretary of Labor has the effect of
taking away the union's right to collective bargaining under section 2 of
Commonwealth Act No. 213 and consequently, its personality to sue for ad in
behalf of its members."
As to the first ground, petitioners obviously do not question the fact that the
number of employees of the La Campana Gaugau Packing involved in the
case is more than the jurisdictional number (31) required bylaw, but they do
contend that the industrial court has no jurisdiction to try the case as against
La Campana Coffee Factory, Inc. because the latter has allegedly only 14
laborers and only of these are members of the respondent Kaisahan. This
contention loses force when it is noted that, as found by the industrial court
and this finding is conclusive upon us La Campana Gaugau Packing
and La Campana Coffee Factory Co. Inc., are operating under one single
management, that is, as one business though with two trade names. True,
the coffee factory is a corporation and, by legal fiction, an entity existing
separate and apart fro the persons composing it, that is, Tan Tong and his
family. But it is settled that this fiction of law, which has been introduced as a
matter of convenience and to subserve the ends of justice cannot be invoked
to further an end subversive of that purpose.
Disregarding Corporate Entity. The doctrine that a corporation is a
legal entity existing separate and apart from the person composing it
is a legal theory introduced for purposes of convenience and to
subserve the ends of justice. The concept cannot, therefore, be
extended to a point beyond its reason and policy, and when invoked
in support of an end subversive of this policy, will be disregarded by
the courts. Thus, in an appropriate case and in furtherance of the
ends of justice, a corporation and the individual or individuals owning
all its stocks and assets will be treated as identical, the corporate
entity being disregarded where used as a cloak or cover for fraud or
illegality. (13 Am. Jur., 160-161.)
. . . A subsidiary or auxiliary corporation which is created by a parent
corporation merely as an agency for the latter may sometimes be
regarded as identical with the parent corporation, especially if the
stockholders or officers of the two corporations are substantially the
same or their system of operation unified. (Ibid. 162; see Annotation
1 A. L. R. 612, s. 34 A. L. R. 599.)
In the present case Tan Tong appears to be the owner of the gaugau factory.
And the coffee factory, though an incorporated business, is in reality owned
exclusively by Tan Tong and his family. As found by the Court of industrial
Relations, the two factories have but one office, one management and one
payroll, except after July 17, the day the case was certified to the Court of
Industrial Relations, when the person who was discharging the office of
cashier for both branches of the business began preparing separate payrolls
for the two. And above all, it should not be overlooked that, as also found by
the industrial court, the laborers of the gaugau factory and the coffee factory
were interchangeable, that is, the laborers from the gaugau factory were
sometimes transferred to the coffee factory and vice-versa. In view of all
these, the attempt to make the two factories appears as two separate
businesses, when in reality they are but one, is but a device to defeat the
394
ends of the law (the Act governing capital and labor relations) and should not
be permitted to prevail.

The second point raised by petitioners is likewise with-out merit. In the first
place, there being more than 30 laborers involved and the Secretary of Labor
having certified the dispute to the Court of Industrial Relations, that court duly
acquired jurisdiction over the case (International Oil Factory vs. NLU, Inc. 73
Phil., 401; section 4, C. A. 103). This jurisdiction was not when the
Department of Labor suspended the permit of the respondent Kaisahan as a
labor organization. For once jurisdiction is acquired by the Court of Industrial
Relations it is retained until the case is completely decided. (Manila Hotel
Employees Association vs. Manila Hotel Co. et al., 73 Phil., 374.)

In view of the foregoing, the petition is denied, with costs against the
petitioner.

Paras, C.J., Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo, Bautista

Angelo and Labrador, JJ., concur.

395
 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.
G.R. No. L-13203 January 28, 1961

396
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.
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:
Deficiency 75% Total Am
Sales Tax Surcharge Due

On November 7, 1950, after several months of investigation by revenue Assessment (First) of November 7, 1950
officers started in July, 1948, the Collector of Internal Revenue made an for deficiency sales Tax for the period
assessment upon Yutivo and demanded from the latter P1,804,769.85 as from 3rd Qrtr 1947 to 4th Qrtr 1949
deficiency sales tax plus surcharge covering the period from the third quarter inclusive P1,031,296.60 P773,473.45 P1,804,7
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 Additional Assessment for period from
subsidiary of the latter. 1st to 4th Qrtr 1950, inclusive 234,880.13 176,160.09 411,040.2

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 Total amount demanded per letter of
respondent Collector in his letter dated November 15, 1952 countermanded December 16, 1954 P1,266,176.73 P949,632.54 P2,215,8
his demand for sales tax deficiency on the ground that "after several
investigations conducted into the matter no sufficient evidence could be

397
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
398
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 of Court 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
399
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.
400
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
401
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
402
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
403
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
404
Bureau of Internal Revenue dated July 29, 1939, which implements sections . . . is unfair, because . . .(it is) practically imposing tax on a tax
184.186 of the Tax Code provides: " already paid. Besides, the adoption of the procedure would in certain
cases elevate the bracket under which the tax is based. The late
. . .'Gross selling price' or gross value in money' of the articles sold, payment is already penalized, thru the imposition of surcharges, by
bartered, exchanged, transferred as the term is used in the adopting the theory of the Collector, we will be creating an additional
aforecited sections (sections 184, 185 and 186) of the National penalty not contemplated by law."
Internal Revenue Code, is the total amount of money or its
equivalent which the purchaser pays to the vendor to receive or get If the taxes based on the sales of SM are computed in accordance with Gen.
the goods. However, if a manufacturer, producer, or importer, in fixing Circulars Nos. 431 and 440 the total deficiency sales taxes, exclusive of the
the gross selling price of an article sold by him has included an 25% and 50% surcharges for late payment and for fraud, would amount only
amount intended to cover the sales tax in the gross selling price of to P820,549.91 as shown in the following computation:
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.
Sales Taxes Due
Gross Sales of Total Gross Selling
Rates of and Computed
General Circular No. 440 of the same Bureau reads: Vehicles Exclusive Price Charged to
Sales Tax under Gen. Cir
of Sales Tax the Public
Nos. 431 & 400
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 5% P11,912,219.57 P595,610.98 P12,507,83055
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 7% 909,559.50 63,669.16 973,228.66
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.) 10% 2,618,695.28 261,869.53 2,880,564.81

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 15% 3,602,397.65 540,359.65 4,142,757.30
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
20% 267,150.50 53,430.10 320,580.60

405
 two judges shall be necessary to promulgate decision thereof. . . . " It is on
30% 837,146.97 251,114.09 1,088,291.06 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,
50% 74,244.30 37,122.16 111,366.46 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
75% 8,000.00 6,000.00 14,000.00 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
TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44
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.
Less Taxes Paid by
Yutivo 988,655.76 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.
Deficiency Tax still due P820,549.91
So ordered without costs.

This is the exact amount which, according to Presiding Judge Nable of the Bengzon, Labrador, Concepcion, Reyes, J.B.L., Barrera and Paredes,
Court of Tax Appeals, Yutivo would pay, exclusive of the surcharges. JJ., concur.
Padilla, J., took no part.
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 G.R. No. L-9687 June 30, 1961
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 LIDDELL & CO., INC., petitioner-appellant,
No. 1125, creating the Court of Tax Appeals, provides that "Any two judges of vs.
the Court of Tax Appeals shall constitute a quorum, and the concurrence of THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.

406
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 No. of Amount Per Cent
407
 Shares

Frank Liddell 13,688 P1,368,800 72.00%

Irene Liddell 1 100 .01%

Mercedes Vecin 1 100 .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%

408
409
 G. W. Kernot 500 50,000 2.64%

19,000 P1,900,000 100.00% Angel Manzano 1,810 181,000 6.031%

On November 15, 1948, in accordance with a resolution of a special meeting Julian Serrano 1,700 170,000 5.670%
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: E. Hasim 830 83,000 2.770%

No. of G. W. Kernot 1,490 149,000 4.970%

Name Amount Per Cent
Shares

30,000 P3,000,000 100.000%

Frank Liddell 19,738 P1,973,800 65.791%

On the basis of the agreement Exhibit A, (May, 1947) "40%" of the earnings
Irene Liddell 1 100 .003% 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 12-1/2%; A. Manzano 12-1/2% and Julian Serrano 7-1/2%. The
Mercedes Vecin 1 100 .003% 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,
Charles Kurz 2,215 221,500 7.381%
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
E.J. Darras 2,215 221,500 7.381% 45% given by Frank Liddell to his employees was reapportioned as follows:

410
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
411
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 &
412
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. Authorities 10 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."
413
Thus, we repeat: to allow a taxpayer to deny tax liability on the ground that Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, De
the sales were made through an other and distinct corporation when it is Leon and Natividad, JJ., concur.
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 G.R. No. L-22614 August 29, 1969
been embodied in proper documents, constantly subject to inspection by the
tax authorities. Liddell & Co., Inc. have always made a full report of its RAMIREZ TELEPHONE CORPORATION, petitioner,
income and receipts in its income tax returns. vs.
BANK OF AMERICA, E.F. HERBOSA, THE SHERIFF OF MANILA and
Paraphrasing our decision in the Yutivo case, we may now say, in filing its THE COURT OF APPEALS,respondents.
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 Quijano and Arroyo, for petitioner.
made a false return for the purpose of defrauding the government of its Lichauco, Picazo and Agcaoili for respondent Bank of America.
revenue, and should suffer a 50% surcharge. But penalty for late payment Vicente M. Magpoc for respondent E.F. Herbosa.
(25%) should be imposed. Fiscal Eulogio S. Serrano for respondent Sheriff of Manila.

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.
CAPISTRANO, J.:
This is a petition for review on certiorari of a decision of the Court of Appeals
of February 27, 1964, wherein the judgment of the lower court was reversed
and another entered dismissing the complaint of plaintiff, now petitioner,
Ramirez Telephone Corporation, and ordering it to pay to defendant, now
respondent, Bank of America, the sum of P500.00 and to the third-party
defendant E.F. Herbosa, now likewise respondent, the same amount, both in
the concept of attorney's fees, the costs being adjudged likewise against

414
petitioner. The judgment of the Court of First Instance which was reversed by Civil Case No. 10620
the Court of Appeals reads as follows:1 E.F. Herbosa, Plaintiff

In view of the foregoing considerations, judgment is hereby rendered -- versus -- GARNISHMENT

in favor of the plaintiff and against the defendant Bank of America
ordering the latter to pay the former the sum of P3,000.00 in the form Ruben R. Ramirez, Defendant
of actual damages, and to pay the costs of these proceedings.
To: Bank of America
Likewise, judgment is hereby rendered sentencing the third-party Manila
defendant, E.F. Herbosa, to indemnify or reimburse the third-party
plaintiff, Bank of America, any sum or sums which the latter may pay Greetings:
the plaintiff by virtue of this judgment.
You and each of you are hereby notified that, by virtue of an order of
The third-party complaint against the Sheriff of Manila as well as the attachment issued by the Court of First Instance of Manila, copy of
counterclaim of defendant Bank of America and third-party defendant which is hereto attached, levy is hereby made (or attachment is
E.F. Herbosa are hereby ordered dismissed. hereby levied) upon all the goods, effects, interests, credits, money,
stocks, shares, any interests in stocks and shares and all debts
The facts as found by the Court of Appeals, which we cannot review are set owing by you to the defendant, Ruben R. Ramirez ---------, in the
forth in its decision, thus:2 above entitled case, and any other personal property in your
possession or under your control, belonging to the said defendant
Resultando: Que los hechos al parecer, no son muy embrollados; el --------- on this date, to cover the amount of P2,400.00 and specially
demandado, Herbosa era y es dueno del edificio No. 612, Int. 3 Sta. the ... .
Mesa; se lo habia dado en arrendamiento a Ruben R. Ramirez, y
como este era el presidente de la Ramirez Telephone Corporation, el xxx xxx xxx
taller de la corporacion aunque su oficina central estaba en la
Escolta, Natividad Building, Exh. D. fue trasladado al local: pero Manila, Philippines, October 13, 1950
habiendose amontonado los alquilares sin pagar, Herbosa presento
demanda de desahucio contra Ramirez en el Juzgado Municipal de
MACARIO M. OFILADA
Manila el 10 de Noviembre, 1949, y elevada la causa al Juzgado del
Sheriff of Manila
1.a Instancia, Herbosa pudo conseguir decision favorable alli el 14
(Exh. 2);
de Octubre, 1950, pero en la vispera de la promulgacion de la
sentencia a su favor habia ya conseguido mandamiento de embargo
preventivo contra Ramirez, Exh. A, y el mismo, servido al Bank of y fue contestado por el banco el mismo dia de la siguiente manera:
America el 13 de Octubre, 1950, Exh. 2, lease como sigue:
Dear Sir:

415
In reply to your Garnishment of October 13, 1950, issued under the
above-subject case, we wish to inform you that we do not hold any
fund in the name of the defendant, Ruben R. Ramirez.
Yours very truly, (Exh. 3);
pero el Sheriff reitero el embargo el 17 de Octubre, 1950, Exh. B,
notificando al Bank of America de que quedaba embargado,
"... the interest or participation which the defendant Ruben R.
Ramirez may or might have in the deposit of the Ramirez
Telephone, Inc., with that Bank sufficient to cover the said
amount of P2,400.00"; Exh. B; y
la institucion bancaria en contestacion al Sheriff, de fecha 17 de
Octubre, 1950 o sea el mismo dia, hizo constar que:
"... we are holding the amount of P2,400.00 in the name of
the Ramirez Telephone, Inc. subject to your further orders,"
Exh. G;
es decir acato la notificacion del embargo de los fondos de la
Ramirez Telephone; ahora bien, recuerdase de que en aquella
fecha, 17 de Octubre, 1950, es Ramirez Telephone tenia en deposito
con el Bank of America, la suma de P4,789.53, Exh. 9; de manera
que con el embargo, se redujo los fondos libres a la cantidad de
P2,389.53; pero el dia siguiente, el Ramirez Telephone retiro la
suma de P1,500.00, quedando por tanto como ultimo balance, nada
mas que unos P889.00; de esto surgio la presente contienda, pues,
el 19 de Octubre, 1950, la Ramirez Telephone por medio de su
presidente, el mismo demandado, Ruben Ramirez, ya mencionado,
habiendo expedido el 19 de Octubre, 1950, otro cheque en la suma
de P2,320.00 a favor de la Ray Electronics, en pago de ciertos
equipos vendidos por este ultimo, Exhs. 15, 17, L, el cheque Exh. N,
este cheque al ser presentado a la Bank of America, fue rechazado
por lo que el abogado de la Ramirez Telephone el 23 de Octubre,
1950, envio carta de requerimiento al Bank of America, Exh. 14,
manifestando que su cliente habia sufrido "considerable damage and
embarrassment," y advirtiendole que si no se le diera completa
satisfaccion el dia siguiente, el presentaria la demanda
correspondiente, "without further notice," Exh. 14; esta carta la
contesto la institucion bancaria el 24 de Octubre, 1950, alegando
que,
"With reference to your letter dated October 23, 1950, in
which you are writing in behalf of the Ramirez Telephone
Corporation, it is suggested that you obtain a release from
the Court on Civil Case No. 10620, Ruben E. Ramirez,
defendant.
"This Bank is acting only in accordance with the garnishment
and has no interest whatsoever in the funds held," Exh. 15;
pero conforme con su advertencia, el abogado dela Ramirez
Telephone, Inc., incoo esta accion el 28 de Octubre, cuatro dias
despues; y el motivo deaccion se de hace consistir en que el banco,
"... knows or should have known that Ruben N. Ramirez the
defendant in said Civil Case and whose property or fund was
ordered attached has no personal deposit in that bank and
that the Ramirez Telephone Corporation is entirely a distinct
and separate entity regardless of the fact that Ruben R.
Ramirez happens to be its President and General Manager.'
par. 4, demanda; y alegando que con motivo de ello y la
siguiente devolucion de su cheque a favor de la Ray
Electronics sin pagar, esta habia cancelado su pedido para
los equipos necesarios en la construccion de sus lineas
telefonicas en la region bicolana, asi que todas sus
operaciones se habian quedado paralizadas, par. 5 id.; la
demandada Bank of America, emplazada de la demandada,
presento mocion de sobresimiento, que denegada, el 4 de
Diciembre, 1950, el banco sometio su contestacion el 23 de
416
 Diciembre, 1950 con reconvencion para despues presentar
demanda contra el Sheriff, el 25 de Agosto, 1953, y Contra
Herbosa, el 16 de Agosto, 1955; y este ultimo a su vez en
contestacion, presento contra reclamacion o mejor dicho,
reconvencion contra la misma demandante, Ramirez
Telephone, y tambien contra el Bank of America, el 10 de
Septiembre, 1955, y el Juzgado Inferior, despues de la vista,
como ya se ha dicho, dictamino en favor de la demandante
contra el Bank of America en la contra-demanda de este
contra aquel; ... ."
It was further found by the Court of Appeals:3
Considerando: Que el testimonio de Estanislao Herbosa al efecto de
que; si bien Ruben R. Ramirez era su inquilino al principio, pero es
que mas tarde, este lo habia manifestado que "the shop of company
was established downstairs," e decir que la Ramirez Telephone
Corporation a la verdad ocupaba el local alquilado, tanto que Ruben
R. Ramirez solia pagar el alquilar en cheques de la Ramirez
Telephone Corporation, y esta declaracion, t.n. 10 y 11, 25 June
1956, estando corroborada no solamente por el Exh. 12, en donde
Ruben R. Ramirez, en papel con el embrete de la Ramirez
Telephone, habia enviado el abogado de Herbosa, el cheque No. C-
78900, manifestando en la carta de que:
In accordance with your agreement yesterday with my
attorney, Mr. Jose L. de Leon, I am sending you herewith
check No. C-78900 for the amount of P812.60, rentals for
the premises I am occupying at the rate of P161.00 a month
for the period from February 1, 1949 to June 30, 1949, both
dates, inclusive, plus P7.00 for the court costs.' Exh. 12;
y esta carta, leida en relacion con el Exh. 3, en donde se ve que
Ruben R. Ramirez y tenia fondos depositados en el banco
mencionado, Bank of America, asi que resulta evidente que lo
fondos de la Ramirez Telephone los eran a la verdad, fondos de que
buenasanta podia disponer su Presidente, Ruben R. Ramirez, para
el pago de los alquilares por el debidos a Herbosa, y luego, tambien
resulta evidente de que la casa por el alquilada Ramirez Telephone,
y estos hechos agregados el otro hecho tambien probado, de que el
75% de las acciones de la compania pertenecia a Ruben Ramirez y
su esposa Rizalina P. de Ramirez, Exh. E, todos estos no pueden
menos de justificar la conclusion de que el embargo de los fondos
de la Ramirez Telephone por y en virtud de un mandamiento judicial
de embargo contra Ruben R. Ramirez, especialmente teniendo en
cuenta que el embargo solo abarcaba,
"The interest or participation which the defendant Ruben R.
Ramirez may or might have in the deposit of the Ramirez
Telephone, Inc., in the amount of P2,400.00" Exh. B;
cuando entonces estaba depositada la cantidad de P4,857.28, Exh.
9, era un acto de justicia a favor del acreedor Herbosa y a la verdad,
de no haberse permitido el mencionado embargo, este se hubiera
visto en igual situacion que aquel pobre agraviado que como se dice
vulgarmente, tras de cornudo, fue apaleado; ... .
The aforestated facts notwithstanding, which must be considered conclusive
and binding on us, plaintiff in the lower court, now petitioner, Ramirez
Telephone Corporation, as noted, appealed, assigning the following alleged
errors:4
I
The Court of Appeals erred in not applying the settled legal principle
that a corporation has a personality separate and distinct from that of
its stockholders and, therefore, the funds of a corporation cannot be
reached to satisfy the debt of its stockholders.
II
417
 The Court of Appeals erred in not taking into account the significant
fact that when the events that gave rise to this case took place, the
lawyer of both respondents, i.e., the Bank of America and E.F.
Herbosa, was one and the same.
III
The Court of Appeals erred in not granting petitioner damages as
awarded by the lower court; likewise, the Court of Appeals erred in
declaring instead that it is petitioner that should pay respondents
attorneys' fees.
Petitioner's main grievance in the first assigned error is that the Court of
Appeals disregarded its corporate personality; it relies on the general
principle "that the corporate entity will not be disregarded no matter how
large the holding a particular stockholder may have in the
corporation." 5 Petitioner would thus maintain that the personality as an entity
separate and distinct from its major stockholders, Ruben R. Ramirez and his
wife, was not to be disregarded even if they did own 75% of the stock of the
corporation. 6 The conclusion that would thus emerge, in petitioner's opinion,
is that its funds as a corporation cannot be garnished to satisfy the debts of a
principal stockholder.
While respect for the corporate personality as such is the general rule, there
are exceptions. In appropriate cases, the veil of corporate fiction may be
pierced. From the facts as found which must remain undisturbed, this is such
a case. This assignment of error has no merit, in view of a number of cases
decided by this Court, the latest of which is Albert v. Court of First
Instance 7 reaffirming a 1965 resolution in Albert v. University Publishing Co.,
Inc. 8In that resolution, the principle is restated thus: "Even with regard to
corporations duly organized and existing under the law, we have in many a
case pierced the veil of corporate fiction to administer the ends of justice." In
support of the above principle, the following cases were cited: Arnold vs.
Willits & Patterson, Ltd., 44 Phil. 634; Koppel (Phil.), Inc. vs. Yatco, 77 Phil.
496; La Campana Coffee Factory, Inc. vs. Kaisahan ng mga Manggagawa sa
La Campana, 93 Phil. 160; Marvel Building Corporation vs. David, 94 Phil.
376; Madrigal Shipping Co., Inc. vs. Ogilvie, L-8431, Oct. 30, 1958; Laguna
Transportation Co., Inc. vs. S.S.S., L-14606, April 28, 1960; McConnel vs.
C.A., L-10510, March 17, 1961; Liddel & Co., Inc. vs. Collector of Internal
Revenue, L-9687, June 30, 1961; Palacio vs. Fely Transportation Co., L-
15121, August 31, 1962. Hence, to repeat, the first assigned error cannot be
sustained.
The next two errors assigned likewise fail to call for a reversal of the
judgment now on appeal. The second alleged error would find fault with the
decision because the Court of Appeals allegedly did not take into account a
significant fact, namely, that only one lawyer represented both the
respondent Bank of America and respondent E.F. Herbosa. We are not called
upon to consider this particular assignment of error as it is essentially factual,
which is a matter for the Court of Appeals, not for us, to determine. The last
assigned error would in effect seek a restatement of the damages awarded
petitioner on the theory that the Court of Appeals decided the matter
erroneously. Since, as we made clear in the foregoing, the decision of the
Court of Appeals is in accordance with law on the facts as found, this alleged
error likewise is not meritorious.
PREMISES CONSIDERED, the judgment of the Court of Appeals of
February 27, 1964 is affirmed, with costs against petitioner Ramirez
Telephone Corporation.
Concepcion, C.J., Dizon, Makalintal, Sanchez, Castro, Fernando, Teehankee
and Barredo, JJ., concur.
Reyes, J.B.L., and Zaldivar, JJ., are on leave.
418
419
420
 From the records it appears that Jolly M. Almoradie was first employed by
Mercury Express International Courier Service, Inc. (MEREX) in October,
G.R. No. 100322 March 9, 1994 1983 as Messenger receiving a monthly salary of P800.00. When it closed its
operations, Almoradie was absorbed by MEREX's sister company Philippine
GUATSON INTERNATIONAL TRAVEL AND TOURS, INC., PHILIPPINE Integrated Labor Assistance Corp. (Philac), likewise as Messenger with an
INTEGRATED LABOR ASSISTANCE CORPORATION, MERCURY increased salary of P1,200.00.
EXPRESS INTERNATIONAL COURIER SERVICES, INC., petitioners,
vs. In September, 1986, Almoradie was transferred to Guatson Travel, allegedly
NATIONAL LABOR RELATIONS COMMISSION AND JOLLY also a sister company of MEREX and Philac, as Liaison Officer with a salary
ALMORADIE, respondents. of P1,864.00. Thereafter, he was promoted to the position of Sales
Representative sometime in April, 1988. On April 30, 1988, Almoradie was
Generosa R. Jacinto for petitioners. issued three separate memoranda as follows:

Donato H. De Castro and Rolando P. Rotairo for private respondent. IOM/88-70

Please explain in writing within 24 hrs. or not

later than Monday morning the reason why
you don't want to sell. 1
NOCON, J.:

IOM/88-71
Petitioners Guatson Travel and Tours, Inc. (hereinafter referred to as
Guatson Travel), Philippine Integrated Labor Assistance Corp. (Philac) and
Mercury Express International Courier Services, Inc. (MEREX) assail the Please explain in writing why did you went
Decision, rendered by the National Labor Relations Commission in Case No. (sic) to BEMIL and who sent you there. 2
NLRC-NCR-00-11-0451-88 entitled "Jolly M. Almoradie v. Guatson's Travel
Company, Philac and MEREX," dated March 21, 1991 and its Resolution, IOM-88
dated May 31, 1991, denying the petitioners' Motion for Reconsideration.
Explain in writing not later than Monday the
In the questioned decision, the NLRC found that Mr. Henry Ocier's (Vice- following:
President and General Manager of petitioner Guatson Travel) actuation of
threatening and forcing private respondent, Jolly M. Almoradie, to resign 1. The reason why you want to be a
amounted to illegal dismissal and thus ordered petitioners to pay private messenger and no more a sales
respondent backwages, computed from the date of his dismissal on representative;
November 1988, until the decision was rendered on February 28, 1991 or the
amount of P50,328.00; and to pay separation pay equivalent to one-half (1/2) 2. That I'm always confronting (sic) you, as
month for every year of service, for seven (7) years or the amount of what you've told me personally;
P6,524.00.

421
 3. Why you will not answer in writing the
memo issued to you by Lou Cantara on 30
Apr;
xxx xxx xxx
5. Why when you were asked last Friday to
join the Sales Blitz to Sta. Ana you said yes
and you change (sic) your mind when you
were asked again last Saturday;
xxx xxx xxx
7. Why you have forgotten the situation
wherein you refuse (sic) to sell a certain
product recommended by Myrna;
8. The meaning of "You pirated me from
Philac . . . 3
Within the time frame specified, Almoradie responded to each of the charges,
the essence of which are as follows:
1. It is not true that I do not want to sale (sic) the rates &
package tour of Our Company as imputed and charge (sic),
because since April, 1988 (sic) when I was transferred from
Accounting to sales department of our Company I was able
to sale (sic) almost 110 dollars to 21 passengers. The truth
however is that, I am hampered in my sales promotion and
solicitation of customer, due to financial constraint
considering that the kind and nature of work entails much
expenses for which I shouldered (sic) with my personal
money. As a matter of fact I have brought this matter to the
Vice President and General Manager if only an appropriation
be set aside for the expenses in going around, meeting
people and soliciting prospective clients.
2. Bemil is a customer of our company. With respect to the
ticketing and booking of Bemil passengers, undertaking (sic)
by the sales department of our company, I used to go Bemil
(sic) to inquire whether they have passengers for booking
and ticketing. As a matter of fact, I went to Bemil to pick-up
their ticketing and booking for their passengers last Monday,
April 29, 1988 (sic) and then returned the following day,
Saturday April 30, 1988, to deliver the ticket.
xxx xxx xxx
3.1. Considering that the job of sales representative entails
so much expense in the performance thereof (sic), as I have
stated in my number one (1) explanation and I have to use
my own personal money to promote and solicit customer
without any funding of our company (sic), I have taught (sic)
it better that I like my position as messenger, that (sic) as
sales representative, although the later (sic) position is more
dignified, hence I prefer to be entered to my messenger
position.
3.2. That I admit of the often confrontation conducted (sic) by
Vice President/General Manager, even in the absence of my
error or fault (sic) . . .
3.3. It is not true that I did not or fail to answer the memo
issued by Lou Cantara, since I was given until May 2, 1988
to answer the same . . .
xxx xxx xxx
3.5. As scheduled, I said yes to the sales blitz to Sta. Ana,
because in truth I am very interested in such sales business
attack since it is in connection with my function as a sales
representative that will surely enhance and sharpen my
sales acumen, but if I was not able to join it is not the reason
422
 my change of mind (sic), but because the Vice-
President/General Manager of Our Company, Henry Ocier
summoned me to his office and had a very lengthy
confrontation of me (sic), and when I go out (sic) after the
confrontation to join the sales blitz-krieg to Sta. Ana last
Saturday, April 30, 1988, Mr. Oscar Vanderlipe who heads
the sales Group (sic) were (sic) already gone.
xxx xxx xxx
3.7. I deny vehemently that I refuse to sale (sic) a certain
product recommended by Myrna de Vera because the same
is totally false. Since April 1, 1988 when I was transferred to
the sales department of our company where from the very
beginning I was briefed and taught and learned about the
nature of my job and the product to sale (sic) by Myrna (sic)
de Vera herself, I have ever since until now ventured and
performed the selling of rates and package tour which are
every products (sic) for sales department of our company. If
sometimes I make no sales, which all sales representative
suffer and are beset such (sic), however, cannot be
considered as refusal to sale (sic). The only product of our
Company that Myrna briefed, taught and required as to (sic)
our rates and Package Tours which I've been selling since
April 1, 1988 up to present. (sic)
xxx xxx xxx 4
On May 4, 1988, Almoradie was reverted to the position of Messenger, yet
sometime in September, 1988, he was again given the position of Account
Executive, the nature of work of which is similar to that of a sales
representative. Almoradie accepted the transfer with the understanding that
he will solely discharge the duties of an account executive and will no longer
be required to do messengerial work.
In the morning of October 1, 1988, Almoradie was allegedly summoned by
Henry Ocier to his office and was there and then forced by the latter to
resign. Ocier taunted Almoradie with threats that it he will not resign, he will
file charges against him which would adversely affect his chances of getting
employed in the future. Ocier allegedly even provided the pen and paper on
which Almoradie wrote and signed the resignation letter dictated by Ocier
himself. 5
On that same day, Almoradie sought the help of a friend, Isagani Mallari, who
advised him to report the matter to the Barangay Captain. 6 Subsequently,
Almoradie filed a complaint for illegal Dismissal on November 14, 1988. The
Labor Arbiter, however dismissed his case based on the following
conclusions:
In examining the facts and the arguments, it is difficult to
abide by the impression that complainant was forced to
resign. Apart from the averment of respondent Guatson that
Mr. Ocier was out of town when the resignation letter was
executed that he just saw the resignation letter when he
arrived. 7There is reason to believe that complainant
apparently defied the order for his transfer or designation as
account executive earlier before he executed his resignation
letter.
It must be concluded that his designation as account
executive is a management prerogative which under the
circumstance is untainted with any unfair labor practice.
Apparently, complainant resented his resignation without any
plausible or cogent reason as he had earlier resented to be a
sales representative for which he was made to explain the
reasons why. The only graceful exit to the complainant was
to execute his letter of resignation. As his letter of resignation
shows, it was executed in his own handwriting
spontaneously out of his own free will. 8
423
Upon Almoradie's appeal, the NLRC reversed the decision of the Labor
Arbiter on his finding that complainant was not forced to resign, anchoring its
conclusion to the fact that Almoradie was a permanent employee who has
been working for the Ocier's for five long years; that he was receiving a fairly
good salary considering that he is single; that he had no potential employer
at the time of his resignation; that there was no evidence to show that Mr.
Henry Ocier was indeed not in town on October 1, 1988, when he allegedly
forced Almoradie to resign; and his reaction immediately after his forced
resignation by seeking the assistance of a friend who was placed in a similar
situation before and in reporting the incident to the Barangay Chairman to
seek redress.
The issue therefore, boils down to the question of whether Jolly Almoradie
was indeed illegally dismissed by being forced to resign in the manner
narrated by him.
From a synthesis of the evidence on record, we fully agree with the finding of
the NLRC that Jolly Almoradie's resignation was NOT voluntary. The NLRC
did not err in disregarding the conclusions reached by the Labor Arbiter
because the latter's findings are not supported by substantial evidence.
It appears that as early as April, 1988, when Almoradie was promoted as
Sales Representative he had caught the ire of management, so much so that
he was issued no less than three memoranda on one day ordering him to
answer certain charges. Why he was again promoted to the position of
Account Executive after he was reverted back to the rank of a messenger
from being a Sales Representative is rather intriguing, unless it was a
scheme of management to really rid him from the company. Apparently,
Almoradie is not cut out for a sales job, and hence could be dismissed or
forced to resign for failing to make good on his job on sales. On the other
hand, it would be difficult to dismiss him while being a messenger since he is
a permanent employee and there would not be enough basis to make him
resign.
We do not agree with petitioners' proposition that Mr. Ocier's mere utterances
of the words "I will file charges against you," and "I have a very good lawyer,"
do not constitute force or coercion as to vitiate the free will of Almoradie in
writing his resignation letter.
Intimidation may vitiate consent when the following requisites are present: (1)
that the intimidation caused the consent to be given; 2) that the threatened
act be unjust or unlawful; 3) that the threat be real or serious, there being
evident disproportion between the evil and the resistance which all man can
offer, leading to the choice of doing that act which is forced on the person to
do as the lesser evil; and 4) that it produces a well-grounded fear from the
fact that the person from whom it comes has the necessary means or ability
to inflict the threatened injury to his person or property. 9
The moment that a person by whom respect and reverence are due should
wrongly exert pressure upon his subordinates, amounting to intimidation in
the manner stated in the Lichauco de Leon case, supra, in order to exact
from said subordinates an act against their will, the same is enough to vitiate
consent.
Henry Ocier did not only say that he will file charges against Almoradie and
that he has a good lawyer but he even threatened to block his future
employment should the latter not file his resignation. This threat is not
farfetched. Almoradie is not even a college graduate. 10 With his limited skills
and the scarcity of employment opportunities it would really be difficult for
him to find a job. Considering further the influence of Mr. Henry Ocier and his
capacity to make good his threat by refusing to give a favorable
recommendation on Almoradie's performance, the latter is helpless in not
complying with the former's demand for his resignation.
Anent NLRC's grant of separation pay and backwages to private respondent
Jolly M. Almoradie, petitioners argues that the companies, Guatson Travel
Company, Philac Merex have separate and distinct legal personalities such
that the latter companies should not be held liable; assuming, for the sake of
argument that private respondent was illegally dismissed.
424
We uphold the NLRC. The three companies are owned by one family, such should be computed from the time petitioner was employed by Merex and
that majority of the officers of the companies are the same. The companies should include the three-year period as backwages. The petition is hereby
are located in one building and use the same messengerial service. DISMISSED for lack of merit.
Moreover, there was no showing that private respondent was paid separation
pay when he was absorbed by Philac upon closure of Merex; nor was there SO ORDERED.
evidence that he resigned from Philac when he transferred to Guatson
Travel. Under the doctrine of piercing the veil of corporate fiction, when valid Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.
ground exists, the legal fiction that a corporation is an entity with a juridical
personality separate and distinct from its members or stockholders may be
disregarded. We have applied this doctrine in the case of "Philippine Scout
Veterans Security and Investigation Agency (PSVSIA), et al. v. The Hon.
Secretary of Labor," G.R. No. 92357, July 21, 1993.

Where there is a finding of illegal dismissal, the employee is entitled to both

reinstatement and award of backwages from the time the compensation was
withheld, in this case in 1988, up to a maximum of three years, applying the
Mercury Drug Rule. 11

Reinstatement, however, will not be required not only for the reason that it
was not prayed for by the respondent, but also because the relationship
between Almoradie and Ocier had become strained as to preclude a
harmonious working relationship. In lieu of reinstatement, separation pay is
awarded. 12 As the term suggests, separation pay is the amount that an
employee receives at the time of his severance from the service and is
designed to provide the employee with the wherewithal during the period that
he is looking for another employment. 13

However the award of separation pay should be, as we have consistently

ruled, equivalent to one (1) month for every year of service, 14 instead of one-
half (1/2) month as awarded by the NLRC. In the computation of separation
pay, the three (3) year period wherein backwages are awarded, must be
included. 15

WHEREFORE, the decision of the NLRC is hereby MODIFIED to the extent

that the award of backwages should be computed based on a three-year
period, while the separation pay of one month for every year of service

425
426

G.R. No. 108734 May 29, 1996
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, Rogelio
Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo Albera,
Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina,
Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres,
Felipe Basilan, and Ruben Robalos, respondents.
HERMOSISIMA, JR., J.:p
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 corporation's
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 petitioner's 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 respondent's 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 non-payment 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.
427
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' back wages 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 petitioner's 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 petitioner's 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 petitioner's 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 Exchange Commission (SEC) and
the General Information Sheet, dated May 25, 1987, submitted by HPPI to
the Securities and Exchange Commission.
The General Information Sheet submitted by the petitioner revealed the
following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
HPPI P 6,999,500.00
428
 Antonio W. Lim 2,900,000.00 355 Maysan Road

Dennis S. Cuyegkeng 300.00 Valenzuela, Metro Manila. 5

Elisa C. Lim 100,000.00 On the other hand, the General Information Sheet of HPPI revealed the
following:
Teodulo R. Dino 100.00
1. Breakdown of Subscribed Capital
Virgilio O. Casino 100.00
Name of Stockholder Amount Subscribed
2. Board of Directors
Antonio W. Lim P 400,000.00
Antonio W. Lim Chairman
Elisa C. Lim 57,700.00
Dennis S. Cuyegkeng Member
AWL Trading 455,000.00
Elisa C. Lim Member
Dennis S. Cuyegkeng 40,100.00
Teodulo R. Dino Member
Teodulo R. Dino 100.00
Virgilio O. Casino Member
Virgilio O. Casino 100.00
3. Corporate Officers
2. Board of Directors
Antonio W. Lim President
Antonio W. Lim Chairman
Dennis S. Cuyegkeng Assistant to the
President Elisa C. Lim Member

Elisa O. Lim Treasurer Dennis S. Cuyegkeng Member

Virgilio O. Casino Corporate Secretary Virgilio O. Casino Member

4. Principal Office Teodulo R. Dino Member

429
 3. Corporate Officers Hence, the resort to the present petition.

Antonio W. Lim President 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
Dennis S. Cuyegkeng Assistant to the property. Petitioner further contends, that the doctrine of piercing the
President 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
Elisa C. Lim Treasurer 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 petitioner's construction business. Hence, it is of no
Virgilio O. Casino Corporate Secretary
consequence that petitioner and HPPI shared the same premises, the same
President and the same set of officers and subscribers. 7
4. Principal Office
We find petitioner's contention to be unmeritorious.
355 Maysan Road, Valenzuela, Metro
Manila. 6
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
On February 1, 1990, HPPI filed an Opposition to private respondents' which it may be connected. 8 But, this separate and distinct personality of a
motion for issuance of a break-open order, contending that HPPI is a corporation is merely a fiction created by law for convenience and to promote
corporation which is separate and distinct from petitioner. HPPI also alleged justice. 9 So, when the notion of separate juridical personality is used to
that the two corporations are engaged in two different kinds of defeat public convenience, justify wrong, protect fraud or defend crime, or is
businesses, i.e., HPPI is a manufacturing firm while petitioner was then used as a device to defeat the labor laws, 10 this separate personality of the
engaged in construction. 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
On March 2, 1990, the Labor Arbiter issued an Order which denied private or an alter ego of another corporation. 12
respondents' motion for break-open order.
The conditions under which the juridical entity may be disregarded vary
Private respondents then appealed to the NLRC. On April 23, 1992, the according to the peculiar facts and circumstances of each case. No hard and
NLRC set aside the order of the Labor Arbiter, issued a break-open order and fast rule can be accurately laid down, but certainly, there are some probative
directed private respondents to file a bond. Thereafter, it directed the sheriff factors of identity that will justify the application of the doctrine of piercing the
to proceed with the auction sale of the properties already levied upon. It corporate veil, to wit:
dismissed the third-party claim for lack of merit.
1. Stock ownership by one or common ownership of both
Petitioner moved for reconsideration but the motion was denied by the NLRC corporations.
in a Resolution, dated December 3, 1992.
2. Identity of directors and officers.

430
 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
instances, 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 plaintiff's 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 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.
Casio 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 third-party 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
431
Clearly, petitioner ceased its business operations in order to evade the
payment to private respondents of back wages 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
Relations, 17 where we had the occasion to rule:
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 petitioner. It is very clear that the latter corporation was a
continuation and successor of the first entity . . . . 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 . . . 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 third-party 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.
Padilla, Bellosillo, Vitug and Kapunan, JJ., concur.
432
G.R. No. L-28694 May 13, 1981

TELEPHONE ENGINEERING & SERVICE COMPANY, INC., petitioner,

vs.
WORKMEN'S COMPENSATION COMMISSION, PROVINCIAL SHERIFF
OF RIZAL and LEONILA SANTOS GATUS, for herself and in behalf of
her minor children, Teresita, Antonina and Reynaldo, all surnamed
GATUS, respondents.

MELENCIO-HERRERA, J.:1wph1.t

These certiorari proceedings stem from the award rendered against

petitioner Telephone Engineering and Services, Co., Inc. (TESCO) on
October 6, 1967 by the Acting Referee of Regional Office No. 4, Quezon City
Sub-Regional Office, Workmen's Compensation Section, in favor of
respondent Leonila S. Gatus and her children, dependents of the deceased
employee Pacifico L. Gatus. The principal contention is that the award was
rendered without jurisdiction as there was no employer-employee
relationship between petitioner and the deceased.

Petitioner is a domestic corporation engaged in the business of

manufacturing telephone equipment with offices at Sheridan Street,
Mandaluyong, Rizal. Its Executive Vice-President and General Manager is
Jose Luis Santiago. It has a sister company, the Utilities Management
Corporation (UMACOR), with offices in the same location. UMACOR is also
under the management of Jose Luis Santiago.

433
On September 8, 1964, UMACOR employed the late Pacifica L. Gatus as
Purchasing Agent. On May 16, 1965, Pacifico L. Gatus was detailed with
petitioner company. He reported back to UMACOR on August 1, 1965. On
January 13, 1967, he contracted illness and although he retained to work on
May 10, 1967, he died nevertheless on July 14, 1967 of "liver cirrhosis with
malignant degeneration."
On August 7, 1967, his widow, respondent Leonila S. Gatus, filed a "Notice
and Claim for Compensation" with Regional Office No. 4, Quezon City Sub-
Regional Office, Workmen's Compensation Section, alleging therein that her
deceased husband was an employee of TESCO, and that he died of liver
cirrhosis. 1 On August 9, 1967, and Office wrote petitioner transmitting the
Notice and for Compensation, and requiring it to submit an Employer's
Report of Accident or Sickness pursuant to Section 37 of the Workmen's
Compensation Act (Act No. 3428). 2 An "Employer's Report of Accident or
Sickness" was thus submitted with UMACOR indicated as the employer of
the deceased. The Report was signed by Jose Luis Santiago. In answer to
questions Nos. 8 and 17, the employer stated that it would not controvert the
claim for compensation, and admitted that the deceased employee
contracted illness "in regular occupation." 3 On the basis of this Report, the
Acting Referee awarded death benefits in the amount of P5,759.52 plus
burial expenses of P200.00 in favor of the heirs of Gatus in a letter-award
dated October 6, 1967 4 against TESCO.
Replying on October 27, 1967, TESCO, through Jose Luis Santiago,
informed the Acting Referee that it would avail of the 15-days-notice given to
it to state its non-conformity to the award and contended that the cause of
the illness contracted by Gatus was in no way aggravated by the nature of
his work. 5
On November 6, 1967, TESCO requested for an extension of ten days within
which to file a Motion for Reconsideration, 6 and on November 15, 1967,
asked for an additional extension of five days. 7 TESCO filed its "Motion for
Reconsideration and/or Petition to Set Aside Award" on November 18, 1967,
alleging as grounds therefor, that the admission made in the "Employer's
Report of Accident or Sickness" was due to honest mistake and/or excusable
negligence on its part, and that the illness for which compensation is sought
is not an occupational disease, hence, not compensable under the law. 8 The
extension requested was denied. The Motion for Reconsideration was
likewise denied in an Order issued by the Chief of Section of the Regional
Office dated December 28, 1967 9 predicated on two grounds: that the
alleged mistake or negligence was not excusable, and that the basis of the
award was not the theory of direct causation alone but also on that of
aggravation. On January 28, 1968, an Order of execution was issued by the
same Office.
On February 3, 1968, petitioner filed an "Urgent Motion to Compel Referee to
Elevate the Records to the Workmen's Compensation Commission for
Review." 10 Meanwhile, the Provincial Sheriff of Rizal levied on and attached
the properties of TESCO on February 17, 1968, and scheduled the sale of
the same at public auction on February 26, 1968. On February 28, 1968, the
Commission issued an Order requiring petitioner to submit verified or true
copies of the Motion for Reconsideration and/or Petition to Set Aside Award
and Order of December 28, 1967, and to show proof that said Motion for
Reconsideration was filed within the reglementary period, with the warning
that failure to comply would result in the dismissal of the Motion. However,
before this Order could be released, TESCO filed with this Court, on
February 22, 1968, The present petition for "Certiorari with Preliminary
Injunction" seeking to annul the award and to enjoin the Sheriff from levying
and selling its properties at public auction.
On February 29, 1968, this Court required respondents to answer the
Petition but denied Injunction. 11 TESCO'S Urgent Motion dated April 2, 1968,
for the issuance of a temporary restraining order to enjoin the Sheriff from
proceeding with the auction sale of its properties was denied in our
Resolution dated May 8, 1968.
TESCO asserts: 1wph1.t
I. That the respondent Workmen's Compensation
Commission has no jurisdiction nor authority to render the
award (Annex 'D', Petition) against your petitioner there
434
 being no employer-employee relationship between it and the
deceased Gatus;
II. That petitioner can never be estopped from questioning
the jurisdiction of respondent commission especially
considering that jurisdiction is never conferred by the acts or
omission of the parties;
III. That this Honorable Court has jurisdiction to nullify the
award of respondent commission.
TESCO takes the position that the Commission has no jurisdiction to render
a valid award in this suit as there was no employer-employee relationship
between them, the deceased having been an employee of UMACOR and not
of TESCO. In support of this contention, petitioner submitted photostat
copies of the payroll of UMACOR for the periods May 16-31, 1967 and June
1-15, 1967 12 showing the name of the deceased as one of the three
employees listed under the Purchasing Department of UMACOR. It also
presented a photostat copy of a check of UMACOR payable to the deceased
representing his salary for the period June 14 to July 13, 1967. 13
Both public and private respondents contend, on the other hand, that TESCO
is estopped from claiming lack of employer employee relationship.
To start with, a few basic principles should be re-stated the existence of
employer-employee relationship is the jurisdictional foundation for recovery
of compensation under the Workmen's Compensation Law. 14 The lack of
employer-employee relationship, however, is a matter of defense that the
employer should properly raise in the proceedings below. The determination
of this relationship involves a finding of fact, which is conclusive and binding
and not subject to review by this Court. 15
Viewed in the light of these criteria, we note that it is only in this Petition
before us that petitioner denied, for the first time, the employer-employee
relationship. In fact, in its letter dated October 27, 1967 to the Acting Referee,
in its request for extension of time to file Motion for Reconsideration, in its
"Motion for Reconsideration and/or Petition to Set Aside Award," and in its
"Urgent Motion to Compel the Referee to Elevate Records to the
Commission for Review," petitioner represented and defended itself as the
employer of the deceased. Nowhere in said documents did it allege that it
was not the employer. Petitioner even admitted that TESCO and UMACOR
are sister companies operating under one single management and housed in
the same building. Although respect for the corporate personality as such, is
the general rule, there are exceptions. In appropriate cases, the veil of
corporate fiction may be pierced as when the same is made as a shield to
confuse the legitimate issues. 16
While, indeed, jurisdiction cannot be conferred by acts or omission of the
parties, TESCO'S denial at this stage that it is the employer of the deceased
is obviously an afterthought, a devise to defeat the law and evade its
obligations. 17 This denial also constitutes a change of theory on appeal
which is not allowed in this jurisdiction. 18Moreover, issues not raised before
the Workmen's Compensation Commission cannot be raised for the first time
on appeal. 19 For that matter, a factual question may not be raised for the first
time on appeal to the Supreme Court. 20
This certiorari proceeding must also be held to have been prematurely
brought. Before a petition for certiorari can be instituted, all remedies
available in the trial Court must be exhausted first. 21 certiorari cannot be
resorted to when the remedy of appeal is present. 22 What is sought to be
annulled is the award made by the Referee. However, TESCO did not pursue
the remedies available to it under Rules 23, 24 and 25 of the Rules of the
Workmen's Compensation Commission, namely, an appeal from the award of
the Referee, within fifteen days from notice, to the Commission; a petition for
reconsideration of the latter's resolution, if adverse, to the Commission en
banc; and within ten days from receipt of an unfavorable decision by the
latter, an appeal to this Court. As petitioner had not utilized these remedies
available to it, certiorari win not he, it being prematurely filed. As this Court
ruled in the case of Manila Jockey Club, Inc. vs. Del Rosario, 2 SCRA 462
(1961). 1wph1.t
An aggrieved party by the decision of a Commissioner
should seek a reconsideration of the decision by the
435
 Commission en banc. If the decision is adverse to him, he
may appeal to the Supreme Court. An appeal brought to the
Supreme Court without first resorting to the remedy referred
to is premature and may be dismissed.
Although this rule admits of exceptions, as where public welfare and the
advancement of public policy so dictate, the broader interests of justice so
require, or where the Orders complained of were found to be completely null
and void or that the appeal was not considered the appropriate remedy, 23 the
case at bar does not fan within any of these exceptions. WHEREFORE, this
Petition is hereby dismissed.
SO ORDERED.
pains, fever and headache. He reported to petitioner the fact of his having
vomitted blood. He was sent to petitioner company's physician, Dr. Roman,
who treated him and sent him to Sto. Tomas Hospital where he was confined
for six days. Thereafter, he was admitted at the Quezon Institute. There he
stayed until March 19, 1962 under the medical care of Dr. Mario Lirag. Dr.
Lirag diagnosed his ailment as pulmonary tuberculosis, moderately advanced
in both lungs. Upon his discharge on March 19, 1962, he was clinically
improved. His X-ray examination, however, showed the same finding, i.e.,
PTB, moderately advanced. He has not resumed work.
Offshoot of the foregoing is respondent's claim filed on May 9, 1962
with the Workmen's Compensation Commission. 1 In affirming the decision of
the Hearing Officer, the Commission ordered petitioner:

Teehankee (Chairman), Makasiar, Fernandez and Guerrero, JJ., 1. To pay the claimant, thru this Commission, the sum of THREE
concur.1wph1.t THOUSAND SEVEN HUNDRED THIRTY-TWO and 30/100
(P3,732.30) PESOS as compensation as of August 11, 1964, and
P27.30 thereafter up to a period of 208 weeks, but in no case said
amount of compensation exceed P4,000.00;
G.R. No. L-23586 March 20, 1968
2. To reimburse the claimant, thru this Commission, the sum of
P53.60 which he had actually spent for his treatment;
A. D. SANTOS, INC., petitioner,
vs.
VENTURA VASQUEZ, respondent. 3. To provide claimant continuous medical, surgical and hospital
services and supplies as his illness may warrant;
Emiliano S. Samson and R. Balderrama-Samson for petitioner.
Orlando L. Espinas for respondent. 4. To pay the claimant, also thru this Commission, the sum of
P277.92 as Attorney's fees; and

5. To pay the Commission the sum of P43.00 as costs based on the

amount of compensation already due the claimant as of August 11,
SANCHEZ, J.:
1964, and P1.00 for every hundred pesos which may accrue in his
favor as weekly compensation pursuant to Section 55 of the Act.
Respondent Ventura Vasquez was petitioner's taxi driver. Sometime on
December 22 or 23, 1961, at about 11:00 a.m., while driving petitioner's
The case is now before us on review.
taxicab, he vomitted blood. Aside from his hemoptysis, he suffered back

436
 Two questions are raised by petitioner: (1) respondent's claim should
have been dismissed for his failure to file the notice of injury and claim for
compensation required by Section 24 of the Workmen's Compensation Act;
and (2) the claim for compensation is directed against Amador Santos, not
against petitioner.
his testimony, in the words of this Court in Sugay vs. Reyes, L-20451,
December 28, 1964, "should not be allowed to confuse the facts relating to
employer-employee relationship" for "when the veil of corporate fiction is
made as a shield to perpetrate a fraud and/or confuse legitimate issues
(here, the relation of employer-employee), the same should be pierced."

1. Sickness manifested itself on December 22 or 23, 1961. Claim was For the reasons given, the decision under review is hereby
filed on May 9, 1962. Petitioner argues that by Section 24 of the Workmen's affirmed.1wph1.t
Compensation Act, the claim should be thrown out of court. Because,
according to petitioner, such claim was not filed within two months following Costs against petitioner. So ordered.
illness.
Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Castro, Angeles
Petitioner's case must fail. Stabilized jurisprudence is that failure of the and Fernando, JJ., concur
employer to file with the Commission notice of controversion set forth in the
second paragraph of Section 45 of the Workmen's Compensation Act is a
waiver of the defense that the claim for compensation was not filed within the
statutory period and a forfeiture of the employer's right to controvert the
G.R. No. L-10510 March 17, 1961
claim. Petitioner here knew of respondent's illness. Yet, it did not controvert
respondent's right to compensation. Constructively, such failure is an
admission that the claim is compensable. 2 M. MC CONNEL, W. P. COCHRANE, RICARDO RODRIGUEZ, ET
AL., petitioners,
vs.
2. Petitioner's averment that respondent driver had no cause of action
THE COURT OF APPEALS and DOMINGA DE LOS REYES, assisted by
against petitioner is equally without merit. Respondent's claim for
her husband, SABINO PADILLA,respondents.
compensation herein is directed against petitioner A.D. Santos, Inc.
Petitioner, in answer to the claim, categorically admitted that claimant was its
taxi driver. Add to this is the fact that the claimant contracted pulmonary Jesus B. Santos and Cornelio Antiquera for petitioners.
tuberculosis by reason of his said employment. And respondent's cause of Teodoro Padilla for respondents.
action against petitioner is complete.
REYES, J.B.L., J.:
But petitioner, cites the fact that respondent driver, in the course of his
testimony, mentioned that he worked for the City Cab operated by Amador The issue before us in the correctness of the decision of the Court of Appeals
Santos. This will not detract from the validity of respondent's right to that, under the circumstances of record, there was justification for
compensation. For, the truth is that really at one time Amador Santos was the disregarding the corporate entity of the Park Rite Co., Inc., and holding its
sole owner and operator of the City Cab. It was subsequently transferred to controlling stockholders personally responsible for a judgment against the
petitioner A.D. Santos, Inc. in which Amador Santos was an officer. The corporation.
mention by respondent of Amador Santos as his employer in the course of

437
The Court of Appeals found that the Park Rite Co., Inc., a Philippine
corporation, was originally organized on or about April 15, 1947, with a
capital stock of 1,500 shares at P1.00 a share. The corporation leased from
Rafael Perez Rosales y Samanillo a vacant lot on Juan Luna street (Manila)
which it used for parking motor vehicles for a consideration.
It turned out that in operating its parking business, the corporation occupied
and used not only the Samanillo lot it had leased but also an adjacent lot
belonging to the respondents-appellees Padilla, without the owners'
knowledge and consent. When the latter discovered the truth around October
of 1947, they demanded payment for the use and occupation of the lot.
The corporation (then controlled by petitioners Cirilo Parades and Ursula
Tolentino, who had purchased and held 1,496 of its 1,500 shares) disclaimed
liability, blaming the original incorporators, McConnel, Rodriguez and
Cochrane. Whereupon, the lot owners filed against it a complaint for forcible
entry in the Municipal Court of Manila on 7 October 1947 (Civil Case No.
4031).
Judgment was rendered in due course on 13 November 1947, ordering the
Park Rite Co., Inc. to pay P7,410.00 plus legal interest as damages from
April 15, 1947 until return of the lot. Restitution not having been made until
31 January 1948, the entire judgment amounted to P11,732.50. Upon
execution, the corporation was found without any assets other than P550.00
deposited in Court. After their application to the judgment credit, there
remained a balance of P11,182.50 outstanding and unsatisfied.
The judgment creditors then filed suit in the Court of First Instance of Manila
against the corporation and its past and present stockholders, to recover
from them, jointly and severally, the unsatisfied balance of the judgment, plus
legal interest and costs. The Court of First Instance denied recovery; but on
appeal, the Court of Appeals (CA-G.R. No. 8434-R) reversed, finding that the
corporation was a mere alter ego or business conduit of the principal
stockholders that controlled it for their own benefit, and adjudged them
responsible for the amounts demanded by the lot owners, as follows:
WHEREFORE, premises considered, the decision appealed from is
reversed. Defendants-appellees Cirilo Paredes and Ursula Tolentino
are hereby declared liable to the plaintiffs-appellants for the rentals
due on the lot in question from August 22, 1947 to January 31, 1948
at the rate of P1,235.00 a month, with legal interest thereon from the
time of the filing of the complaint. Deducting the P550.00 which was
paid at the time when the corporation was already acquired by the
said defendants-appellees Cirilo Paredes and Ursula Tolentino, they
are hereby ordered to pay to plaintiffs-appellants Dominga de los
Reyes and Sabino Padilla the sum of P6,036.66 with legal interest
therein from the time of the filing of the complaint until fully paid.
Defendant-appellee RICARDO RODRIGUEZ is hereby ordered to
pay to the plaintiffs-appellants Dominga de los Reyes and Sabino
Padilla the sum of P1,742.64 with legal interest thereon from the time
of the filing of the complaint and until it is fully paid. In addition
thereto the defendants-appellees Cirilo Paredes, Ursula Tolentino
and Ricardo Rodriguez shall pay the costs proportionately in both
instances.
IT IS SO ORDERED.
Cirilo Paredes and Ursula Tolentino then resorted to this court. We
granted certiorari.
On the main issue whether the individual stockholders maybe held liable for
obligations contracted by the corporation, this Court has already answered
the question in the affirmative wherever circumstances have shown that the
corporate entity is being used as an alter ego or business conduit for the sole
benefit of the stockholders, or else to defeat public convenience, justify
wrong, protect fraud, or defend crime (Koppel [Phil.] Inc. vs. Yatco, 77 Phil.
496; Arnold vs. Willits and Patterson, 44 Phil. 364).
The Court of Appeals has made express findings to the following effect:
438
There is no question that a wrong has been committed by the so-
called Park Rite Co., Inc., upon the plaintiffs when it occupied the lot
of the latter without its prior knowledge and consent and without
paying the reasonable rentals for the occupation of said lot. There is
also no doubt in our mind that the corporation was a mere alter ego
or business conduit of the defendants Cirilo Paredes and Ursula
Tolentino, and before them the defendants M. McConnel, W. P.
Cochrane, and Ricardo Rodriguez. The evidence clearly shows that
these persons completely dominated and controlled the corporation
and that the functions of the corporation were solely for their
benefits.
When it was originally organized on or about April 15, 1947, the
original incorporators were M. McConnel, W. P. Cochrane, Ricardo
Rodriguez, Benedicto M. Dario and Aurea Ordrecio with a capital
stock of P1,500.00 divided into 1,500 shares at P1.00 a share.
McConnel and Cochrane each owned 500 shares, Ricardo
Rodriguez 408 shares, and Dario and Ordrecio 1 share each. It is
obvious that the shares of the last two named persons were merely
qualifying shares. Then or about August 22, 1947 the defendants
Cirilo Paredes and Ursula Tolentino purchased 1,496 shares of the
said corporation and the remaining four shares were acquired by
Bienvenido J. Claudio, Quintin C. Paredes, Segundo Tarictican, and
Paulino Marquez at one share each. It is obvious that the last four
shares bought by these four persons were merely qualifying shares
and that to all intents and purposes the spouses Cirilo Paredes and
Ursula Tolentino composed the so-called Park Rite Co., Inc. That the
corporation was a mere extension of their personality is shown by
the fact that the office of Cirilo Paredes and that of Park Rite Co.,
Inc. were located in the same building, in the same floor and in the
same room at 507 Wilson Building. This is further shown by the
fact that the funds of the corporation were kept by Cirilo Paredes in
his own name (p. 14, November 8, 1950, T.S.N.) The corporation
itself had no visible assets, as correctly found by the trial court,
except perhaps the toll house, the wire fence around the lot and the
signs thereon. It was for this reason that the judgment against it
could not be fully satisfied. (Emphasis supplied).
The facts thus found can not be varied by us, and conclusively show that the
corporation is a mere instrumentality of the individual stockholder's, hence
the latter must individually answer for the corporate obligations. While the
mere ownership of all or nearly all of the capital stock of a corporation is a
mere business conduit of the stockholder, that conclusion is amply justified
where it is shown, as in the case before us, that the operations of the
corporation were so merged with those of the stockholders as to be
practically indistinguishable from them. To hold the latter liable for the
corporation's obligations is not to ignore the corporation's separate entity, but
merely to apply the established principle that such entity can not be invoked
or used for purposes that could not have been intended by the law that
created that separate personality.
The petitioners-appellants insist that the Court could have no jurisdiction over
an action to enforce a judgment within five (5) years from its rendition, since
the Rules of Court provide for enforcement by mere motion during those five
years. The error of this stand is apparent, because the second action,
originally begun in the Court of First Instance, was not an action to enforce
the judgment of the Municipal Court, but an action to have non-parties to the
judgment held responsible for its payment.
Finding no error in the judgment appealed from, the same is hereby affirmed,
with costs against petitioners-appellants Cirilo Paredes and Ursula Tolentino.
Bengzon, Actg. C.J., Bautista, Angelo, Labrador, Barrera and Dizon,
JJ., concur.
Concepcion and Paredes, JJ., took no part.
439
G.R. No. L-20502 February 26, 1965

EMILIO CANO ENTERPRISES, INC., petitioner,

vs.
COURT OF INDUSTRIAL RELATIONS, ET AL., respondents.

D. T. Reyes and Associates for petitioner.

Mariano B. Tuason for respondent Court of Industrial Relations.
C. E. Santiago for respondent Honorata Cruz.

BAUTISTA ANGELO, J.:

In a complaint for unfair labor practice filed before the Court of Industrial
Relations on June 6, 1956 by a prosecutor of the latter court, Emilio, Ariston
and Rodolfo, all surnamed Cano, were made respondents in their capacity as
president and proprietor, field supervisor and manager, respectively, of Emilio
Cano Enterprises, Inc.

After trial, Presiding Judge Jose S. Bautista rendered decision finding Emilio
Cano and Rodolfo Cano guilty of the unfair labor practice charge, but
absolved Ariston for insufficiency of evidence. As a consequence, the two
were ordered, jointly and severally, to reinstate Honorata Cruz, to her former
position with payment of backwages from the time of her dismissal up to her
reinstatement, together with all other rights and privileges thereunto
appertaining.

440
Meanwhile, Emilio Cano died on November 14, 1958, and the attempt to
have the case dismissed against him having failed, the case was appealed to
the court en banc, which in due course affirmed the decision of Judge
Bautista. An order of execution was issued on August 23, 1961 the
dispositive part of which reads: (1) to reinstate Honorata Cruz to her former
position as ordered in the decision; and (2) to deposit with the court the
amount of P7,222.58 within ten days from receipt of the order, failing which
the court will order either a levy on respondents' properties or the filing of an
action for contempt of court.
The order of execution having been directed against the properties of Emilio
Cano Enterprises, Inc. instead of those of the respondents named in the
decision, said corporation filed an ex parte motion to quash the writ on the
ground that the judgment sought to be enforced was not rendered against it
which is a juridical entity separate and distinct from its officials. This motion
was denied. And having failed to have it reconsidered, the corporation
interposed the present petition for certiorari.1wph1.t We, therefore, find unmeritorious the relief herein prayed for.
when invoked in support of an end subversive of this policy it should be
disregarded by the courts (12 Am. Jur. 160-161).
A factor that should not be overlooked is that Emilio and Rodolfo Cano are
here indicted, not in their private capacity, but as president and manager,
respectively, of Emilio Cano Enterprises, Inc. Having been sued officially their
connection with the case must be deemed to be impressed with the
representation of the corporation. In fact, the court's order is for them to
reinstate Honorata Cruz to her former position in the corporation and
incidentally pay her the wages she had been deprived of during her
separation. Verily, the order against them is in effect against the corporation.
No benefit can be attained if this case were to be remanded to the court a
quomerely in response to a technical substitution of parties for such would
only cause an unwarranted delay that would work to Honorata's prejudice.
This is contrary to the spirit of the law which enjoins a speedy adjudication of
labor cases disregarding as much as possible the technicalities of procedure.

The issue posed before us is: Can the judgment rendered against Emilio and WHEREFORE, petition is dismissed, with costs.
Rodolfo Cano in their capacity as officials of the corporation Emilio Cano
Enterprises, Inc. be made effective against the property of the latter which Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala,
was not a party to the case? Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.

The answer must be in the affirmative. While it is an undisputed rule that a

corporation has a personality separate and distinct from its members or
stockholders because of a fiction of the law, here we should not lose sight of
the fact that the Emilio Cano Enterprises, Inc. is a closed family corporation
where the incorporators and directors belong to one single family. Thus, the
following are its incorporators: Emilio Cano, his wife Juliana, his sons
Rodolfo and Carlos, and his daughter-in-law Ana D. Cano. Here is an
instance where the corporation and its members can be considered as one.
And to hold such entity liable for the acts of its members is not to ignore the
legal fiction but merely to give meaning to the principle that such fiction
cannot be invoked if its purpose is to use it as a shield to further an end
subversive of justice. 1 And so it has been held that while a corporation is a
legal entity existing separate and apart from the persons composing it, that
concept cannot be extended to a point beyond its reason and policy, and

441

G.R. No. L-20886 April 27, 1967
NATIONAL MARKETING CORPORATION (NAMARCO), plaintiff-appellant,
vs.
ASSOCIATED FINANCE COMPANY, INC., and FRANCISCO
SYCIP, defendants.
FRANCISCO SYCIP, defendant-appellee.
Tomas P. Matic, Jr,. for plaintiff and appellant.
Francisco Sycip in his behalf as defendant and appellee.
DIZON, J.:
Appeal by the National Marketing Corporation hereinafter referred to as
NAMARCO, from the decision of the Court of First Instance of Manila in Civil
Case No. 45770 ordering the Associated Finance Company, Inc.
hereinafter referred to as the ASSOCIATED to pay the NAMARCO the
sum of P403,514.28, with legal interest thereon from the date of filing of the
action until fully paid, P80,702.26 as liquidated damages, P5,000.00 as
attorney's fees, plus costs, but dismissing the complaint insofar as defendant
Francisco Sycip was concerned, as well as the latter's counterclaim. The
appeal is only from that portion of the decision dismissing the case as
against Francisco Sycip.
On March 25, 1958, ASSOCIATED, a domestic corporation, through its
President, appellee Francisco Sycip, entered into an agreement to exchange
sugar with NAMARCO, represented by its then General Manager, Benjamin
Estrella, whereby the former would deliver to the latter 22,516 bags (each
weighing 100 pounds) of "Victorias" and/or "National" refined sugar in
exchange for 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil"
raw sugar belonging to NAMARCO, both agreeing to pay liquidated damages
equivalent to 20% of the contractual value of the sugar should either party fail
to comply with the terms and conditions stipulated (Exhibit A). Pursuant
thereto, on May 19,1958, NAMARCO delivered to ASSOCIATED 7,732.71
bars of "Busilak" and 17,285.08 piculs of "Pasumil" domestic raw sugar. As
ASSOCIATED failed to deliver to NAMARCO the 22,516 bags of "Victoria"
and/or "National" refined sugar agreed upon, the latter, on January 12, 1959,
demanded in writing from the ASSOCIATED either (a) immediate delivery
thereof before January 20, or (b) payment of its equivalent cash value
amounting to P372,639.80.
On January 19, 1959, ASSOCIATED, through Sycip, offered to pay
NAMARCO the value of 22,516 bags of refined sugar at the rate of P15.30
per bag, but the latter rejected the offer. Instead, on January 21 of the same
year it demanded payment of the 7,732.71 bags of "Busilak" raw sugar at
P15.30 per bag, amounting to P118,310.40. and of the 17,285.08 piculs of
"Pasumil" raw sugar at P16.50 per picul, amounting, to P285.203.82, or a
total price of P403,514.28 for both kinds of sugar, based on the sugar
quotations (Exh. H) as of March 20, 1958 the date when the exchange
agreement was entered into.
As ASSOCIATED refused to deliver the raw sugar or pay for the refined
sugar delivered to it, inspite of repeated demands therefore, NAMARCO
instituted the present action in the lower court to recover the sum of
P403,514.28 in payment of the raw sugar received by defendants from it;
P80,702.86 as liquidated damages; P10,000.00 as attorney's fees, expenses
of litigation and exemplary damages, with legal interest thereon from the
filing of the complaint until fully paid.
In their amended answer defendants, by way of affirmative defenses, alleged
that the correct value of the sugar delivered by NAMARCO to them was
P259,451.09 or P13.30 per bag of 100 lbs. weight (quedan basis) and not
P403,514.38 as claimed by NAMARCO. As counterclaim they prayed for the
award of P500,000.00 as moral damages, P100,000.00 as exemplary
damages and P10,000.00 as attorney's fees.
After due trial court rendered the appealed judgment. The appeal was taken
to the Court of Appeals, but on January 15, 1963 the latter certified the case
to us for final adjudication pursuant to sections 17 and 31 of the Judiciary Act
442
of 1948, as amended, the amount involved being more than P200,000.00,
exclusive of interests and cost.
The only issue to be resolved is whether, upon the facts found by the trial
court, which, in our opinion, are fully supported by the evidence
Francisco Sycip may be held liable, jointly and severally with his co-
defendant, for the sums of money adjudged in favor of NAMARCO.
The evidence of record shows that, of the capital stock of ASSOCIATED,
Sycip owned P60,000.00 worth of shares, while his wife the second
biggest stockholder owned P20,000.00 worth of shares; that the par value
of the subscribed capital stock of ASSOCIATED was only P105,000.00; that
negotiations that lead to the execution of the exchange agreement in
question were conducted exclusively by Sycip on behalf of ASSOCIATED;
that, as a matter of fact, in the course of his testimony, Sycip referred to
himself as the one who contracted or transacted the business in his personal
capacity, and asserted that the exchange agreement was his personal
contract; that it was Sycip who made personal representations and gave
assurances that ASSOCIATED was in actual possession of the 22,516 bags
of "Victorias" and/or "National" refined sugar which the latter had agreed to
deliver to NAMARCO, and that the same was ready for delivery; that, as a
matter of fact, ASSOCIATED was at that time already insolvent; that when
NAMARCO made demands upon ASSOCIATED to deliver the 22,516 bags
of refined sugar it was under obligation to deliver to the former,
ASSOCIATED and Sycip, instead of making delivery of the sugar, offered to
pay its value at the rate of P15.30 per bag a clear indication that they did
not have the sugar contracted for.1wph1.t
The foregoing facts, fully established by the evidence, can lead to no other
conclusion than that Sycip was guilty of fraud because through false
representations he succeeded in inducing NAMARCO to enter into the
aforesaid exchange agreement, with full knowledge, on his part, on the fact
that ASSOCIATED whom he represented and over whose business and
affairs he had absolute control, was in no position to comply with the
obligation it had assumed. Consequently, he can not now seek refuge behind
the general principle that a corporation has a personality distinct and
separate from that of its stockholders and that the latter are not personally
liable for the corporate obligations. To the contrary, upon the proven facts,
We feel perfectly justified in "piercing the veil of corporate fiction" and in
holding Sycip personally liable, jointly and severally with his co-defendant, for
the sums of money adjudged in favor of appellant. It is settled law in this and
other jurisdictions that when the corporation is the mere alter ego of a
person, the corporate fiction may be disregarded; the same being true when
the corporation is controlled, and its affairs are so conducted as to make it
merely an instrumentality, agency or conduit of another (Koppel Phils., etc.
vs. Yatco, etc., 43 O.G. No. 11. Nov. 1947; Yutivo Sons, etc. vs. Court of Tax
Appeals, etc., G.R. No. L-13203, promulgated on January 28, 1961).
Wherefore, the decision appealed from is modified by sentencing defendant-
appellee Francisco Sycip to pay, jointly and severally with the Associated
Finance Company, Inc., the sum of money which the trial court sentenced the
latter to pay to the National Marketing Corporation, as follows: the sum of
FOUR HUNDRED THREE THOUSAND FIVE HUNDRED FOURTEEN
PESOS, and TWENTY-EIGHT CENTAVOS P403,514.28), with interest at the
legal rate from the date of the filing of the action until fully paid plus an
additional amount of EIGHTY THOUSAND SEVEN HUNDRED TWO PESOS
and EIGHTY-SIX CENTAVOS (P80,702.86) as liquidated damages and
P5,000.00 as attorney's fees and further to pay the costs. With costs.
Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal, Bengzon, J.P., Zaldivar
and Sanchez JJ., concur.
443
444
 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.
G.R. No. 80043 June 6, 1991
In Our resolution of 28 August 1988 We required the respondent to comment
on the petition. Respondent Metropolitan Bank and Trust Co. filed its
ROBERTO A. JACINTO, petitioner,
comment4 on 12 October 1988. We required the petitioner to file a reply
vs.
thereto,5 which he comment plied with on 20 December 1988.6
HONORABLE COURT OF APPEALS and METROPOLITAN BANK AND
TRUST COMPANY, respondents.
We gave due course to the petition on 8 May 1989 7 and required the parties
to submit their respective memoranda.
Romeo G. Carlos for petitioner.
Jorge, Perez & Associates for private respondents.
Private respondent filed its memorandum on 29 June 1989 8 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:

DAVIDE, JR., J.:
1. Whether or not the respondent Court of Appeals can validly pierce
This is an appeal by certiorari to partially set aside the Decision of the Court
the fiction of corporate identity of the defendant corporation Inland
of Appeals in C.A-G.R. CV No. 08153 1.promulgated on 19 August 1987,
Industries, Inc. even if there is no allegation in the complaint
which affirmed in toto the decision of the Regional Trial Court of Manila,
regarding the same, nor is there anything in the prayer demanding
Branch 11, in Civil Case No. 133164 entitled "Metropolitan Bank and Trust
the piercing of the corporate veil of the corporation Inland Industries,
Co. vs. Inland Industries Inc. and Roberto Jacinto," the dispositive portion of
Inc.;
which reads:
2. Whether or not the Court of Appeals can validly pierce the fiction
WHEREFORE, judgment is hereby rendered ordering defendants to
of corporate identity of the defendant Inland Industries, Inc. even if
pay, jointly and severally, the plaintiff, the principal obligation of
absolutely no proof was presented in court to serve as legal
P382,015.80 (Annex J-1 to J-3 of Stipulation), with interest/charges
justification for the same.

445
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.?
446
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
447
 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
defendant-appellant 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 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.
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.
448
G.R. No. 89804 October 23, 1992

CALVIN S. ARCILLA, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and EMILIO
RODULFO, respondents.

DAVIDE, JR., J.:

This petition is a belated attempt to avoid the adverse amended decision of

public respondent, promulgated on 31 May 1989 in C.A.-G.R. No.
11389, 1 on the ground that petitioner is not personally liable for the amount
adjudged since the same constitutes a corporate liability which nevertheless
cannot even bind or be enforced against the corporation because it is not a
party in the collection suit filed before the trial court.

The procedural antecedents are not complicated.

On 4 June 1985, private respondent filed with the Regional Trial Court (RTC)
of Catanduanes a complaint for a sum of money against petitioner. 2 The
case was docketed as Civil Case No. 1992 and was assigned to Branch 42
thereof. It is alleged therein:

449
xxx xxx xxx
3. That from late 1981 up to early 1983, the defendant,
taking advantage of his close friendship with the plaintiff,
succeeded in securing on credit from the plaintiff, various
items, cash and checks which the defendant encashed, in
the total amount of P93,358.51, which the plaintiff willingly
extended because of the representations of the defendant
that he was a successful financial consultant of local and
international businessmen;
4. That defendant's indebtedness referred to in the next
preceding paragraph, is shown and described in thirty (30)
"vales" signed by him or by persons authorized by him, all of
which documents are in the possession of the plaintiff for
being unredeemed or unpaid, xerox copies attached as
Annexes "A" to "Z" and "AA" to "DD" which are hereby made
integral parts hereof;
5. That commencing with the summer months of 1983 up to
the time immediately before the filing of this complaint, the
plaintiff had made numerous demands for payment but the
respondent acted in gross and evident bad faith in refusing
to satisfy the plaintiff's plainly valid, just and demandable
claim;
6. That the plaintiff is left without any recourse other than to
enforce his claim in court and had to secure the services of
the undersigned counsel who charged the plaintiff with
P1,000.00 for accepting the case, P200.00 appearance fee
for every appearance before this Court, and attorney's
contingent fee of 25% of the award in favor of the plaintiff;
plaintiff shall incur litigation expenses which may amount to
no less than P5,000.00, all of which amounts are
recoverable from the defendant.
In his Answer, 3 petitioner does not deny having had business transactions
with the private respondent but alleges that the professional relationship
began only in August of 1982 when he "was looking for a "pro-forma" invoice
to support his loan with the Kilusang Kabuhayan at Kaunlaran (KKK for short)
under the Ministry of Human Settlement (sic)." 4 He explicitly admits that
"(H)is loan was in the same of his family corporation, CSAR Marine
Resources,
Inc.;" 5 however, the "vales", more specifically Annexes "A" to "DD" of the
complaint, "were liquidated in the bank loan releases." 6 It is thus clear that
his main defense is payment; he did not interpose any other affirmative
defense.
In his Pre-Trial Brief, 7 petitioner reiterated the earlier claim that his first
business dealing with the plaintiff (private respondent herein) was in August
of 1982. This time, however, he alleges that "as President of CSAR Marine
Resources, Inc., he requested for a pro-forma Invoice for said corporation to
support the loan application with the Kilusang Kabuhayan at Kaunlaran (KKK
for short), with the Ministry of Human Settlement (sic)." 8
In its Decision of 1 August 1986, 9 the trial court made the following findings
of fact:
Defendant admitted the genuineness (sic) and due execution
of Exhibits "A" to "DD" but, according to him, he already paid
plaintiff P56,098.00 thru PNB Virac Branch, per Cash
Voucher dated September 28, 1982 (Exh. 3) and then
P42,363.75 also thru PNB Virac Branch, per PNB check No.
628861K dated December 16, 1982 (Exh. 1).
Analyzing the evidence adduced by both parties, it ruled that since Exhibit "3"
is dated 28 September 1982 and the "vales", Exhibits "A" to "DD", with the
exception of Exhibits "K" in the amount of P1,730.00 and "Q" in the amount
of P10,765.00, were issued after said date, it could not have been in
payment of the "vales" other than that evidenced by Exhibits "K" and "Q"
Considering, however, that the "vales" remained in the possession of the
private respondent, they are presumed to remain unpaid; in fact, private
450
respondent so testified that they were not paid at all. The court therefore
ordered petitioner to pay private respondent:
(a) the total amount of P92,358.43 covered by the "vales",
plus interest thereon at the rate of twelve (12%) per cent per
annum from June 4, 1985 when the complaint was filed;
(b) P9,000.00 for and as attorney's fees; and
(c) the cost of suit. 10
Petitioner appealed this decision to the public respondent which docketed the
case as C.A.-G.R. CV No. 11389.
The public respondent affirmed the trial court's decision in its Decision of 14
January 1988. 11 As could be gleaned therefrom, petitioner's assigned errors
are as follows:
. . . defendant raised as error of the court a quo in (sic)
holding that the "vales" (Exhs. A to DD) have not been paid;
that the presumption in favor of the plaintiff-appellee that
since he was in possession of the "vales" the same have not
been paid, remained undisputed; that the total transaction
between the parties amount to more than P200,000.00; and
in rendering a decision in favor of the plaintiff-appellee plus
the award of attorney's fees in his favor. 12
On 5 February 1988, petitioner filed a motion to reconsider the aforesaid
decision 13 alleging therein, inter alia, that (a) the evidence showing payment
of the "vales" is "uncontroverted", hence the presumption that they were not
paid simply because they remain in the possession of the creditor cannot
arise; (b) the alleged non-payment of the "vales" could have been further
explained if the trial court gave the appellant the opportunity to present sur-
rebuttal witness and documentary evidence; besides, he has newly
discovered evidence invoked in a prayer for a new trial that was
nevertheless denied by the lower court which consists of a letter, dated 7
February 1983, signed by Rafael Rodulfo, General Manager of the private
respondent and addressed to Brig. Gen. Clemente Racela, then KKK
General Action Officer, categorically stating that "the account of CSAR
Marine Resources, Inc. c/o Atty. Calvin Arcilla" is only P23,639.33; and (c)
the evidence presented by both parties disclosure that "the subject account
are (sic) all in the name of CSAR MARINE RESOURCES, INC., a
corporation separate and distinct from the appellant;" such fact remains
"uncontroverted" as shown by Exhibits "1", "3", "A" to "DD" adopted as
Exhibits "7" to "25" for the appellant." 14 He then prays that:
. . . considering that appellees was not able to prove by
preponderance of evidence the alleged unpaid account of
appellant, the decision promulgated on January 14, 1988 be
RECONSIDERED and a new one be entered REVERSING
the lower court decision and thereby ordering the
DISMISSAL of plaintiff-appellee's complaint, with damages
and costs against appellee.
In the remote possibility, that the appellee's complaint cannot
be dismissed outrightly, it is further prayed that his
Honorable Tribunal orders (sic) a new trial for appellant to
present additional evidence he wanted to present in his
motion for new trial. 15
xxx xxx xxx
Reacting to this motion, private respondent, in a "Manifestation dated 7
February 1988, informed the public respondent that in the interest of justice
and fair play, he interposes no objection to the alternative prayer for a new
trial. 16 Hearing was thereafter conducted to receive the petitioner's so-called
newly discovered evidence consisting of the abovementioned letter of Rafael
Rodulfo, dated 7 February 1983, to General Clemente A. Racela (Exh. "1"-
Motion) wherein the former, as General Manager of private respondent's
Universal Enterprises, informed the latter that:
451
 . . . Csar Marine Resources, Inc. c/o Atty. Calvin Arcilla has
an outstanding obligation of TWENTY THREE THOUSAND
SIX PESOS to Universal Enterprises as a result of various
purchases of construction materials. 17
Thereafter, on 31 May 1989, the public respondent promulgated an Amended
Decision, 18 the dispositive portion of which reads as follows:
WHEREFORE, the decision of this Court promulgated on
January 14, 1988 is hereby reconsidered and a new one
rendered, ordering defendant-appellant to pay plaintiff-
appellee in his capacity as President of Csar Marine
Resources, Inc. the outstanding balance of P23,639.33 to
Universal Enterprises, owned and operated by plaintiff-
appellee, plus interest at 12% per annum from June 4, 1985
when the complaint was filed; attorney's fees of P1,000.00,
P200.00 per court appearance of counsel and 25% of the
amount awarded; plus the costs of the suit. 19
On 4 January 1989, petitioner filed a Motion For Clarificatory
Judgment 20 alleging therein that:
3. It is very clear from the findings of this Honorable Court
contained in the amended decision promulgated on May 31,
1989 that:
3.1. Defendant Calvin S. Arcilla never had
any personal business transaction (sic) in
the plaintiff;
3.2. Csar Marine Resources, Inc. has an
outstanding balance in the amount of
P23,636.33 with plaintiff-appellee out of the
KKK loan transaction;
3.3. Csar Marine Resources, Inc. is not a
party in this case;
xxx xxx xxx
5. It is rather confusing (sic) that defendant-appellant is
ordered to pay plaintiff-appellee in his capacity as President
of Csar Marine Resources, Inc. the said amount of
P23,639.33, when plaintiff-appellee for ulterior motives
choose (sic) not to implead said corporation. It need not be
emphasized that the personality and liability of the
defendant-appellant and that of Csar Marine Resources,
Inc., as a corporation, are separate and distinct from its (sic)
other. . . . . 21
He then prays that:
. . . an order be issued clarifying the liability of defendant-
appellant in his personal capacity as regards the amount of
P23,639.33, if any, otherwise, the case be dismissed against
him. 22
Public respondent denied this motion in its Resolution of 17 August
1989 23 on these grounds: (a) the veil of corporate fiction should be pierced in
this case; (b) since petitioner did not raise the issue of separate corporate
identity in the pleadings in the trial court or in his Brief, he cannot raise it for
the first time in a Motion for Clarificatory Judgment; in his answer to
paragraphs 3 and 4 of the complaint, he admits that it was he and not his
corporation who transacted business with the private respondent; and (c) the
"vales" refer not only to construction materials for which the loan to Csar
Marine Resources, Inc. was supposed to be used, but also to consumables
such as salt, rice, food seasoning, cigarettes, coffee, etc.; this indicates that
the petitioner himself did not seriously treat the corporate affairs of Csar
Marine Resources, Inc. as separate and distinct from his own.
452
Not satisfied with the Resolution, petitioner filed this petition. He alleges
therein that respondent Court of Appeals:
I
. . . ERRED IN HOLDING CSAR MARINE RESOURCES,
INC., A DOMESTIC CORPORATION DULY ORGANIZED
ACCORDING TO LAW, WHERE PETITIONER THE
PRESIDENT (sic), LIABLE TO THE PRIVATE
RESPONDENT IN THE AMOUNT AWARDED IN THE
APPEALED DECISION WITHOUT BEING IMPLEADED AS
A PARTY IN THE CASE IN VIOLATION OF LAW AND THE
APPLICABLE DECISIONS OF THE SUPREME COURT; and
II
. . . IN NOT DISMISSING THE CASE AGAINST THE
PETITIONER. 24
After the filing of the Comment, the Reply thereto and the Rejoinder to the
latter, this Court gave due course to the petition and required the parties to
submit their respective Memoranda. 25
The records bear nothing to prop up the instant petition. The arguments
adduced by the petitioner breathe no life to it.
On the contrary, the pleadings lead Us to the inescapable conclusion that the
petitioner, who is himself a lawyer, is merely taking advantage of the use of
the innocuous phrase "in his capacity as President" found in the dispositive
portion of the challenged Amended Decision making the same a sanctuary
for a defense which he, as hereinafter discussed, had long since abandoned
or waived either deliberately or through his obliviscence. His sole purpose, of
course, is to avoid complying with the liability adjudged against him by the
public respondent; such avoidance is premiered on the so-called newly
discovered evidence offered after the public respondent had bent over
backwards to grant him a new trial despite the availability of such evidence
during pendency of the proceedings before the trial court. It is to be noted
that he failed to assign as error in his Brief the denial by the said court of his
motion for new trial on the basis thereof.
The grant of affirmative relief based on the first assigned error would really
redound to the benefit of an entirety which was not made a party in the main
case and which did not seek to intervene therein. Therefore, it has no
personality to seek as review of the public respondent's Amended Decision
under Rule 45 of the Rules of Court. Only the original parties to the main
case may do so. 26 Moreover, by no stretch of even the most fertile
imagination may one be able to conclude that the challenged Amended
Decision directed Csar Marine Resources, Inc. to pay the amounts adjudge.
By its clear and unequivocal language, it is the petitioner who was declared
liable therefor and consequently made to pay. That the latter was ordered to
do so as president of the corporation would not free him from the
responsibility of paying the due amount simply because according to him, he
had ceased to be corporate president; such conclusion stems from the fact
that the public respondent, in resolving his motion for clarificatory judgment,
pierced the veil of corporate fictional and cast aside the contention that both
he and the corporation have separate and distinct personalities. In short,
even if We are to assume arguendo that the obligation was incurred in the
name of the corporation, the petitioner would still be personally liable therefor
because for all legal intents and purposes, he and the corporation are one
and the same. Csar Marine Resources, Inc. is nothing more than his
business conduit and alter ego. The fiction of a separate juridical personality
conferred upon such corporation by law should be
disregarded. 27 Significantly, petitioner does not seriously challenge the public
respondent's application of the doctrine which permits the piercing of the
corporate veil and the disregarding of the fiction of a separate juridical
personality; this is because he knows only too well that from the very
beginning, he merely used the corporation for his personal purposes.
In his answer to the complaint, petitioner volunteered the information that
the pro-forma invoice which he obtained from the private respondent and
which became the source of the obligations reflected in the "vales" was to
support his loan. He states in part:
453
 . . . when defendant was looking for a "pro-forma" invoice to
support his loan with the Kilusang Kabuhayan at Kaunlaran .
. . His loan was in the name of his family corporation, CSAR
Marine Resources, Inc. . . . . 28
That it was indeed his loan is further borne out by his allegations
therein part:
(a) The accounting between plaintiff and
defendant, however, was not closed because adjustments
were needed in the following points: 29
(b) 5. While it is true that plaintiff made demands for payment
of an alleged balance of P23,000.00 in March 1983, which
demand was even coursed thru the KKK Regional and
Provincial Offices, after the demand of
P23,000.00 defendant paid additional P5,000.00 cash to
plaintiff. 30
In his motion to reconsider the public respondent's original decision,
petitioner becomes more candid in his admissions that indeed, the
transaction with the private respondent and the loan obtained
previously were for his personal account. Thus he asserts that:
(a) the first document made between appellee and
appellant was the pro-forma invoice. 31
(b) [c]considering that appellant had already an approved
loan and was ready for release . . . . 32
Moreover, petitioner neglected to set up in his Answer the defense that he is
not personally liable to private respondent because the "vales" were
corporate obligations of Csar Marine Resources, Inc.. Of course, that
defense would have been inconsistent with his volunteered admission that
the KKK loan which resulted in the procurement of the pro-forma invoice
from the private respondent was for his benefit. In any case, the failure to
set it up as an affirmative defense amounted to a waiver thereof. Section 2,
Rule 9 of the Rules of Court expressly proved that defenses and objections,
other than the failure to state a cause of action and lack of jurisdiction, not
pleaded either in a motion to dismiss or in the answer are deemed waved.
Petitioner, as a lawyer, knows or is supposed to know this rule. Since he
prepared the Answer himself, We cannot think of any possible reason why he
failed to set up this defense other than his realization of its inherent
weakness or his outright inexcusable negligence of forgetfulness. And even if
it were due to inadvertence, he could still have subsequently availed of
Section 2, Rule 10 of the Rules of Court which allows a party to amend his
answer as a matter of right within the period therein stated. Failing that, he
could have resorted to Section 3 thereof which allows the making of
amendments upon leave of court. On the other hand, if the lapse was due to
forgetfulness, it is just unfortunate that he did not exercise due diligence in
the conduct of his won affairs. He can expect no reward for it.
Then too, as correctly noted by the public respondent, petitioner, in his Brief,
did not assign as error the holding of the trial court that he is solely liable for
the obligation.
Petitioner's volunteered admission that he procured the pro-forma invoice
from the private respondent in connection with his loan from the KKK, using
his family corporation in the process, and his deliberate waiver of the
aforementioned defense provide an insurmountable obstacle to the viability
of this petition.
WHEREFORE, for utter lack of merit, the instant petition is DENIED with
costs against petitioner.
This decision is immediately executory.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.
454

G.R. No. L-69494 June 10, 1986
A.C. RANSOM LABOR UNION-CCLU, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, First Division, A.C.
RANSOM (PHILS.) CORPORATION, RUBEN HERNANDEZ, MAXIMO C.
HERNANDEZ, JR., PORFIRIO R. VALENCIA, LAURA H. CORNEJO,
FRANCISCO HERNANDEZ, CELESTINO C. HERNANDEZ & MA.
ROSARIO HERNANDEZ, respondents.
MELENCIO-HERRERA, J.:
The facts relevant to this case may be related as follows:
1. Respondent A. C. Ransom (Philippines) Corporation (RANSOM, for short)
was established in 1933 by Maximo C. Hernandez, Sr. It was a "family"
corporation, the stockholders of which were/are members of the Hernandez
family. It has a compound in Las Pinas Rizal, where it has been engaged in
the manufacture mainly of ink and articles associated with ink.
2. On June 6, 1961, employees of RANSOM, most of them being members
of petitioner Labor UNION, went on strike and established a picket line
which, however, was lifted on June 21st with most of the strikers returning
and being allowed to resume their work by RANSOM Twenty-two (22)
strikers were refused reinstatement by the Company.
3. During 1969, the same Hernandez family organized another corporation,
Rosario Industrial Corporation (ROSARIO, for short) which also engaged, in
the RANSOM Compound, in the business of manufacture of ink and products
associated with ink.
4. The strike became the subject of Cases Nos. 2848 ULP and 2880
ULP of the Court of Industrial Relations which, on December 19, 1972,
ordered RANSOM "its officers and agents to reinstate the 22 strikers with
back wages from July 25, 1969.
5. On April 2, 1973, RANSOM filed an application for clearance to close or
cease operations effective May 1, 1973, which was granted by the Ministry of
Labor and Employment in its Order of June 7, 1973, without prejudice to the
right of employees to seek redress of grievance, if any. Although it has
stopped operations, RANSOM has continued its personality as a corporation.
For practical purposes, reinstatement of the 22 strikers has been precluded.
As a matter of fact, reinstatement is not an issue in this case.
6. Back wages of the 22 strikers were subsequently computed at
P164,984.00, probably in early 1974. The exact date is not reflected in the
record.
7. Up to September 9, 1976, petitioner UNION had filed about ten (10)
motions for execution against RANSOM; but all of them could not be
implemented, presumably for failure to find leviable assets of RANSOM;
although it appears that, in 1975, RANSOM had sold machineries and
equipment for P28million to Revelations Manufacturing Corporation.
8. Directly related to this case is the last Motion for Execution, dated
December 18, 1978, filed by petitioner UNION wherein it asked that officers
and agents of RANSOM be held personally liable for payment of the back
wages. That Motion was granted by Labor Arbiter, Tito F. Genilo, on March
11, 1980 (The GENILO ORDER), wherein he expressly authorized a Writ of
Execution to be issued for P164,984.00 (the back wages) against RANSOM
and seven officers and directors of the Company who are the named
individual respondents herein. RANSOM took an appeal to NLRC which
455
affirmed the GENILO ORDER, except as modified in the body of its decision
of July 31, 1984.
9. In RANSOM's appeal to the NLRC, two issues were raised:
(a) One of the issues was:
THE DECISION OF THE INDUSTRIAL RELATIONS COURT
HAVING BECOME FINAL AND EXECUTORY IN 1973, IS IT
ENFORCEABLE BY A WRIT OF EXECUTION ISSUED IN
1980 OR MORE THAN FIVE YEARS AFTER THE FINALITY
OF THE DECISION SOUGHT TO BE ENFORCED?
The corresponding ruling made by NLRC was:
Perforce respondent's theory that execution proceedings
must stop after the lapse of five (5) years and that a motion
to revive need be filed, must fail. Suffice it to state also that
the statute of limitations has been devised to operate
primarily against those who sleep on their rights, not against
those who assert their right but fail for causes beyond their
control. The above recital of facts contradicts respondent's
contention that the CIR decision of August 19, 1972 had
remained dormant to require a motion to revive.
(b) The second issue raised was:
IS THE JUDGMENT AGAINST A CORPORATION TO
REINSTATE ITS DISMISSED EMPLOYEES WITH
BACKWAGES, ENFORCEABLE AGAINST ITS OFFICERS
AND AGENTS IN THEIR INDIVIDUAL, PRIVATE AND
PERSONAL CAPACITIES WHO WERE NOT PARTIES IN
THE CASE WHERE THE JUDGMENT WAS RENDERED;
The NLRC ruling was:
As to the liability of the respondent's officers and agents, we
agree with the contention of the respondent-appellant that
there is nothing in the Order dated May 11, 1986 that would
justify the holding of the individual officers and agents of
respondent in their personal capacity. As a general rule,
officers of the corporation are not liable personally for the
official acts unless they have exceeded the scope of their
authority. In the absence of evidence showing that the
officers mentioned in the Order of the Labor Arbiter dated
March 11, 1980 have exceeded their authority, the writ of
execution can not be enforced against them, especially so
since they were not given a chance to be heard.
RANSOM and the seven individual respondents in this case have not
appealed from the ruling of the NLRC that Section 6, Rule 39, is not
invocable by them in regards to the execution of the decision of December
19, 1972. Hence, the issue can no longer be raised herein. Even if the said
section were applicable, the 5-year period therein mentioned may not have
expired by December 18, 1978 because the period should be counted only
from the time the back wages were determined, which could have been in
early 1974.
We now come to the NLRC's decision upholding non-personal liabilities of
the individual respondents herein for back wages of the 22 strikers.
(a) Article 265 of the labor Code, in part. expressly provides:
Any worker whose employment has been terminated as a
consequence of an unlawful lockout shall be entitled
to reinstatement with fill back wages.
Article 273 of the Code provides that:
Any person violating any of the provisions of Article 265 of
this Code shall be punished by a fine of not exceeding five
456
 hundred pesos and/or imprisonment for not less than one (1)
day nor more than six (6) months.
(b) How can the foregoing provisions be implemented when the employer is
a corporation? The answer is found in Article 212 (c) of the Labor Code
which provides:
(c) 'Employer includes any person acting in the interest of an
employer directly or indirectly. The term shall not include any
labor organization or any of its officers or agents except
when acting as employer.
The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law.
Since RANSOM 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" RANSOM. The corporation, only in the technical sense, is the
employer.
The responsible officer of an employer corporation can be held personally,
not to say even criminally, liable for non-payment of back wages. That is the
policy of the law. In the Minimum Wage Law, Section 15(b) provided:
(b) If any violation of his Act is committed by a corporation,
trust, partnership or association, the manager or in his
default, the person acting as such when the violation took
place, shall be responsible. In the case of a government
corporation, the managing head shall be made responsible,
except when shown that the violation was due to an act or
commission of some other person, over whom he has no
control, in which case the latter shall be held responsible.
In PD 525, where a corporation fails to pay the emergency allowance therein
provided, the prescribed penalty "shall be imposed upon the guilty officer or
officers" of the corporation.
(c) If the policy of the law were otherwise, the corporation employer can have
devious ways for evading payment of back wages. in the instant case, it
would appear that RANSOM, in 1969, foreseeing the possibility or probability
of payment of back wages to the 22 strikers, organized ROSARIO to replace
RANSOM, with the latter to be eventually phased out if the 22 strikers win
their case. RANSOM actually ceased operation on May 1, 1973, after the
December 19, 1972 Decision of the Court of Industrial Relations was
promulgated against RANSOM.
(d) The record does not clearly Identify "the officer or officers" of RANSOM
directly responsible for failure to pay the back wages of the 22 strikers. In the
absence of definite proof in that regard, we believe it should be presumed
that the responsible officer is the President of the corporation who can be
deemed the chief operation officer thereof. Thus, in RA 602, criminal
responsibility is with the "Manager" or in his default, the person acting as
such. In RANSOM, the President appears to be the Manager.
(e) Considering that non-payment of the back wages of the 22 strikers has
been a continuing situation, it is our opinion What the personal liability of the
RANSOM President, at the time the back wages were ordered to be paid
should also be a continuing joint and several personal liabilities of all who x-
ray have thereafter succeeded to the office of president; otherwise, the 22
strikers may be deprived of their rights by the election of a president without
leviable assets.
WHEREFORE, the questioned Decision of the National Labor Relations
Commission is SET ASIDE, and the Order of Labor Arbiter Tito F. Genilo of
March 11, 1980 is reinstated with the modification that personal liability for
the back wages due the 22 strikers shall be limited to Ruben Hernandez,
who was President of RANSOM in 1974, jointly and severally with other
Presidents of the same corporation who had been elected as such after 1972
or up to the time the corporate life was terminated.
SO ORDERED.
Abad Santos (Chairman), Yap, Cruz and Paras, * , JJ., concur.
457
Narvasa, J., took no part.

458
459
 1. In G.R. No. 79975, whether or not the private respondent
was an employee of the petitioner and, if so, had been
illegally dismissed; and corollarily, whether or not the NLRC
had jurisdiction over their dispute.

2. In G.R. No. 79907, whether or not the petitioner could be

G.R. No. 79907 March 16, 1989 held solidarity liable with Sweet Lines, Inc. to the private
respondent.
SAMUEL CASAS LIM, petitioner,
vs. The record shows that private respondent Victoria Calsado was hired by
THE NATIONAL LABOR RELATIONS COMMISSION and VICTORIA R. Sweet Lines, Inc. on March 5, 1981, as Senior Branch Officer of its
CALSADO, respondents. International Accounts Department for a fixed salary and a stipulated 5 %
commission on sales production. On December 1, 1983, after tendering her
resignation to accept another offer of employment, she was persuaded to
G.R. No. 79975. March 16, 1989
remain with an offer of her promotion to Manager of the Department with
corresponding increase in compensation, which she accepted. She was also
SWEET LINES, INC., petitioner, allowed to buy a second-hand Colt Lancer pursuant to a liberal car plan
vs. under which one-half of the cost was to be paid by the company and the
NATIONAL LABOR RELATIONS COMMISSION; HON. NESTOR C. LIM (In other half was to be deducted from her salary. Relations began to sour later,
his capacity as Labor Arbiter of the Ministry of Labor and Employment however, when she repeatedly asked for payment of her commissions, which
and VICTORIA R. CALSADO, respondents. had accumulated and were long overdue. She also complained of the
inordinate demands on her time even when she was sick and in the hospital.
Puruganan, Chato, Chato & Tan Law Office for petitioner. Finally, on July 16, 1985, she was served with a letter from Samuel Casas
Lim, the other petitioner, informing her that her "employment with Sweet
Leo C. Romero for petitioner Sweet Lines, Inc. Lines" would terminate on August 5, 1985. Efforts were also taken by Sweet
Lines to forcibly take the car from her, culminating in an action for replevin
Andrea R. dela Cueva for Victoria R. Calsado. against her in the regional trial court of Manila.

CRUZ, J.:
These two cases have been consolidated because they relate to the same
factual antecedents and the same private respondent. The issues are:
On August 14, 1985, Calsado filed a complaint against both petitioners for
illegal dismissal, illegal deduction, and unpaid wages and commissions plus
moral and exemplary damages, among other claims. 1 There followed an
extended hearing where she testified on the details of her employment,
emphasizing her unsatisfactory treatment by the management of Sweet
Lines and especially the termination of her services without the required
notice and hearing and without valid cause. She also presented four other
witnesses to corroborate her charges.

460
The respondents' defenses were based mainly on the claim that Calsado
was not an employee of Sweet Lines but an independent contractor and that
therefore their dispute with her came under the jurisdiction of the civil courts
and not of the Labor Arbiter. 2 On this matter the private respondent
pointedly comments:
At this point, private respondent would like to underscore the
fact that while private respondent in the proceedings before
the Labor Arbiter presented five witnesses including herself,
all of whom were cross-examined by petitioners, and
numerous documents which were marked as Exhs. "A" to
"GG-8d" and 858 receipts and bills, all of which were duly
identified and testified to by private respondent and her
witnesses and examined by petitioners, petitioner failed to
present any single evidence, testimonial or documentary, to
controvert private respondent's evidence. All that they
presented were their unsubstantiated pleadings not one of
which was under oath, not even their position paper which,
under the NLRC rules (Sec. 2, Rule 7, Revised Rules of the
NLRC), have to be verified. 3
On December 29, 1986, decision was rendered against the two petitioners by
the Labor Arbiter 4 who held them liable in solidum to the complainant for the
following amounts:
(a) Separation pay equivalent to one month pay for every
year of service based on her latest basic salary of P2,500.00
plus allowance of P500.00, or a total monthly pay of
P3,000.00;
(b) Backwages based on her last monthly pay rate of
P3,000.00 to be computed from the time of her dismissal to
the actual payment of her separation pay;
(c) Proportionate 13th month pay for the year 1985;
(d) Sales commission in the sum of P432,656.68;
(e) Moral damages of P100,000.00;
(f) Exemplary damages of P10,000.00; and
(g) Attorney's fees of P10,000.00 plus 25 % of the total
monetary awards in favor of the complainant.
The decision was appealed to the National Labor Relations Commission and
affirmed in toto except as to the attorney's fees, which were reduced to 10%
of the total award. 5 Both Sweet Lines and Lim then came to us in separate
petitions to raise the above-stated issues. On October 14, 1987, we issued a
temporary restraining order against the enforcement of the decision of the
public respondent dated September 11, 1987. 6 The petitions were
consolidated on December 7, 1987, and given due course on May 16, 1987,
with the parties being required to submit their respective memoranda. On the
first question, we hold that the employee-employer relations between
Calsado and Sweet Lines have been sufficiently established. The following
documents submitted by the former and not controverted by the latter should
belie the claim that Calsado was only an independent contractor over whom
Sweet Lines had no control.
1. Certification issued by Sweet Lines, lnc. dated May
2l,1984, stating that private respondent 'is employed with this
company since March 5, 1982 up to the present, presently
designated as International Accounts Manager of the Sweet
Lines, Inc., Manila Branch." (Exh. "W" )
2. Termination letter issued by Samuel Casas Lim to private
respondent reading. 'Your employment with Sweet lines, Inc.
will cease effective August 15, 1985. In connection with the
foregoing, you are entitled to (1) separation pay equivalent to
one half month of every year of service ... ; (2) The
computed money value of unused vacation leave ... ; (3)
Thirteenth month pay ... ;" (Exh. "W")
461
 3. Notice of private respondent's promotion effective
December 1, 1982 from Senior Branch Officer to Manager,
International Accounts, with an increase in basic salary from
P1,250 to P2,500 a month; (Exh. "D")
4. Computation of her salary, allowance and 13th month pay
differentials on account of her promotion, prepared and
approved by the proper officials of petitioner Sweet Lines,
Inc. whose signatures appear thereon; (Exh. "E")
5. Certification dated September 6, 19M issued by the
petitioner company, subscribed and sworn to before a notary
public declaring that private respondent was then an Account
Executive of Sweet Lines, Inc.; (Exh. "E")
6. Certification, notarized on January 10, 1985, by Atty.
Gregorio Francisco, counsel for petitioner company, that
private respondent "is a bona fide employee of Sweet Lines,
Inc. and presently holding the position of Manager,
International Account.' (Exh. "Y")
7. Approved application for sick leave of private respondent
for 15 days from March 7, 1985 to April 3, 1985. (Exh. "I")
There is in the above exhibits a consistent and categorical recognition of
Calsado as an employee of petitioner Sweet Lines. Indeed, its notarized
certification that Calsado was its bona fide employee is irrefutable. The
petitioner cannot now argue that the grant to her of the 13th month pay and
even the differential pay was a mere accomodation like the car plan (which,
for that matter, is a benefit usually extended only to employees). If it is true
that Sweet Lines had no control over her and left her free to determine her
work schedule, there would have been no reason at all for its approval of her
application for sick leave from March 7, 1985 to April 3, 1985. The
termination letter itself, which was signed by the other petitioner as Vice
President of Sweet Lines, said she was "entitled" to certain payments as a
result of the cessation of her "employment with Sweet Lines, Inc."
Sweet Lines has also failed to substantiate its allegation that Calsado was an
independent contractor, as it should have, with evidence showing inter
alia that she had the financial resources and other means or equipment to
operate as such. One must prove what one alleges, but Sweet Lines
confined itself to mere denials.
At any rate, the determination of the existence of employee-employer
relations is a factual finding which this Court will not disturb or reverse in the
absence of a showing of grave abuse of discretion. We do not see such
justification here. On the contrary, the ascertainment of the employment
status of the private respondent was made on the basis of the criteria
consistently employed by the Court in the determination of the employee-
employer relationship. 7 We find from the record that all these test have been
satisfied.
Such relationship having been established, the third issue is automatically
resolved and requires not much elaboration. Suffice it only to stress that the
damages claimed by private respondent as a result of her illegal dismissal
and the violation of the terms and conditions of her employment also come
within the jurisdiction of the Labor Arbiter as a contrary rule would result in
the splitting of actions and the consequent multiplication of suits. So we
recently affirmed in Limquiaco v. Ramolete 8 and more positively in National
Union of Bank Employees v. Lazaro, 9 where we declared:
As we stated, the damages (allegedly) suffered by the
petitioners only form part of the civil component of the injury
arising from the unfair labor practice. Under Article 247 of the
Code, "the civil aspects of all cases involving unfair labor
practices which may include claims for damages and other
affirmative relief, shall be under the jurisdiction of the labor
arbiters.
On the fourth issue, we agree with petitioner Lim that he cannot be held
personally liable with Sweet Lines for merely having signed the letter
informing Calsado of her separation. There is no evidence that he acted with
462
malice or bad faith. The letter, in fact, informed her not only of her separation
but also of the benefits due her as a result of the termination of her services.
It is true that Lim has raised this matter rather tardily and also that he
belongs to a closed corporation controlled by the members of one family
only. But these circumstances should not be allowed to operate against him if
he is to be accorded substantial justice in the resolution of the private
respondent's claim. As we said in Ortigas vs. Lufthansa German
Airlines, 10 the Court is "clothed with ample authority to review matters, even
if they are not assigned as errors in the appeal, if it finds that its
consideration is necessary in arriving at a just decision of the case." As for
the second charge, the mere fact that Lim is part of the family corporation
does not mean that all its acts are imputable to him directly and personally.
His acts were official acts, done in his capacity as Vice President of Sweet
Lines and on its behalf. There is no showing that he acted without or in
excess of his authority or was motivated by personal ill-will toward Calsado.
The applicable decision is Sunio v. NLRC, 11 where it was held:
Petitioner Sunio was impleaded in the Complaint in his
capacity as General Manager of petitioner corporation. There
appears to be no evidence on record that he acted
maliciously or in bad faith in terminating the services of
private respondents. His act, therefore, was within the scope
of his authority and was a corporate act.
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 entity to which
it may be related. Mere ownership by a single stockholder or
by another corporation of all or nearly all of the capital stock
of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality. Petitioner
Sunio, therefore, should not have been made personally
answerable for the payment of private respondents' back
salaries.
The case of Ransom v. NLRC 12 is not in point because there the debtor
corporation actually ceased operations after the decision of the Court of
Industrial Relations was promulgated against it, making it necessary to
enforce it against its former president. Sweet lines is still existing and able to
satisfy the judgment in favor of the private respondent.
The Solicitor General, invoking equity rather than law, observes that making
Lim solidarity liable with Sweet Lines will ensure payment of Calsado's claim.
But this precaution, even assuming it to be valid, is really unnecessary. in
fact, as a condition for the issuance of our temporary restraining order of
October 14, 1987, Sweet Lines posted as required a bond in the amount of
P850,000.00, which should cover the amounts awarded to the private
respondent.13
We especially uphold the award of moral and exemplary damages in view of
the acts of harassment and bad faith testified to by the private respondent
and not refuted by Sweet Lines. Her treatment during her employment, the
delays in the payment of her commissions, the pressures exerted upon her
even when she was sick in the hospital, the suggestion of one of the
company officers that she discuss her complaints with him alone in a private
place, her arbitrary separation, the questionable attempts to get the vehicle
from her after her dismissal, among other aggravations, clearly demonstrate
the validity of the private respondent's complaints.
Finally, we hold that the contention of Sweet Lines that separation pay and
back wages are inconsistent with each other is not well-taken. Separation
pay is granted where reinstatement is no longer advisable because of
strained relations between the employee and the employer. Back wages
represent compensation that should have been earned but were not
collected because of the unjust dismissal. The bases for computing the two
are different, the first being usually the length of the employee's service and
the second the actual period when he was unlawfully prevented from
working.
We have ordered the payment of both in proper case 14 as otherwise the
employee might be deprived of benefits justly due him. Thus, if an employee
463
who has worked only one year is sustained by the labor court after three
years from his unjust dismissal, granting him separation pay only would
entitle him to only one month salary. There is no reason why he should not
also be paid three years back wages corresponding to the period when he
could not return to his work or could not find employment elsewhere.

WHEREFORE, subject to the modification that the award of backwages shall

be limited to only three years, in accordance with existing policy, G.R. No.
79975 is DISMISSED, with costs against the petitioner, G.R. No. 79907 is
GRANTED and petitioner Samuel Casas Lim is hereby absolved of liability in
his personal capacity. The temporary restraining order dated October 14,
1987, is LIFTED. It is so ordered.

Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.

464
465
 Labor Relations Commission in NLRC-NCR Case No. 7-2739-86 and
ordered as follows:

WHEREFORE, the questioned decision is AFFIRMED but with

modification that the petitioner shall not be held jointly and severally
liable with AMAL for the private respondents' money claims against
the latter. However, for his bad faith in arrogating to himself AMAL's
properties to the prejudice of the private respondents, the petitioner
is ordered: 1) to pay the private respondents moral damages in the
sum of P20,000.00 and exemplary damages in the sum of
P20,000.00; and 2) to return the assets of AMAL that he has
appropriated, or the value thereof, with legal interest thereon from
the date of the appropriation until they are actually restored, these
amounts to be proportionately distributed among private respondents
in satisfaction of the judgment rendered in their favor against AMAL. 2

Petitioner was the general manager of the Manila Office of Affiliated

Machineries Agency, Ltd. (AMAL) and among the respondents in a complaint
for illegal dismissal and non-payment of statutory benefits filed by herein
G.R. No. 90856 February 1, 1996 respondents who were former employees of AMAL.

ARTURO DE GUZMAN, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, (2ND DIVISION), LABOR
ARBITER MA. LOURDES A. SALES, AVELINO D. VALLES-TEROL,
ALEJANDRO Q. FRIAS, LINDA DELA CRUZ, CORAZON M. DELA
FUENTE, LILIA F. FLORO, and MARIO F. JAYME, respondents.
RESOLUTION
FRANCISCO, R., J.:
This is a motion filed by petitioner Arturo de Guzman seeking the
reconsideration of the decision of this Court, promulgated on July 23,
1992,1 which modified the decisions of the Labor Arbiter and the National
Respondent employees initiated the complaint following AMAL's refusal to
pay the former's monetary claims after AMAL decided to cease its operations
in 1986. Petitioner was impleaded for allegedly selling part of AMAL's assets
and applying the proceeds of the same, as well as the remaining assets, to
satisfy his own claims against the company. He also formed a new company
named Susarco, Inc. and engaged in the same line of business with the
former clients of AMAL.
On September 30, 1987, the Labor Arbiter rendered judgment and held
petitioner jointly and severally liable with AMAL for respondent employees'
claims.3 Upon appeal to the National Labor Relations Commission, the
decision was affirmed in toto.4
Not satisfied, petitioner proceeded to this Court on certiorari assailing the
aforementioned decision and claiming grave abuse of discretion.

466
As initially mentioned, this Court modified the decision of the NLRC and
absolved petitioner from his solidary liability for respondent employees'
claims. This was based on a finding that as mere managerial employee,
petitioner had no participation in the decision to cease operations and
terminate the services of respondent employees which was the exclusive
responsibility of AMAL alone. Nevertheless, for having acted in bad faith by
appropriating the assets of AMAL to satisfy his own claims to the prejudice of
respondent employees' pending claims, petitioner was held directly liable for
moral and exemplary damages based on the provisions of Articles 19, 21,
2219(10) and 2229 of the Civil Code.
In this motion, petitioner assails the award of damages and the order to
return the assets of AMAL which he appropriated for being unwarranted,
arguing that the same were beyond the jurisdiction of this Court to grant in a
complaint for illegal dismissal in the absence of an employer-employee
relationship between petitioner and respondent employees.
The argument is premised on the following pronouncements on previous
decisions that:
. . . The Court, therefore, believes and so holds that the "money
claims of workers" referred to in paragraph 3 of Article 217 embraces
money claims which arise out of or in connection with the employer-
employee relationship, or some aspect or incident of such
relationship. Put a little differently, that money claims of workers
which now fall within the original and exclusive jurisdiction of Labor
Arbiters are those money claims which have some reasonable
causal connection with the employer-employee relationship.
xxx xxx xxx
. . . The important principle that runs through these three (3) cases is
that where the claim to the principal relief sought is to be resolved
not by reference to the Labor Code or other labor relations statute or
a collective bargaining agreement but by the general civil law, the
jurisdiction over the dispute belongs to the regular courts of justice
and not to the Labor Arbiter or to the NLRC. In such situations,
resolution of the dispute requires expertise, not in labor management
relation nor in wage structures and other terms and conditions of
employment, but rather in the application of the general civil law.
Clearly, such claims fall outside of the area of competence or
expertise ordinarily ascribed to Labor Arbiters and the NLRC and the
rationale for granting jurisdiction over such claims to these agencies
disappears.5
While it is conceded that no employer-employee ties existed between the
petitioner and respondent employees, this does not preclude this Court from
adjudging him liable for damages. In labor disputes like the instant suit, it is
not required that the claim for relief should directly result from an employer-
employee relationship. It suffices that there be a showing of a reasonable
causal connection between the claim asserted and the employer-employee
relations.6
Respondent employees could have been afforded relief in their suit for illegal
dismissal and non-payment of statutory benefits were it not for petitioner's
unscrupulous acts of appropriating for himself the assets of AMAL which
rendered the satisfaction of respondent employees' claims impossible. By
taking undue advantage of his position as general manager of AMAL,
petitioner was able to facilitate the consummation of his acts as he had
access over the company's assets.
On this score, it is evident that petitioner's acts of bad faith were offshoots of
the termination of their employment relations with AMAL. The company's
decision to close down its business impelled petitioner to act precipitately in
appropriating the assets of AMAL, fearing perhaps that the same might not
be enough to satisfy all the legitimate claims against it.
Petitioner's contention that his application of AMAL's assets to satisfy his own
claims against the company is nothing more than a simple legal
compensation or set-off deserves scant consideration as it was done without
deference to the legitimate claims of respondent employees and other
creditors of AMAL, in contravention of the provisions on concurrence and
467
preference of credits under the Civil Code. Although his legitimate claims are
not disputed, the same, however, are properly cognizable at the proceedings
for AMAL's dissolution.

Thus, we affirm our previous conclusion that although the question of

damages arising from petitioner's bad faith has not directly sprung from the
illegal dismissal, it is clearly intertwined therewith. Accordingly, petitioner's
bad faith having been sufficiently established, the award of damages against
him and the order for him to return the assets of AMAL which he
appropriated, or their value, are in order.

Finally, we underscore the fact that this case has already dragged on for the
past nine years, making it extremely urgent that it be resolved with finality
and for this Court not to sanction any further delay or attempts to frustrate the
disposition of the legitimate claims of respondent employees.

WHEREFORE, the motion for reconsideration is hereby DENIED for lack of

merit. The denial is final.

SO ORDERED.

Padilla, Davide, Jr., Bellosillo and Hermosisima, Jr., JJ., concur.

468
 CALTEX PHILIPPINES INC., PILIPINAS SHELL PETROLEUM CORP. and
PETRON CORP., respondents.

YNARES-SANTIAGO, J.:

On November 5, 1997, this Court in Tatad v. Secretary of the Department of

Energy and Lagman, et al., v. Hon.Ruben Torres, et al., 1 declared Republic
Act No. 8180, entitled "An Act Deregulating the Downstream Oil Industry and
For Other Purposes", unconstitutional, and its implementing Executive Order
No. 392 void.

R.A. 8180 was struck down as invalid because three key provisions intended
to promote free competition were shown to achieve the opposite result. More
specifically, this Court ruled that its provisions on tariff differential, stocking of
inventories, and predatory pricing inhibit fair competition, encourage
monopolistic power, and interfere with the free interaction of the market
forces.

While R.A. 8180 contained a separability clause, it was declared

unconstitutional in its entirety since the three (3) offending provisions so
permeated the law that they were so intimately the esse of the law. Thus, the
whole statute had to be invalidated.

As a result of the Tatad decision, Congress enacted Republic Act No. 8479, a
new deregulation law without the offending provisions of the earlier law.
Petitioner Enrique T. Garcia, a member of Congress, has now brought this
petition seeking to declare Section 19 thereof, which sets the time of full
G.R. No. 132451 December 17, 1999 deregulation, unconstitutional. After failing in his attempts to have Congress
incorporate in the law the economic theory he espouses, petitioner now asks
us, in the name of upholding the Constitution, to undo a violation which he
CONGRESSMAN ENRIQUE T. GARCIA, petitioner,
claims Congress has committed.
vs.
HON. RENATO C. CORONA, in his capacity as the Executive Secretary,
HON. FRANCISCO VIRAY, in his capacity as the Secretary of Energy, The assailed Section 19 of R.A. 8479 states in full:

469
Sec. 19. Start of Full Deregulation. Full deregulation of
the Industry shall start five (5) months following the effectivity
of this Act: Provided, however, That when the public interest
so requires, the President may accelerate the start of full
deregulation upon the recommendation of the DOE and the
Department of Finance (DOF) when the prices of crude oil
and petroleum products in the world market are declining
and the value of the peso in relation to the US dollar is
stable, taking into account relevant trends and
prospects; Provided, further, That the foregoing provision
notwithstanding, the five (5)-month Transition Phase shall
continue to apply to LPG, regular gasoline and kerosene as
socially-sensitive petroleum products and said petroleum
products shall be covered by the automatic pricing
mechanism during the said period.
Upon the implementation of full deregulation as provided
herein, the Transition Phase is deemed terminated and the
following laws are repealed:
a) Republic Act No. 6173, as amended;
b) Section 5 of Executive Order No. 172, as amended;
c) Letter of Instruction No. 1431, dated October 15, 1984;
d) Letter of Instruction No. 1441, dated November 20, 1984,
as amended;
e) Letter of Instruction No. 1460, dated May 9, 1985;
f) Presidential Decree No. 1889; and
g) Presidential Decree No. 1956, as amended by Executive
Order No. 137:
Provided, however, That in case full deregulation is started
by the President in the exercise of the authority provided in
this Section, the foregoing laws shall continue to be in force
and effect with respect to LPG, regular gasoline and
kerosene for the rest of the five (5)-month period.
Petitioner contends that Section 19 of R.A. 8479, which prescribes the period
for the removal of price control on gasoline and other finished products and
for the full deregulation of the local downstream oil industry, is patently
contrary to public interest and therefore unconstitutional because within the
short span of five months, the market is still dominated and controlled by an
oligopoly of the three (3) private respondents, namely, Shell, Caltex and
Petron.
The objective of the petition is deceptively simple. It states that if the
constitutional mandate against monopolies and combinations in restraint of
trade 2 is to be obeyed, there should be indefinite and open-ended price
controls on gasoline and other oil products for as long as necessary. This will
allegedly prevent the "Big 3" Shell, Caltex and Petron from price-fixing
and overpricing. Petitioner calls the indefinite retention of price controls as
"partial deregulation".
The grounds relied upon in the petition are:
A.
Sec. 19 OF R.A. NO. 8479 WHICH PROVIDES FOR FULL
DEREGULATION FIVE (5) MONTHS OR EARLIER
FOLLOWING THE EFFECTIVITY OF THE LAW, IS
GLARINGLY PRO-OLIGOPOLY, ANTI-COMPETITION AND
ANTI-PEOPLE, AND IS THEREFORE PATENTLY
UNCONSTITUTIONAL FOR BEING IN GROSS AND
CYNICAL CONTRAVENTION OF THE CONSTITUTIONAL
POLICY AND COMMAND EMBODIED IN ARTCLE XII,
SECTION 19 OF THE 1987 CONSTITUTION AGAINST
470
MONOPOLIES AND COMBINATIONS IN RESTRAINT OF
TRADE.
B.
SAID SECTION 19 OF R.A. No. 8479 IS GLARINGLY PRO-
OLIGOPOLY, ANTI-COMPETITION AND ANTI-PEOPLE,
FOR THE FURTHER REASON THAT IT PALPABLY AND
CYNICALLY VIOLATES THE VERY OBJECTIVE AND
PURPOSE OF R.A. NO. 8479, WHICH IS TO ENSURE A
TRULY COMPETITIVE MARKET UNDER A REGIME OF
FAIR PRICES.
C.
SAID SECTION 19 OF R.A. No. 8479, BEING GLARINGLY
PRO-OLIGOPOLY, ANTI-COMPETITION AND ANTI-
PEOPLE, BEING PATENTLY UNCONSTITUTIONAL AND
BEING PALPABLY VIOLATIVE OF THE LAW'S POLICY
AND PURPOSE OF ENSURING A TRULY COMPETITIVE
MARKET UNDER A REGIME OF FAIR PRICES, IS A VERY
GRAVE AND GRIEVOUS ABUSE OF DISCRETION ON
THE PART OF THE LEGISLATIVE AND EXECUTIVE
BRANCHES OF GOVERNMENT.
D.
PREMATURE FULL DEREGULATION UNDER SECTION 19
OF R.A. NO. 8479 MAY AND SHOULD THEREFORE BE
DECLARED NULL AND VOID EVEN AS THE REST OF ITS
PROVISIONS REMAIN IN FORCE, SUCH AS THE
TRANSITION PHASE OR PARTIAL DEREGULATION WITH
PRICE CONTROLS THAT ENSURES THE PROTECTION
OF THE PUBLIC INTEREST BY PREVENTING THE BIG 3
OLIGOPOLY'S PRICE-FIXING AND OVERPRICING. 3
The issues involved in the deregulation of the downstream oil industry are of
paramount significance. The ramifications, international and local in scope,
are complex. The impact on the nation's economy is pervasive and far-
reaching. The amounts involved in the oil business are immense.
Fluctuations in the supply and price of oil products have a dramatic effect on
economic development and public welfare. As pointed out in the Tatad
decision, few cases carry a surpassing importance on the daily life of every
Filipino. The issues affect everybody from the poorest wage-earners and
their families to the richest entrepreneurs, from industrial giants to humble
consumers.
Our decision in this case is complicated by the unstable oil prices in the world
market. Even as this case is pending, the price of OPEC oil is escalating to
record levels. We have to emphasize that our decision has nothing to do with
worldwide fluctuations in oil prices and the counter-measures of Government
each time a new development takes place.
The most important part of deregulation is freedom from price control.
Indeed, the free play of market forces through deregulation and when to
implement it represent one option to solve the problems of the oil-consuming
public. There are other considerations which may be taken into account such
as the reduction of taxes on oil products, the reinstitution of an Oil Price
Stabilization Fund, the choice between government subsidies taken from the
regular taxpaying public on one hand and the increased costs being
shouldered only by users of oil products on the other, and most important,
the immediate repeal of the oil deregulation law as wrong policy. Petitioner
wants the setting of prices to be done by Government instead of being
determined by free market forces. His preference is continued price control
with no fixed end in sight. A simple glance at the factors surrounding the
present problems besetting the oil industry shows that they are economic in
nature.
R.A. 8479, the present deregulation law, was enacted to implement Article
XII, Section 19 of the Constitution which provides:
471
 The State shall regulate or prohibit monopolies when the
public interest so requires. No combinations in restraint of
trade or unfair competition shall be allowed.
This is so because the Government believes that deregulation will eventually
prevent monopoly. The simplest form of monopoly exists when there is only
one seller or producer of a product or service for which there are no
substitutes. In its more complex form, monopoly is defined as the joint
acquisition or maintenance by members of a conspiracy, formed for that
purpose, of the power to control and dominate trade and commerce in a
commodity to such an extent that they are able, as a group, to exclude actual
or potential competitors from the field, accompanied with the intention and
purpose to exercise such power. 4
Where two or three or a few companies act in concert to control market
prices and resultant profits, the monopoly is called an oligopoly or cartel. It is
a combination in restraint of trade.
The perennial shortage of oil supply in the Philippines is exacerbated by the
further fact that the importation, refining, and marketing of this precious
commodity are in the hands of a cartel, local but made up of foreign-owned
corporations. Before the start of deregulation, the three private respondents
controlled the entire oil industry in the Philippines.
It bears reiterating at the outset that the deregulation of the oil industry is a
policy determination of the highest order. It is unquestionably a priority
program of Government. The Department of Energy Act of 1992 5 expressly
mandates that the development and updating of the existing Philippine
energy program "shall include a policy direction towards deregulation of the
power and energy industry."
Be that as it may, we are not concerned with whether or not there should be
deregulation. This is outside our jurisdiction. The judgment on the issue is a
settled matter and only Congress can reverse it. Rather, the question that we
should address here is are the method and the manner chosen by
Government to accomplish its cherished goal offensive to the Constitution? Is
indefinite price control in the manner proposed by petitioner the only feasible
and legal way to achieve it?
Petitioner has taken upon himself a most challenging task. Unquestionably,
the direction towards which the nation's efforts at economic and social
upliftment should be addressed is a function of Congress and the President.
In the exercise of this function, Congress and the President have obviously
determined that speedy deregulation is the answer to the acknowledged
dominion by oligopolistic forces of the oil industry. Thus, immediately after
R.A. 8180 was declared unconstitutional in the Tatad case, Congress took
resolute steps to fashion new legislation towards the objective of the earlier
law. Invoking the Constitution, petitioner now wants to slow down the
process.
While the Court respects the firm resolve displayed by Congress and the
President, all departments of Government are equally bound by the
sovereign will expressed in the commands of the Constitution. There is a
need for utmost care if this Court is to faithfully discharge its duties as arbitral
guardian of the Constitution. We cannot encroach on the policy functions of
the two other great departments of Government. But neither can we ignore
any overstepping of constitutional limitations. Locating the correct balance
between legality and policy, constitutional boundaries and freedom of action,
and validity and expedition is this Court's dilemma as it resolves the
legitimacy of a Government program aimed at giving every Filipino a more
secure, fulfilling and abundant life.
Our ruling in Tatad is categorical that the Constitution's Article XII, Section
19, is anti-trust in history and spirit. It espouses competition. We have stated
that only competition which is fair can release the creative forces of the
market. We ruled that the principle which underlies the constitutional
provision is competition. Thus:
Sec. 19, Article XII of our Constitution is anti-trust in history
and in spirit. It espouses competition. The desirability of
competition is the reason for the prohibition against restraint
of trade, the reason for the interdiction of unfair competition,
472
 and the reason for regulation of unmitigated monopolies.
Competition is thus the underlying principle of section 19,
Article XII of our Constitution which cannot be violated by
R.A. No. 8180. We subscribe to the observation of Prof.
Gellhorn that the objective of anti-trust law is "to assure a
competitive economy, based upon the belief that through
competition producers will strive to satisfy consumer wants
at the lowest price with the sacrifice of the fewest resources.
Competition among producers allows consumers to bid for
goods and services, and thus matches their desires with
society's opportunity costs." He adds with appropriateness
that there is a reliance upon "the operation of the "market"
system (free enterprise) to decide what shall be produced,
how resources shall be allocated in the production process,
and to whom the various products will be distributed. The
market system relies on the consumer to decide what and
how much shall be produced, and on competition, among
producers to determine who will manufacture it." 6
In his recital of the antecedent circumstances, petitioner repeats in
abbreviated form the factual findings and conclusions which led the Court to
declare R.A. 8180 unconstitutional. The foreign oligopoly or cartel formed by
respondents Shell, Caltex and Petron, their indulging in price-fixing and
overpricing, their blockade tactics which effectively obstructed the entry of
genuine competitors, the dangers posed by the oil cartel to national security
and economic development, and other prevailing sentiments are stated as
axiomatic truths. They are repeated in capsulized context as the current
background facts of the present petition.
The empirical existence of this deplorable situation was precisely the reason
why Congress enacted the oil deregulation law. The evils arising from
conspiratorial acts of monopoly are recognized as clear and present. But the
enumeration of the evils by our Tatad decision was not for the purpose of
justifying continued government control, especially price control. The
objective was, rather, the opposite. The evils were emphasized to show the
need for free competition in a deregulated industry. And to be sure, the
measures to address these evils are for Congress to determine, but they
have to meet the test of constitutional validity.
The Court respects the legislative finding that deregulation is the policy
answer to the problems. It bears stressing that R.A. 8180 was declared
invalid not because deregulation is unconstitutional. The law was struck
down because, as crafted, three key provisions plainly encouraged the
continued existence if not the proliferation of the constitutionally proscribed
evils of monopoly and restraint of trade.
In sharp contrast, the present petition lacks a factual foundation specifically
highlighting the need to declare the challenged provision unconstitutional.
There is a dearth of relevant, reliable, and substantial evidence to support
petitioner's theory that price control must continue even as Government is
trying its best to get out of regulating the oil industry. The facts of the petition
are, in the main, a general dissertation on the evils of monopoly.
Petitioner overlooks the fact that Congress enacted the deregulation law
exactly because of the monopoly evils he mentions in his petition. Congress
instituted the lifting of price controls in the belief that free and fair competition
was the best remedy against monopoly power. In other words, petitioner's
facts are also the reasons why Congress lifted price controls and why the
President accelerated the process. The facts adduced in favor of continued
and indefinite price control are the same facts which supported what
Congress believes is an exercise of wisdom and discretion when it chose the
path of speedy deregulation and rejected Congressman Garcia's economic
theory.
The petition states that it is using the very thoughts and words of the Court in
its Tatad decision. Those thoughts and words, however, were directed
against the tariff differential, the inventory requirement, and predatory pricing,
not against deregulation as a policy and not against the lifting of price
controls.
A dramatic, at times expansive and grandiloquent, reiteration of the same
background circumstances narrated in Tatad does not squarely sustain
473
petitioner's novel thesis that there can be deregulation without lifting price
controls.
Petitioner may call the industry subject to price controls as deregulated. In
enacting the challenged provision, Congress, on the other hand, has
declared that any industry whose prices and profits are fixed by government
authority remains a highly regulated one.
Petitioner, therefore, engages in a legal paradox. He fails to show how there
can be deregulation while retaining government price control. Deregulation
means the lifting of control, governance and direction through rule or
regulation. It means that the regulated industry is freed from the controls,
guidance, and restrictions to which it used to be subjected. The use of the
word "partial" to qualify deregulation is sugar-coating. Petitioner is really
against deregulation at this time.
Petitioner states that price control is good. He claims that it was the
regulation of the importation of finished oil products which led to the exit of
competitors and the consolidation and dominion of the market by an
oligopoly, not price control. Congress and the President think otherwise.
The argument that price control is not the villain in the intrusion and growth of
monopoly appears to be pure theory not validated by experience. There can
be no denying the fact that the evils mentioned in the petition arose while
there was price control. The dominance of the so-called "Big 3" became
entrenched during the regime of price control. More importantly, the
ascertainment of the cause and the method of dismantling the oligopoly thus
created are a matter of legislative and executive choice. The judicial process
is equipped to handle legality but not wisdom of choice and the efficacy of
solutions.
Petitioner engages in another contradiction when he puts forward what he
calls a self-evident truth. He states that a truly competitive market and fair
prices cannot be legislated into existence. However, the truly competitive
market is not being created or fashioned by the challenged legislation. The
market is simply freed from legislative controls and allowed to grow and
develop free from government interference. R.A. 8479 actually allows the
free play of supply and demand to dictate prices. Petitioner wants a
government official or board to continue performing this task. Indefinite and
open-ended price control as advocated by petitioner would be to continue a
regime of legislated regulation where free competition cannot possibly
flourish. Control is the antithesis of competition. To grant the petition would
mean that the Government is not keen on allowing a free market to develop.
Petitioner's "self-evident truth" thus supports the validity of the provision of
law he opposes.
New players in the oil industry intervened in this case. According to them, it is
the free market policy and atmosphere of deregulation which attracted and
brought the new participants, themselves included, into the market. The
intervenors express their fear that this Court would overrule legislative policy
and replace it with petitioner's own legislative program.
The factual allegations of the intervenors have not been refuted and we see
no reason to doubt them. Their argument that the co-existence of many
viable rivals create free market conditions induces competition in product
quality and performance and makes available to consumers an expanded
range of choices cannot be seriously disputed.
On the other hand, the pleadings of public and private respondents both put
forth the argument that the challenged provision is a policy decision of
Congress and that the wisdom of the provision is outside the authority of this
Court to consider. We agree. As we have ruled in Morfe v. Mutuc 7:
(I)t is well to remember that this Court, in the language of
Justice Laurel, "does not pass upon question or wisdom,
justice or expediency of legislation." As expressed by Justice
Tuason: "It is not the province of the courts to supervise
legislation and keep it within the bounds of propriety and
common sense. That is primarily and exclusively a legislative
concern." There can be no possible objection then to the
observation of Justice Montemayor: "As long as laws do not
violate any Constitutional provision, the Courts merely
474
 interpret and apply them regardless of whether or not they
are wise or salutary." For they, according to Justice Labrador,
"are not supposed to override legitimate policy and . . . never
inquire into the wisdom of the law."
It is thus settled, to paraphrase Chief Justice Concepcion
in Gonzales v. Commission on Elections, that only
congressional power or competence, not the wisdom of the
action taken, may be the basis for declaring a statute invalid.
This is as it ought to be: The principle of separation of
powers has in the main wisely allocated the respective
authority of each department and confined its jurisdiction to
such a sphere. There would then be intrusion not allowable
under the Constitution if on a matter left to the discretion of a
coordinate branch, the judiciary would substitute its own. If
there be adherence to the rule of law, as there ought to be,
the last offender should be the courts of justice, to which
rightly litigants submit their controversy precisely to maintain
unimpaired the supremacy of legal norms and prescriptions.
The attack on the validity of the challenged provision
likewise insofar as there may be objections, even if valid and
cogent, on its wisdom cannot be sustained.
In this petition, Congressman Garcia seeks to revive the long settled issue of
the timeliness of full deregulation, which issue he had earlier submitted to
this Court by way of a Partial Motion for Reconsideration in the Tatadcase. In
our Resolution dated December 3, 1997, which has long become final and
executory, we stated:
We shall first resolve petitioner Garcia's linchpin contention
that the full deregulation decreed by R.A. No. 8180 to start at
the end of March 1997 is unconstitutional. For prescinding
from this premise, petitioner suggests that "we simply go
back to the transition period, price control will be revived
through the automatic pricing mechanism based on
Singapore Posted Prices. The Energy Regulatory Board . . .
would play a limited and ministerial role of computing the
monthly price ceiling of each and every petroleum fuel
product, using the automatic pricing formula. While the
OPSF would return, this coverage would be limited to
monthly price increases in excess of P0.50 per liter.
We are not impressed by petitioner Garcia's submission.
Petitioner has no basis in condemning as
unconstitutional per se the date fixed by Congress for the
beginning of the full deregulation of the downstream oil
industry. Our Decision merely faulted the Executive for
factoring the depletion of OPSF in advancing the date of full
deregulation to February 1997. Nonetheless, the error of the
Executive is now a non-issue for the full deregulation set by
Congress itself at the end of March 1997 has already come
to pass. March 1997 is not an arbitrary date. By that date,
the transition period has ended and it was expected that the
people would have adjusted to the role of market forces in
shaping the prices of petroleum and its products. The choice
of March 1997 as the date of full deregulation is a judgment
of Congress and its judgment call cannot be impugned by
this Court. 8
Reduced to its basic arguments, it can be seen that the challenge in this
petition is not against the legality of deregulation. Petitioner does not
expressly challenge deregulation. The issue, quite simply, is the timeliness or
the wisdom of the date when full deregulation should be effective.
In this regard, what constitutes reasonable time is not for judicial
determination. Reasonable time involves the appraisal of a great variety of
relevant conditions, political, social and economic. They are not within the
appropriate range of evidence in a court of justice. It would be an extravagant
extension of judicial authority to assert judicial notice as the basis for the
determination. 9
We repeat that what petitioner decries as unsuccessful is not a final result. It
is only a beginning. The Court is not inclined to stifle deregulation as enacted
475
by Congress from its very start. We leave alone the program of deregulation
at this stage. Reasonable time will prove the wisdom or folly of the
deregulation program for which Congress and not the Court is accountable.
Petitioner argues further that the public interest requires price controls while
the oligopoly exists, for that is the only way the public can be protected from
monopoly or oligopoly pricing. But is indefinite price control the only feasible
and legal way to enforce the constitutional mandate against oligopolies?
Art. 186 of the Revised Penal Code, as amended, punishes as a felony the
creation of monopolies and combinations in restraint of trade. The Solicitor
General, on the other hand, cites provisions of R.A. 8479 intended to prevent
competition from being corrupted or manipulated. Section 11, entitled "Anti-
Trust Safeguards", defines and prohibits cartelization and predatory pricing. It
penalizes the persons and officers involved with imprisonment of three (3) to
seven (7) years and fines ranging from One million to Two million pesos. For
this purpose, a Joint Task Force from the Department of Energy and
Department of Justice is created under Section 14 to investigate and order
the prosecution of violations.
Sec. 8 and 9 of the Act, meanwhile, direct the Departments of Foreign Affairs,
Trade and Industry, and Energy to undertake strategies, incentives and
benefits, including international information campaigns, tax holidays and
various other agreements and utilizations, to invite and encourage the entry
of new participants. Section 6 provides for uniform tariffs at three percent
(3%).
Sec. 13 of the Act provides for "Remedies", under which the filing of actions
by government prosecutors and the investigation of private complaints by the
Task Force is provided. Sections 14 and 15 provide how the Department of
Energy shall monitor and prevent the occurrence of collusive pricing in the
industry.
It can be seen, therefore, that instead of the price controls advocated by the
petitioner, Congress has enacted anti-trust measures which it believes will
promote free and fair competition. Upon the other hand, the disciplined,
determined, consistent and faithful execution of the law is the function of the
President. As stated by public respondents, the remedy against
unreasonable price increases is not the nullification of Section 19 of R.A.
8479 but the setting into motion of its various other provisions.
For this Court to declare unconstitutional the key provision around which the
law's anti-trust measures are clustered would mean a constitutionally
interdicted distrust of the wisdom of Congress and of the determined
exercise of executive power.
Having decided that deregulation is the policy to follow, Congress and the
President have the duty to set up the proper and effective machinery to
ensure that it works. This is something which cannot be adjudicated into
existence. This Court is only an umpire of last resort whenever the
Constitution or a law appears to have been violated. There is no showing of a
constitutional violation in this case.
WHEREFORE, the petition is DISMISSED.
SO ORDERED.
Bellosillo, Melo, Puno, Kapunan, Mendoza, Quisumbing, Purisima, Pardo,
Buena and De Leon, Jr., JJ., concur.
Davide, Jr., C.J., in the result. I also join Mr. Justice Panganiban in his
separate opinion.
Vitug, J., in the result.
Panganiban, J., please see Separate Opinion.
Gonzaga-Reyes, J., took no part. Spouse with counsel for intervenors.
Separate Opinions
476
PANGANIBAN, J., separate opinion;
In essence, deregulation shifts the burden of price control from the
government to the "market forces" in order (1) to eliminate government
intervention that may "do more harm than good" 1 and (2) to achieve a truly
competitive market of fair prices. 2 It is also aimed at removing government
abuse and corruption in price-setting. At bottom, deregulation is supposed to
provide the best goods and services at the cheapest prices.
The policy, however, is not an infallible cure to abuse, for the evil sought to
be avoided may well pass on to the market players, particularly when they
combine to restrain trade or engage in unfair competition. In the words of
Prof. Romulo L. Neri of the Asian Institute of Management, "[t]he marker is
motivated by price and profits (and sadly, not by moral values [or public
interest]). The market does not automatically supply those who need (no
matter how badly they need it) but only those who have the money to buy." 3
The buzz words of the third millennium are "deregulation," "globalization" and
"liberalization." Territorial frontiers are virtually erased by these schemes, as
goods and services are exchanged across borders unhampered by
traditional tariffs, taxes, currency controls, quantitative restrictions and other
protective barriers. Thus, states and governments tend to surrender some of
their authorities and powers to the "market" and to the renewed energy of
laissez faire, such that the threats to civil liberties and human rights, including
economic rights, may shift from government abuses to the more bedeviling
market forces that transcend boundaries and sovereignties. In developing
countries more than in developed ones, such threats are real and ever
present.
Judicial Review
to Checks Abuses
This is where the power of judicial review comes in to examine the legal
effects of these new economic paradigms and, in the present controversy, to
check whether the present Oil Deregulation Law (RA 8479) restrains rather
than promotes free trade, in contravention of the Constitution. True, the
President and Congress, not this Court, have the power and the prerogative
to determine whether to adopt such market policies and, if so, under what
conditions and circumstances. However, all such policies and their
ramifications must conform to the Constitution. Otherwise, this Court has the
duty to strike them down, not because they are unwise or inconvenient, but
because they are constitutionally impermissible.
Doctrinally, policies and acts of the political departments of government may
be voided by this Court on either of two grounds infringement of the
Constitution or grave abuse of discretion. 4 An infringement may be proven by
demonstrating that the words of the law directly contradict a provision of the
fundamental law, or by presenting proof that the law authorizes or enables
the respondents to violate the Constitution.
Petitioner Garcia's Thesis on
Unconstitutionality Concerns Policy
Having set down the doctrinal legal parameters, let me now discuss the
petitioner's thesis. Petitioner Enrique T. Garcia anchors his position on the
alleged unconstitutionality of Section 19 of RA 8479, 5 which sets the full
deregulation of the oil industry five months from the effectivity of the law, on
the argument that said provision directly violates Section 19, Article XII of the
Constitution, which reads as follows:
Sec. 19. The State shall regulate or prohibit monopolies
when the public interest so requires. No combinations in
restraint of trade or unfair competition shall be allowed.
He maintains that once Section 19 of RA 8479 is struck down, the
government will be able to fix and lower petroleum prices indefinitely while
awaiting the advent of "real" competition in the market.
Petitioner contends that the three largest oil companies (the "Big Three")
comprise an oligopoly of the downstream oil industry. Oligopolies, he claims,
477
"negate free market competition and fair prices." He submits that "regulation
through price control . . . is patently required by the public interest [and] the
failure to regulate the oligopoly through price control is patently inimical to the
national interest and patently negates, circumvents and contravenes Section
19, Article XII of the Constitution."
In Tatad v. Secretary of the Department of Energy, 6 this Court defined a
monopoly and a combination in restraint of trade as follows:
A monopoly is a privilege or peculiar advantage vested in
one or more persons or companies, consisting in the
exclusive right or power to carry on a particular business or
trade, manufacture a particular article, or control the sale or
the whole supply of a particular commodity. It is a form of
market structure in which one or only a few firms dominate
the total sales of a product or service. On the other hand, a
combination in restraint of trade is an agreement or
understanding between two or more persons, in the form of
a contract, trust, pool, holding company, or other form of
association, for the purpose of unduly restricting competition,
monopolizing trade and commerce in a certain commodity,
controlling its production, distribution and price, or otherwise
interfering with freedom of trade without statutory authority.
Combination in restraint of trade refers to the means, while
monopoly refers to the end.
In that case, RA 8180, the predecessor of RA 8479, was struck down by this
Court for being contrary to Section 19, Article XII of the Constitution. We took
this action because we found that its provisions on (1) tariff differential, (2)
minimum inventory and (3) predatory pricing "inhibit fair competition,
encourage monopolistic power and interfere with the free interaction of
market forces." We concluded, "The aftermath of R.A. No. 8180 is a
deregulated market where competition can be corrupted and where market
forces can be manipulated by oligopolies."
In my Concurring Opinion in Tatad, I labeled RA 8180 as "a pseudo
deregulation law which in reality restrains free trade and perpetuates a cartel,
an oligopoly" because of the aforecited three provisions, and because
petitioners therein demonstrated to the Court "that the Big Three oil
companies were producing and processing almost identical products which
they were selling to the general public at identical prices. When one company
adjusted its prices upwards or downwards, the other two followed suit at the
same time and by the same amount." 7
In his present Petition, petitioner persistently alleges that "[i]t is self-evident
truth that public interest requires the prevention of monopolistic/oligopolitic
pricing . . . ," and that such "monopolistic/oligopolistic pricing may be
prevented only through price control during the regime of monopoly/oligopoly
or through a truly competitive market under a regime of fair prices." In
support of his allegations, he cites "self-evident truths [which] have
. . . been officially recognized and implemented during more than 20 years of
price control before the passage of the two oil deregulation laws" and which
"have also been recognized and upheld by no less than the Supreme
Court En Banc in the Tatad and Lagman cases . . . ." He contends that "the
Big 3 remain as strong and dominant as ever."
In other words, petitioner believes that there is no valid reason to lift price
control at this time when allegedly there still exists an oligopoly in the
industry. He proposes instead that government control should stand for an
indefinite period until the new players are able to capture a substantial part of
the market.
Unfortunately, however, the foregoing thematic statements and economic
theory of Petitioner Garcia are policy in nature and are arguments supporting
the wisdom of interim government price control. Indeed, "self-evident truths,"
economic theories, deeply-held beliefs, speculative assumptions and
generalizations may be the bases of legislative and executive actions, but
they cannot be substitutes for evidence and legal arguments in a judicial
proceeding. Considered judgment calls of the legislative and the executive
departments are the issues of whether the country should adopt the policy of
complete or partial deregulation, and when such policy should take effect and
over what products or services. These issues come within judicial
478
determination only when there is clear and substantial proof that said policy
and its concomitant variations are violative of the Constitution or are made by
those agencies in grave abuse of their discretion.
The Legal Issue Is Whether Petitioner
Has Submitted Sufficient Proof That the
Big Three Have Violated the Constitution
To be more specific, the pivotal issue before this Court is not whether it is
wiser and more beneficial to empower the government to fix fuel prices;
rather, it is whether petitioner has submitted enough factual bases to justify
the legal conclusion that the Big Three Petron, Shell and Caltex have
combined themselves "in restraint of trade or [to cause] unfair competition,"
to such an extent as to legally justify a striking down of Section 19 of RA
8479. The task of proving this issue is not easy; in fact, it is formidable and
daunting. This is because laws are prima facie presumed constitutional and,
unless clearly shown to be infirm, they will always be upheld. 8 So, too,
regularity in the performance of official functions is the postulate, and any
allegation of grave abuse or irregularity must be proven cogently.
Deregulation per se Is
Not Constitutionally Infirm
A close perusal of the assailed Section 19 of RA 8479 and Section 19 of
Article XII of the Constitution does not readily reveal their irreconcilability.
Indeed, even petitioner admits that the deregulation policy per se is not
contrary to the Constitution. Neither could it be successfully argued that the
implementation of such policy within the five-month phase-in period is per se
anathema to our fundamental law. It is his imperative task therefore to
adduce before the Court factual and legal bases to demonstrate clearly and
cogently the unconstitutionality of the acts of Congress and the President in
adopting and implementing full deregulation of petroleum prices at this time.
In this context, I have pored over the records of this case and searched long
and wide for such factual and legal bases but, other than presumptions and
generalizations that are unsupported by hard evidence, I could not find any.
Petitioner fails to substantiate his allegations that the three oil giants have
engaged, directly or indirectly, in an unholy alliance to fix prices and restrain
trade.
True, retail prices of petroleum products have been increased, to the
consternation of the public, but petitioner has not shown by specific fact or
clear proof how the questioned provision of RA 8479 has been used to
transgress the Constitution. He has not demonstrated that the Big Three
arbitrarily dictate and corrupt the price of oil in a manner violative of the
Constitution.
Petitioner merely resurrects and relies heavily on the arguments, the
statistics and the proofs he submitted two years ago in the first oil
deregulation case, Tatad v. Secretary of the Department of Energy. Needless
to state, those reasons were taken into consideration in said case, and they
indeed helped show the unconstitutionality of RA 8180. But exactly the same
old grounds cannot continue to support petitioner's present allegation that the
major oil companies Petron, Shell and Caltex persist to this date in their
oligopolistic practices, as a consequence of the current Oil Deregulation Law
and in violation of the Constitution. In brief, the legal cause and effect
relationship has not been amply shown.
Petitioner Has Not Proven
Arbitrariness or Despotism
Petitioner harps at the five-month period of transition from price control to full
deregulation provided under Section 19 of RA 8479. He claims that such
short period is not enough to ensure a "truly competitive market" in the
supposed oligopoly of the oil industry. Again, his statement is not backed up
by evidentiary basis. He offers no substantial proof that Congress, in
deciding to lift price controls five months from the effectivity of RA 8475,
gravely abused its discretion. To repeat, it is not within the province of the
479
judiciary to determine whether five months is indeed short and, for that
matter, what length of time is adequate. That is a matter of legislation
addressed to the discretion of our policy makers.
It is basic to our form of government that the Court cannot inquire into the
wisdom or expediency of the acts of the executive or the legislative
department, unless there is a clear showing of constitutional infirmity or grave
abuse of discretion amounting to lack or excess of jurisdiction. 9 "By grave
abuse of discretion is such capricious and whimsical exercise of judgment as
is equivalent to lack of jurisdiction. Mere abuse of discretion is not enough. It
must be grave abuse of discretion, as when the power is exercised in an
arbitrary or despotic manner by reason of passion or personal hostility, and
must be so patent and so gross as to amount to an evasion of a positive duty
or to a virtual refusal to perform the duty enjoined or to act at all in
contemplation of law." 10 These jurisprudential elements of arbitrariness,
despotism, passion and hostility have not been shown to exist under the
present circumstances.
Market Share of New Players
Has Increased Under RA 8479
Historically, deregulation as a policy in the downstream oil industry was
begun in 1996 when new players started to set up and operate their
businesses in the country. That was practically a full three years of
operations, the last two of which saw no significant barriers in terms of tariff
differential, minimum inventory or predatory pricing.
Obviously, the conditions prevailing when the Court struck down RA 8180
two years ago have not been proven to be prevalent at present. In 1996, the
new players had a market share of barely one percent. 11 The new players
have since expanded or increased in number (46 as of June 30, 1999), and
they now have about nine percent share of the market. 12 Significantly, these
new players have intervened in this case in defense of the law. These are the
little Davids who claim that with RA 8479 as their slingshot, they can, given
enough time, fight and win against the three erstwhile unbeatable Goliaths.
Indeed, they believe that the questioned provision has given them the
impetus to compete and thereby eventually show the benefits of
deregulation; namely, the best products at the cheapest prices.
With this factual backdrop and in the dire absence of contrary proof, it would
be specious to conclude that under the aegis of Section 19 of RA 8479, the
Big Three have restrained trade or unduly restricted competition.
Moreover, the three provisions in RA 8180 which were adjudged abhorrent to
the fundamental principles of free enterprise are no longer found in RA 8479.
The depletion of the Oil Price Stabilization Fund, the extraneous factor that
was considered by the President in accelerating the implementation of full
deregulation under RA 8180, was no longer taken into account in the present
milieu. The Court's reasons for declaring the unconstitutionality of RA 8180
are, therefore, not germane to the validity of RA 8479. The petitioner cannot
rely on the same rationale for the purpose of successfully assailing RA 8479.
Indeed, he admits that "the Tatad and Lagman cases . . . did not consider
and adjudicate on the lifting of price control per se, under RA 8180, as an
issue."
Epilogue
In sum, I make no secret of my sympathy for petitioner's frustration at the
inability of our government to arrest the spiraling cost of fuel and energy. 13 I
hear the cry of the poor that life has become more miserable day by day. I
feel their anguish, pain and seeming hopelessness in securing their material
needs.
However, the power to lower petroleum prices through the adoption or the
rejection of viable economic policies or theories does not lie in the Court or
its members. Furthermore, absent sufficient factual evidence and legal
moorings, I cannot vote to declare a law or any provision thereof to be
unconstitutional simply because, theoretically, such action may appear to be
wise or beneficial or practical. Neither can I attribute grave abuse of
discretion to another branch of government without an adequate showing of
480
patent arbitrariness, whim or caprice. Should I do so, I myself will be gravely
abusing my discretion, the very evil that petitioner attributes to the legislature.
WHEREFORE, I vote to DISMISS the Petition.
QUISUMBING, J., concurring opinion;
I fully concur in the ponencia of Justice Consuelo Ynares-Santiago. What I
would like to stress here and now is that, contrary to certain ill-informed
comments in media, petitioner's pleadings were thoroughly dissected at the
hearing where he and his counsel as well as the respondents amply
presented their arguments. Questions of law and policy were also illuminated
from different perspectives in sessions and in memoranda internally
exchanged by members of the Court. Right away, it must be added, no delay
attended the resolution of this petition. For while the Constitution allows two
years, this case was decided en banc in less than half that period, from the
time of submission of the parties' memoranda. Below is a full presentation of
my view on the controversy generated by petitioner's insistence that the
Court overturn an act passed by his own branch of government and
approved by the Chief Executive.
At issue in this special civil action for certiorari under Rule 65 is the
constitutionality of Sec. 19 of Republic Act No. 8479, 1 entitled "An Act
Deregulating the Downstream Oil Industry and for other Purposes". The law
was enacted pursuant to the policy of the State to liberalize and deregulate
the downstream oil industry. R.A. 8479 is the remedial legislation passed by
Congress to cure the infirmities found in Republic Act No. 8180, the first oil
industry deregulation law, otherwise known as the "Downstream Oil Industry
Deregulation Act of 1996".
In a banc decision promulgated on November 5, 1997, the Court declared
R.A. 8180 unconstitutional for having transgressed the constitutional
prohibition against monopolies and combinations in restraint of trade,
specifically mandated in Section 19, Article XII of the Constitution.
Consequently, Executive Order No. 392 (E.O. 392) implementing the
provision of said law was voided. On December 3, 1997, the motions for
reconsideration were denied for utter lack of merit.
Now before us is a challenge to the second oil industry deregulation law, R.A.
8479. The relevant factual and procedural antecedents of the present petition
are as follows:
In 1992, the Philippine government welcomed more liberal economic policies
and started the ground work for privatization of some government-owned or
controlled corporations and deregulation of the oil industry. In due time,
Congress enacted Republic Act No. 7638 on December 9, 1992. It created
the Department of Energy (DOE). Among others, it was tasked, at the end of
four years from the effectivity of R.A. No. 7638 and upon approval of the
President, to institute the "programs and the timetable for the deregulation of
appropriate projects and activities of the energy industry." 2
Following the intent of R.A. 7638, the Philippine National Oil Company
(PNOC) sold 40% of its equity in Petron Corporation to the Aramco Overseas
Company.
Sometime in March 1996, Congress made that daring step towards the
realization of liberating the oil industry from government regulation and
enacted R.A. 8180. On February 8, 1997, President Fidel V. Ramos issued
E.O. 392, which signaled the implementation or start of deregulation in the oil
industry.
Senator Francisco Tatad and Congressmen Enrique Garcia, Edcel Lagman,
Joker Arroyo and Wigberto Taada, among others, filed separate petitions
docketed as G.R. Nos. 124360 and 127867, before the Court. The petitioners
contended that some of the provisions of R.A. No. 8180 violated Section 19
of Article XII of the 1987 Constitution, which states:
The State shall regulate or prohibit monopolies when the
public interest so requires. No combinations in restraint of
trade or unfair competition shall be allowed.
481
The challenged provisions in R.A. 8180 were:
(1) the provision on tariff differential found in Section 5 (b) which states:
Sec. 5 (b) Any law to the contrary notwithstanding and
starting with the effectivity of this Act, tariff duty shall be
imposed and collected on imported crude oil at the rate of
three percent (3%) and imported refined petroleum products
at the rate of seven percent (7%), except fuel oil and LPG,
the rate for which shall be the same as that for imported
crude oil: Provided, that beginning on January 1, 2004 the
tariff rate on imported crude oil and refined petroleum
products shall be the same. Provided, further, That this
provision may be amended only by an Act of Congress.
(2) the minimum inventory clause, in Section 6 which provides:
Sec. 6 To ensure the security and continuity of petroleum
crude and products supply, the DOE shall require the
refiners and importers to maintain a minimum inventory
equivalent to ten percent (10%) of their respective annual
sales volume or forty (40) days of supply, whichever is lower.
(3) the predatory pricing scheme in Section 9:
Sec. 9 To ensure fair competition and prevent cartels and
monopolies in the downstream oil industry, the following acts
shall be prohibited:
xxx xxx xxx
(b) Predatory pricing which means selling or offering to sell
any product at a price unreasonably below the industry
average cost so as to attract customers to the detriment of
competitors.
In declaring provisions of R.A. 8180 unconstitutional, the Court held:
. . . Petron, Shell and Caltex stand as the only major league
players in the oil market. . . . The tariff differential of 4%
therefore works to their immense benefit. . . . New players
that intend to equalize the market power of Petron, Shell and
Caltex by building refineries of their own will have to spend
billions of pesos. Those who will not build refineries but
compete with them will suffer the huge disadvantage of
increasing their product cost by 4%. They will be competing
on an uneven field.
The provision on inventory widens the balance of advantage
of Petron, Shell and Caltex against prospective new players.
Petron, Shell and Caltex can easily comply with the
inventory requirement of R.A. No. 8180 in view of their
existing storage facilities. Prospective competitors again will
find compliance with this requirement difficult as it will entail
a prohibitive cost. . . .
Finally, we come to the provision on predatory pricing which
is defined as ". . . selling or offering to sell any product at a
price unreasonably below the industry average cost so as to
attract customers to the detriment of competitors." . . . The
ban on predatory pricing cannot be analyzed in isolation. Its
validity is interlocked with the barriers imposed by R.A. No.
8180 on the entry of new players. 3
That decision came under sharp attack by critics who accused the Court of
improvidently intervening in the economic affairs of the State. Economists
and businessmen remarked that the decision was a major blow to economic
reforms and an additional burden to the government's already huge budget
deficit as it would require reinstating a subsidy on oil products. 4 Pertinent
portions of the Decision decreed:
482
 With this Decision, some circles will chide the Court for
interfering with an economic decision of Congress. Such
criticism is charmless for the Court is annulling R.A. No.
8180 not because it disagrees with deregulation as an
economic policy but because as cobbled by Congress in its
present form, the law violates the Constitution. The right call
therefor should be for Congress to write a new oil
deregulation law that conforms with the Constitution and not
for this Court to shirk its duty of striking down a law that
offends the Constitution. . . . Indeed when confronted by a
law violating the Constitution, the Court has no option but to
strike it down dead. . . . Hence, for as long as the
Constitution reigns supreme so long will this Court be vigilant
in upholding the economic rights of our people especially
from the onslaught of the powerful. Our defense of the
people's economic rights may appeal heartless because it
cannot be half-hearted.
IN VIEW WHEREFORE, the petitions are granted. R.A. No.
8180 is declared unconstitutional and E.O. No. 372 [392]
void. 5
Public respondents filed their consolidated motion for reconsideration. Some
of the new players, in the industry: Eastern Petroleum Corp., Seaoil
Petroleum Corp., Subic Bay Distribution, Inc., TWA, Inc., and Dubphil Gas
moved to intervene and aired their stand against the total nullification of R.A.
8180. They also averred that they were in favor of declaring the three
offensive provisions unconstitutional. Petitioner Enrique T. Garcia, likewise,
filed a partial motion for reconsideration and pushed for a return only to
partial deregulation in which the main features of deregulation would be
allowed free reign, but the retail price of oil products would still be regulated
through the Energy Regulatory Board.
The Court found no merit in the motion for reconsideration, motion for
intervention, and partial motion for reconsideration. Despite the separability
clause, the Court ruled that the three questioned provisions cannot be struck
down alone, for they were the ones intended to carry out the policy of the law
as embodied in Section 2. 6
On the question of the validity of E.O. 392, the Court held that the Executive
Department failed to follow faithfully the standards set by R.A. 8180 when it
considered the extraneous factor of depletion of the Oil Price Stabilization
Fund (OPSF) fund, instead of limiting the basis for the acceleration of full
deregulation of the industry to only two factors, viz: (1) the time when the
prices of crude oil and petroleum products in the world market are declining,
and (2) the time when the exchange rate of the peso in relation to the US
dollar is stable. 7 By considering another factor, the Executive Department
rewrote the standards set forth in R.A. 8180. 8 In light of the uncertainty of the
consideration given by the Executive department to the depletion of the
OPSF fund for the full deregulation of the oil industry, we ruled that E.O. 392
constituted a misapplication of R.A. 8180. In sum, the implementing order
was found void, while the basic law was held unconstitutional.
On reconsideration, our December 3, 1997 Resolution stressed that R.A.
8180 is unconstitutional because (1) it gave more power to an already
powerful oil oligopoly; (2) it blocked the entry of effective competitors; and (3)
it will sire an even more powerful oligopoly whose unchecked power will
prejudice the interest of the consumers and compromise the general
welfare. 9 The Court reiterated, however, that there was no impediment in re-
enacting R.A. 8180 minus the provisions which are anti-competition.
Consequently, Congress fast-tracked a new oil deregulation law, R.A. 8479,
which was approved and duly signed on February 10, 1998. It took effect an
February 12, 1998 upon the completion of its publication in a newspaper of
general circulation.
Dissatisfied with the amendments incorporated into the new law by his own
colleagues in Congress, Honorable Enrique T. Garcia filed the instant
petition.
483
The Court is the ultimate guardian of our Constitution. By virtue of its power
of judicial review, it is duty-bound in an appropriate case to ascertain whether
a law is free from constitutional flaws. While favoring free competition in the
oil industry, the Court struck down R.A. 8180 because of provisions therein
that contravened the basic law, our Constitution. Before dwelling into the
issues now raised by the petitioner, we must determine whether R.A. 8479
truly cured the invalid portions of R.A. 8180. When we advocated vigilance in
upholding the economic rights of our people, we truly hoped that Congress
would address the defects of R.A. 8180 and not re-enact R.A. 8180 through
the guise of R.A. 8479.
It bears recalling, however, that when the Supreme Court mediates to
allocate constitutional boundaries or invalidates the acts of a coordinate
body, what it is upholding is not its own supremacy but the supremacy of the
Constitution. With this in mind, we now focus on the provisions of R.A. 8479,
in particular the 4% tariff differential, minimum inventory level, and predatory
pricing provisions, which aim to prevent the big three oil companies from
taking advantage of deregulation as a means of cartelizing their operations,
and thereby result in monopolistic and oligopolistic practices condemned by
the basic law of the land.
First, the 4% tariff differential. On December 31, 1997, after the Court
declared with finality that R.A. 8180 is unconstitutional, President Ramos
issued Executive Order No. 461. The Order imposed a three percent (3%)
import duty on petroleum products enumerated therein. The President's
move avoided the revival of the old tariff rates of 10% on crude oil and 20%
on refined oil while the legislative department was in the process of crafting a
new oil deregulation law. Noteworthy, Sec. 6 of R.A. 8479 imposed the same
tariff treatment on petroleum products. Section 6 reads:
Sec. 6 a) Any law to the contrary notwithstanding and
starting with the effectivity of this Act, a single and uniform
tariff duty shall be imposed and collected both on imported
crude oil and imported refined petroleum products at the rate
of three percent (3%): Provided, however, That the President
of the Philippines may, in the exercise of his powers, reduce
such tariff rate when on his judgment such reduction is
warranted, pursuant to Republic Act No. 1937, as amended,
otherwise known as the "Tariff and Customs
Code": Provided, further, That beginning January 1, 2004 or
upon implementation of the Uniform Tariff Program under the
World Trade Organization and ASEAN Free Trade Area
commitments, the tariff rate shall be automatically adjusted
to the appropriate level notwithstanding the provisions under
this Section.
Second, the minimum inventory level requirement. R.A. 8479 eliminated the
provision in R.A. 8180 requiring the refiners and importers to maintain a
minimum inventory equivalent to ten percent (10%) of their respective annual
sales volume or forty (40) days' supply. The minimum inventory requirement
was removed, giving the new entrants opportunities to use their resources to
be more competitive.
Third, predatory pricing. In the December 3, 1997 Resolution of the Court in
G.R. Nos. 124360 and 127867, we expressed the view that the definition of
predatory pricing was too loose to be a real deterrent. 10 Congressman Dante
O. Tinga acknowledged in his explanatory note of House Bill 10057 (H.B.
10057) that the definition of predatory pricing needed specificity, particularly
with respect to the definitive benchmark price and the express anti-
competitive intent. He suggested the Areeda-Turner test and proposed to
redefine predatory pricing. Section 11 par. (b) of R.A. 8479 adopted
Congressman Tinga's recommendation, to wit:
b) Predatory pricing which means selling or
offering to sell any oil product at a price
below the seller's or offeror's average
variable cost for the purpose of destroying
competition, eliminating a competitor or
discouraging a potential competitor from
entering the market: Provided, however,
That pricing below average variable cost in
order to match the lower price of the
competitor and not for the purpose of
destroying competition shall not be deemed
484
 predatory pricing. For purposes of this
prohibition, "variable cost" as distinguished
from "fixed cost", refers to costs such as
utilities or raw materials, which vary as the
output increases or decreases and "average
variable cost" refers to the sum of all
variable costs divided by the number of units
of outputs.
To strengthen the anti-trust safeguards of R.A. 8479, respondents argue that
there are enough provisions to encourage entry of new participants. For
instance, R.A. 8479 allows for active participation of the private sector and
cooperatives in the retail of petroleum through joint ventures to establish
gasoline stations. Moreover, R.A. 8479 requires initial public offering of
shares equivalent to 10% of the capital investments by oil companies.
Respondents also cite that the enforcement of monitoring activities by the
DOE encourages consumer vigilance over unwarranted increase in the
prices of petroleum products. Another safeguard against collusion among
oligopolists is the creation of a task force with members from the DOE and
the Department of Justice (DOJ) to investigate complaints for violations of
R.A. 8479. They assert that the mere dominance of Petron, Pilipinas Shell,
and Caltex, is not per se a combination in restraint of trade. Combination in
restraint of trade, they claim, is the means to achieve monopoly.
Petitioner Garcia adverts to oil deregulation in phases. The new oil
deregulation law has two phases: (1) the transition phase and (2) the full
deregulation phase.
During the transition period, all non-pricing aspects were lifted. Although the
Oil Price Stabilization Fund was abolished, a buffer fund 11 was created to
cover increases in the prices of petroleum products, except premium
gasoline. The Automatic Oil Pricing Mechanism was maintained to
approximate the domestic prices of petroleum products in the international
market. The Energy Regulatory Board (ERB) approved a market-oriented
formula to determine the Wholesale Posted Price of petroleum products
based solely on the changes of either the Singapore Posting of refined
petroleum products, the Singapore Import Parity or the crude landed cost.
After the transition phase comes full deregulation as provided by Sec. 19 of
R.A. 8479, which reads thus:
Sec. 19. Start of Full Deregulation. Full deregulation of
the Industry shall start five (5) months following the effectivity
of this Act: Provided however, That when the public interest
so requires, the President may accelerate the start of full
deregulation upon the recommendation of the Department of
Energy (DOE) and the Department of Finance (DOF) when
the prices of crude oil and petroleum products in the world
market are declining and the value of the peso in relation to
the US dollar is stable, taking into account relevant trends
and prospects: Provided, further, That the foregoing
provision notwithstanding, the five (5)-month Transition
Phase shall continue to apply to LPG, regular gasoline and
kerosene as socially-sensitive petroleum products and said
petroleum products shall be covered by the automatic pricing
mechanism during the said period. 12
Note that the abovecited transition phase of five months could be
abbreviated when public interest so requires. The President's power to
accelerate the start of full deregulation, however, depended upon the
recommendation of the Departments of Energy and Finance.
Accordingly as recommended, on March 14, 1998, President Ramos issued
E.O. 471 to accelerate the implementation of full deregulation. Partinently the
E.O., which implements R.A. 8479, provides:
WHEREAS, Republic Act No. 7638, otherwise known as the
"Department of Energy Act of 1992," provides that, "at the
end of four years from its effectivity last December 1992, the
Department [of Energy] shall, upon approval of the
President, institute the programs and timetable of
deregulation of appropriate energy projects and activities of
the energy sector;"
485
WHEREAS, Section 19 of Republic Act No. 8479, otherwise
known as the "Downstream Oil Industry Deregulation Act of
1998," provides that [T]hat "when the public interest so
requires, the President may accelerate the start of full
deregulation upon the recommendation of the Department of
Energy (DOE) and the Department of Finance (DOF) when
the prices of crude oil and petroleum products in the world
market are declining and the value of the peso in relation to
the US dollar is stable, taking into account relevant trends
and prospects: Provided, further, That the foregoing
provision notwithstanding, the five (5)-month Transition
Phase shall continue to apply to LPG, regular gasoline and
kerosene as socially-sensitive petroleum products and said
petroleum products shall be covered by the automatic pricing
mechanism during said period;
WHEREAS, pursuant to the joint recommendation of the
Department of Energy and the Department of Finance, and
in the interest of the consuming public, recent developments
favor the acceleration of the start of full deregulation of the
downstream oil industry because: (i) the prices of crude oil
and petroleum products in the world market are beginning to
be stable and on a downtrend since January 1998; and (ii)
the exchange rate of the peso in relation to the US dollar has
been stable for the past three months, averaging at around
P40.00 to one US dollar;
WHEREAS, Executive Order No. 377 dated 31 October
1996 provides for an institutional framework for the
administration of the deregulated industry by defining the
functions and responsibilities of various government
agencies;
WHEREAS, pursuant to Republic Act No. 8479, the
deregulation of the industry will foster a truly competitive
market which can better achieve the social policy objectives
of fair prices and adequate, continuous supply of
environmentally-clean and high quality petroleum products;
NOW, THEREFORE, I, FIDEL V. RAMOS, President of the
Philippines, by the powers vested in me by law, do hereby
declare the full deregulation of the downstream oil
industry; provided, however, that LPG, regular gasoline and
kerosene shall be covered by the Automatic Pricing Formula
pursuant to R.A. No. 8479. 13
The implementing guidelines for the acceleration of full deregulation of the
industry, set forth in E.O. 471, required the concurrence of two
conditions, viz.: (1) the downtrend of prices of oil and petroleum products,
and (2) stability of exchange rate of peso in relation to US dollar, taking into
account relevant trends and prospects.
However, E.O. 471 carried an additional proviso, the transition phase was
continued for LPG, regular gas and kerosene. These socially sensitive
products continued to be covered by the automatic pricing mechanism until
July of 1998. Only then was full deregulation of the industry effected, and the
automatic pricing mechanism was also lifted for LPG, regular gas and
kerosene.
Turning now to herein petition, Congressman Enrique Garcia raised the
following issues to assail the provision implementing full deregulation of the
oil industry:
I. Sec. 19 OF R.A. NO. 8479 which provides for full
deregulation five (5) months or earlier following the
effectivity of the law, is glaringly pro-oligopoly, anti-
competition and anti-people, and is therefore patently
unconstitutional for being in gross and cynical contravention
of the constitutional policy and command embodied in
486
 Article XII, Section 19 of the 1987 Constitution against
monopolies and combinations in restraint of trade.
II. Said Section 19 of R.A. No. 8479 is glaringly pro-oligopoly,
anti-competition and anti-people, for the further reason that it
palpably and cynically violates the very objective and
purpose of R.A. No. 8479, which is to ensure a truly
competitive market under a regime of fair prices.
III. Said Section 19 of R.A. No. 8479, being glaringly pro-
oligopoly, anti-competition and anti-people, being patently
unconstitutional and being palpably violative of the law's
policy and purpose of ensuring a truly competitive market
under a regime of fair prices, is a very grave and grievous
abuse of discretion on the part of the legislative and
executive branches of government.
IV. Premature full deregulation under Section 19 of R.A. No.
8479 may and should therefore be declared null and void
even as the rest of its provisions remain in force, such as the
transition phase or partial deregulation with price controls
that ensures the protection of the public interest by
preventing the big 3 oligopoly's price-fixing and overpricing.
These issues may be synthesized into one: Whether or not the full
implementation of deregulating the downstream oil industry as provided in
Section 19 of R.A. 8479 violates the Constitutional mandate of free
competition in a liberalized oil industry under Section 19, Article XII of the
1987 Philippine Constitution?
Petitioner Garcia principally faults Section 19 of the new R.A. 8479 as well as
E.O. 471 now for violating the constitutional prohibition against monopoly,
and being anti-competition.
Petitioner claims that there was a premature full deregulation under Section
19 of R.A. 8479. He protests the acceleration of the full implementation of
deregulation decreed under E.O. 471. Petitioner insists that the short
transition period is pro-oligopoly, anti-competition and anti-people and is
patently unconstitutional because the period is too short to establish true
competition in the local oil industry. True competition, he claims, exists only
when there can be a sizable number of players, and at present, the new
players comprise only 3% of the market share which does not put up real
competition against the "Big Three" oil companies (Caltex, Shell and Petron).
What he suggests is to prolong the transition phase or partial deregulation
with price controls while the big oil companies are still dominating the market,
to ensure the protection of the public interest and prevent the big three
oligopolies from fixing the price or overpricing. He further contends that the
automatic oil pricing mechanism will enable the domestic price of petroleum
products to approximate and promptly reflect the price of oil in the
international market. He also stressed that new players may come under an
indefinite or open-ended transition phase.
Commenting on the petition, respondents claim that the propriety of full
deregulation involves the wisdom of Congress and is therefore, a non-
justiciable issue. They counter petitioner's arguments by pointing out that the
shortening of the transition period and acceleration of full deregulation were
decreed pursuant to the joint recommendation of the DOE and DOF, based
on the concurring conditions of a downtrend of crude oil in world market and
the stability of the exchange rate of P40.00 to US$1.
The respondents argue that the short transition period is not violative of the
Constitution because the new players were given until July 1998 to set up
their businesses as they have in fact, and they have captured at least 3% of
the total oil market.
Respondent Petron asserts that full deregulation protects the public from the
greed and exploitation of business. Petron further contends that competition
can be ushered in only with the certainty of price deregulation and the short
transition period would guarantee the investors that within a manageable
period, they would be able to set prices, taking into account their investment
and operating costs. It claims an indefinite transition period would discourage
new investors because the new players had hoped that within a reasonable
time, price regulation would be lifted.
487
The Solicitor General filed a comment on behalf of the public respondents,
interposing economic arguments that price regulation reduces economic
efficiency and is prejudicial to the public. 14 Public respondents assert that the
acceleration of full deregulation is based on existing conditions and sound
economic theory.
Respondent Shell filed a rejoinder, stating that to prolong the transition period
will revive the automatic pricing mechanism which means that it will only
replace the mode of price regulation by still another regulatory scheme. It
argues that if Sec. 19 of R.A. 8479 were to be struck down, full deregulation
will never take place and it would render the entire law different from what
was passed by Congress.
Petitioner counters that he is questioning the constitutionality rather than the
wisdom of Sec. 19 of R.A. 8479; it is pro-oligopoly, hence patently
unconstitutional. Petitioner further avers that condemnation against
monopolies and combination in restraint of trade should be given legal
sanction by the Court. Petitioner maintains that the nullification of Sec. 19 of
R.A. 8479 will result in partial deregulation, where there will be no regulation
as regards the importation of petroleum products and the establishment of
gas station, but oil pricing would be regulated based on the Automatic Pricing
Mechanism.
Note that during the review of R.A. 8180 by the Court in G.R. No. 127867,
petitioners Edcel C. Lagman, Arroyo, et al., likewise questioned the
constitutionality of Section 15 of R.A. No. 8180 15 as well as E.O. No.
392 16 which provided for the implementation of full deregulation. The Court
decreed thus:
. . . Full deregulation at the end of March 1997 is mandatory
and the Executive has no discretion to postpone it for any
purported reason. Thus, the law is complete on the question
of the final date of full deregulation. The discretion given to
the President is to advance the date of full deregulation
before the end of March 1997. Section 15 lays down the
standard to guide the judgment of the President he is to
time it as far as practicable when the prices of crude oil and
petroleum products in the world market are declining and
when the exchange rate of the peso in relation to the US
dollar is stable.
xxx xxx xxx
It ought to follow that the argument that E.O. No. 392 is null
and void as it was based on indeterminate standards set by
R.A. 8180 must likewise fail. If that were all to the attack
against the validity of E.O. No. 392, the issue need not
further detain our discourse. 17
In G.R. No. 127867, Congressman Garcia filed an Urgent Motion for Partial
Reconsideration from the November 5, 1997, decision of the Court. He
sought to strike down only the premature full deregulation but maintain partial
deregulation under R.A. No. 8180 with price controls and price mechanism
based on Singapore Posted Prices. The Court resolved the issue this way:
We shall first resolve petitioner Garcia's linchpin contention
that the full deregulation decreed by R.A. No. 8180 to start at
the end of March 1997 is unconstitutional. For prescinding
from this premise petitioner suggests that "we simply go
back to the transition period under R.A. No. 8180." Under the
transition period, price control will be revived through the
automatic pricing mechanism based on Singapore Posted
Prices. The Energy Regulatory Board . . . would play a
limited and ministerial role of computing the monthly price
ceiling of each and every petroleum fuel product, using the
automatic pricing formula. . . .
We are not impressed by petitioner Garcia's submission.
Petitioner has no basis in condemning as
unconstitutional per se the date fixed by Congress for the
beginning of the full deregulation of the downstream oil
industry. . . . The choice of March 1997 as the date of full
488
 deregulation is a judgment of Congress and its judgment call
cannot be impugned by this Court. 18
Now in the present petition, Garcia insists on his old plea for a return only to
partial deregulation of the downstream oil industry, wherein the main features
of deregulation would be permitted but the retail prices of oil products would
still be regulated through an Automatic Pricing Mechanism.
However, I find his contentions to be lacking legal basis, even if his proposal
appears to be expedient, or even beneficial, especially to the poor. As the
Court said Taada vs. Tuvera, 19 "[T]his Court is not called upon to rule on the
wisdom of the law or to repeal it or modify it if we find it impractical. That is
not our function. That function belongs to the legislator. Our task is merely to
interpret and apply the law as conceived and approved by the political
departments of the government in accordance with the prescribed
procedure." 20
For if we allow an open-ended transition period to maintain government
pricing regulation, we would have suspended the much-needed liberalization
of the downstream oil industry. It would certainly run counter to the
government's policy of allowing free interplay of market forces, with minimal
government supervision. In fact, it could defeat full deregulation to ensure fair
competition in the downstream oil industry, where new and prospective
players are on even level playing field with the Big Three.
Furthermore, to base the implementation of full deregulation on the presence
of a sizable number of new investors, as petitioner would want us to do,
would be to legislate a floating provision dependent on the happening of a
contingent event. To do so, would be to undermine the very purpose of the
law, which is to liberalize and deregulate the downstream oil industry in order
to ensure a truly competitive market under a regime of fair prices, adequate
and continuous supply, environmentally clean and high-quality petroleum
products.
Consequently, to heed the petitioner's prayer, this Court would have to
legislate, a power granted only to Congress. The operation of a statute may
be duly suspended only by authority of the legislature. 21 Indeed, a
suspension of a valid statute must rest upon legislative action; 22 it may not
be effected solely by a judicial act. 23 Clearly it is a policy decision of the
legislative and executive departments in whose turf we must not tread, under
the principle of separation of powers. The term "political question" connotes
what it means in ordinary parlance, namely, a question of policy. 24 It refers to
"those questions which, under the Constitution, are to be decided by the
people in their sovereign capacity, or in regard to which full discretionary
authority has been delegated to the legislative or executive of the
government." 25 If is concerned with issues dependent upon the wisdom, not
legality, of a particular measure. 26 The judiciary does not directly settle policy
issues. Under our system of government, policy issues are within the domain
of the political branches of government and of the people themselves as the
repository of all state powers. 27
In PLDT vs. National Telecommunications Commission, 28 the ultimate
considerations cited in matters affecting vital industries, are the public need,
public interest, and the common good. In that case, the Court said:
Free competition in the industry may also provide the answer
to a much-desired improvement in the quality and delivery of
this type of public utility, to improved technology, fast and
handy mobile service, and reduced user dissatisfaction. 29
Similarly, the above-mentioned considerations could undergird the nation's
energy and other economic policies. The liberalization of the oil industry is a
reform program initiated by Congress to free the government from the
obligation of infusing funds to subsidize increases in the prices of oil
products. Such funds may now be utilized for other much needed programs
with a public purpose.
Well-established is the principle that every law has in its favor the
presumption of constitutionality. 30 To declare a law unconstitutional, the
repugnancy of that law to the Constitution must be clear and unequivocal.
But we recognize that even if a law is aimed at the attainment of some public
good, still its provisions cannot infringe upon constitutional rights. 31That
489
infringement, however, must be proved and established persuasively to
invalidate a provision of a law, if not the entire law itself.
Petitioner ought to have demonstrated the need for the extension of the
transition period. But, in fact, he could not downplay the DOE report that new
players accounted for a sizable share of the market, some 18.1 percent of
the total product imports, and competing companies are keen in joining the
Philippine oil industry since the full implementation of deregulation. And, as
stressed by the public respondents in the rejoinder dated January 7, 1999:
Since 1996, new players have taken a significant share in
the market, to wit: (a) seven (7) new players have entered
the downstream oil industry before RA No. 8180; (b) during
the effectivity of RA No. 8180, twenty eight (28) new players
have engaged in a number of downstream oil industry
activities; and (c) three (3) new players have engaged in fuel
bulk marketing, while two (2) new players have started to
establish gasoline service stations immediately before and
during the effectivity of RA No. 8479. At the same time, many
more companies have indicated their intention to enter the
downstream oil industry business. 32
The new players, according to industry experts, are gradually making
a dent in the local market and their share is expected to surge in a
few years when their retail stations are established. 33
However, the presence or entry of numerous players in the oil industry is not
a condition precedent before a full deregulated petroleum industry could be
had. But we recognize that it is precisely the implementation of full
deregulation that would serve to entice new players to compete against the
so-called Big Three. Hopefully, this move would prevent the powerful oil
companies from manipulating prices, to the prejudice of the consumers and
the public in general.
The petitioner strongly manifested his fears concerning pernicious
consequences of total lifting of price control in the oil industry. His main
concern is that the government might be helpless in case the Big 3 (Shell,
Petron and Caltex) overprice their petroleum products. But the people are not
without legal recourse. The public can manifest outright objections to
overpricing and report to the Department of Energy any unreasonable
increase in the prices of these oil products. The monitoring power of the DOE
is embodied in Sec. 14 of R.A. 8479, and its implementing rule, Section 18 of
DOE Circular No. 98-03-004, thus:
R.A. 8479, Sec. 14 Powers and Functions of the DOE and
DOE Secretary:
Monitoring
a) The DOE shall monitor and publish daily international
crude oil prices, as well as follow the movements of
domestic oil prices. It shall likewise monitor the quality of
petroleum products and stop the operation of business
involved in the sale of petroleum products which do not
comply with the national standards of quality that are aligned
with the national standards/protocols of quality. . . .
xxx xxx xxx
d) Any report from any person of an unreasonable rise in the
prices of petroleum products shall be immediately acted
upon. For this purpose, the creation of DOE-DOJ Task Force
is hereby mandated to determine within thirty (30) days the
merits of the report and initiate the necessary actions
warranted under the circumstances: Provided that nothing
herein shall prevent the said task force from investigating
and/or filing the necessary complaint with the proper court or
agency motu propio.
Department Circular No. 98-03-004, Sec. 18 Powers and
Functions of the DOE and DOE Secretary
490
Monitoring
The DOE shall monitor the following pursuant to Section 14
of the Act. Any misrepresentation, mislabeling, concealment
or fraud, shall be subject to penalties under existing
applicable laws.
a. Prices
The DOE shall monitor and publish
international oil prices as well as follow the
movement of domestic oil prices.
(1) Price Display Boards
For the convenience of the
public, all retailers of
petroleum products shall
display the prices of each
type of petroleum product
sold in gasoline stations in
prominently installed price
display boards with
backgrounds preferably
conforming to the color
coding scheme for the
product, such as: green for
Unleaded Premium
Gasoline, red for Premium
Low Lead Gasoline, orange
for Regular Gasoline, yellow
for Diesel Fuel, and white
for Kerosene. In the case of
LPG (which has no product
color), the price display
board may be light blue in
color. The numeric entries in
these boards shall be at
least six (6) inches in
height.
The price display boards
shall be properly installed
and labeled not later than
June 30, 1998. Failure to
comply with this
requirements shall be
penalized pursuant to
Section 24 of the Act.
(2) Unreasonable Rise in
Prices
Any report from any person
of an unreasonable rise in
the prices of petroleum
products shall be
immediately acted upon by
the DOE-DOJ Task Force in
accordance with Section 17
of this IRR. The said Task
force shall determine within
thirty (30) days the merits of
the report and shall initiate
the necessary actions
warranted under the
circumstances.
A calculus of fear and pessimism, however, does not justify the remedy
petitioner seeks: that we now overturn a law enacted by Congress and
approved by the Chief Executive. The Court must act on valid legal reasons
that will explain why we should interfere with vital legislation. 34 To strike
491
down a provision of law we need a clear showing that what the Constitution
prohibits, the statute has allowed to be done. 35 Since there is no clear
showing that Section 19 of R.A. 8479 has violated the constitutional
prohibition against monopolies and combinations in restraint of trade, I vote
that the present petition be DISMISSED.

492
493
 The Anti-Trust Act of July 2, 1890, c. 647, 26 Stat. 209, should be construed
in the light of reason; and, as so construed, it prohibits all contracts and
combination which amount to an unreasonable or undue restraint of trade in
interstate commerce.

The combination of the defendants in this case is an unreasonable and

undue restraint of trade in petroleum and its products moving in interstate
commerce, and falls within the prohibitions of the act as so construed.

Where one of the defendants in a suit, brought by the Government in a

Circuit Court of the United States under the authority of 4 of the Anti-Trust
Act of July 2, 1890, is within the district, the court, under the authority of 5
of that act, can take jurisdiction and order notice to be served upon the
U.S. Supreme Court nonresident defendants.

Standard Oil Co. of New Jersey v. United States, 221 U.S. Allegations as to facts occurring prior to the passage of the Anti-Trust Act
1 (1910) may be considered solely to throw light on acts done after the passage of the
act.
Standard Oil Co. of New Jersey v. United States
Page 221 U. S. 2
Argued March 14, 15, 16, 1910
The debates in Congress on the Anti-Trust Act of 1890 show that one of the
Restored to docket for reargument April 11, 1910 influences leading to the enactment of the statute was doubt as to whether
there is a common law of the United States governing the making of
Reargued January 12, 13, 16, 17, 1911 contracts in restraint of trade and the creation and maintenance of
monopolies in the absence of legislation.
Decided May 15, 1911
While debates of the body enacting it may not be used as means for
221 U.S. 1 interpreting a statute, they may be resorted to as a means of ascertaining the
conditions under which it was enacted.
APPEAL FROM THE CIRCUIT COURT OF THE UNITED STATES
The terms "restraint of trade," and "attempts to monopolize," as used in the
FOR THE EASTERN DISTRICT OF MISSOURI Anti-Trust Act, took their origin in the common law, and were familiar in the
law of this country prior to and at the time of the adoption of the act, and their
meaning should be sought from the conceptions of both English and
Syllabus
American law prior to the passage of the act.

494
The original doctrine that all contracts in restraint of trade were illegal was
long since so modified in the interest of freedom of individuals to contract that
the contract was valid if the resulting restraint was only partial in its
operation, and was otherwise reasonable.
The early struggle in England against the power to create monopolies
resulted in establishing that those institutions were incompatible with the
English Constitution.
At common law, monopolies were unlawful because of their restriction upon
individual freedom of contract and their injury to the public and at common
law, and contracts creating the same evils were brought within the prohibition
as impeding the due course of, or being in restraint of, trade.
At the time of the passage of the Anti-Trust Act, the English rule was that the
individual was free to contract and to abstain from contracting and to
exercise every reasonable right in regard thereto, except only as he was
restricted from voluntarily and unreasonably or for wrongful purposes
restraining his right to carry on his trade. Mogul Steamship Co. v.
McGregor, 1892, A.C. 25.
A decision of the House of Lords, although announced after an event, may
serve reflexly to show the state of the law in England at the time of such
event.
This country has followed the line of development of the law of England, and
the public policy has been to prohibit, or treat as illegal, contracts, or acts
entered into with intent to wrong the public and which unreasonably restrict
competitive conditions, limit the right of individuals, restrain the free flow of
commerce, or bring about public evils such as the enhancement of prices.
Page 221 U. S. 3
The Anti-Trust Act of 1890 was enacted in the light of the then existing
practical conception of the law against restraint of trade, and the intent of
Congress was not to restrain the right to make and enforce contracts,
whether resulting from combinations or otherwise, which do not unduly
restrain interstate or foreign commerce, but to protect that commerce from
contracts or combinations by methods, whether old or new, which would
constitute an interference with, or an undue restraint upon, it.
The Anti-Trust Act contemplated and required a standard of interpretation,
and it was intended that the standard of reason which had been applied at
the common law should be applied in determining whether particular acts
were within its prohibitions.
The word "person" in 2 of the Anti-Trust Act, as construed by reference to
8 thereof, implies a corporation as well as an individual.
The commerce referred to by the words "any part" in 2 of the Antitrust Act,
as construed in the light of the manifest purpose of that act, includes
geographically any part of the United States and also any of the classes of
things forming a part of interstate or foreign commerce.
The words "to monopolize" and "monopolize" as used in 2 of the Anti-Trust
Act reach every act bringing about the prohibited result.
Freedom to contract is the essence of freedom from undue restraint on the
right to contract.
In prior cases where general language has been used, to the effect that
reason could not be resorted to in determining whether a particular case was
within the prohibitions of the Anti-Trust Act, the unreasonableness of the acts
under consideration was pointed out, and those cases are only authoritative
by the certitude that the rule of reason was applied; United States v. Trans-
Missouri Freight Association, 166 U. S. 290, and United States v. Joint Traffic
Association, 171 U. S. 505, limited and qualified so far as they conflict with
the construction now given to the Anti-Trust Act of 1890.
The application of the Anti-Trust Act to combinations involving the production
of commodities within the States does not so extend the power of Congress
495
to subjects dehors its authority as to render the statute
unconstitutional. United States v. E. C. Knight Co., 156 U. S. 1, distinguished.
The Anti-Trust Act generically enumerates the character of the acts prohibited
and the wrongs which it intends to prevent, and is susceptible of being
enforced without any judicial exertion of legislative power.
The unification of power and control over a commodity such as petroleum
Page 221 U. S. 4
and its products by combining in one corporation the stocks of many other
corporations aggregating a vast capital gives rise, of itself, to the prima
facie presumption of an intent and purpose to dominate the industry
connected with, and gain perpetual control of the movement of, that
commodity and its products in the channels of interstate commerce in
violation of the Anti-Trust Act of 1890, and that presumption is made
conclusive by proof of specific acts such as those in the record of this case.
The fact that a combination over the products of a commodity such as
petroleum does not include the crude article itself does not take the
combination outside of the Anti-Trust Act when it appears that the
monopolization of the manufactured products necessarily controls the crude
article.
Penalties which are not authorized by the law cannot be inflicted by judicial
authority.
The remedy to be administered in case of a combination violating the Anti-
Trust Act is two-fold: first, to forbid the continuance of the prohibited act, and
second, to so dissolve the combination as to neutralize the force of the
unlawful power.
The constituents of an unlawful combination under the Anti-Trust Act should
not be deprived of power to make normal and lawful contracts, but should be
restrained from continuing or recreating the unlawful combination by any
means whatever, and a dissolution of the offending combination should not
deprive the constituents of the right to live under the law, but should compel
them to obey it.
In determining the remedy against an unlawful combination, the court must
consider the result, and not inflict serious injury on the public by causing a
cessation of interstate commerce in a necessary commodity.
173 Fed. Rep. 177, modified and affirmed.
The facts, which involve the construction of the Sherman Anti-Trust Act of
July 2, 1890, and whether defendants had violated its provisions, are stated
in the opinion.
Page 221 U. S. 30
MR. CHIEF JUSTICE WHITE delivered the opinion of the court.
The Standard Oil Company of New Jersey and 33 other corporations, John
D. Rockefeller, William Rockefeller, and five other individual defendants
prosecute this appeal to reverse a decree of the court below. Such decree
was entered upon a bill filed by the United States under authority of 4 of the
act of July 2, 1890, c. 647, p. 209, known as the Anti-Trust Act, and had for
its object the enforcement of the provisions of that act. The record is
inordinately voluminous, consisting of twenty-three volumes of printed matter,
aggregating about twelve thousand pages, containing a vast amount of
confusing and conflicting testimony
Page 221 U. S. 31
relating to innumerable, complex and varied business transactions, extending
over a period of nearly forty years. In an effort to pave the way to reach the
subjects which we are called upon to consider, we propose at the outset,
following the order of the bill, to give the merest possible outline of its
contents, to summarize the answer, to indicate the course of the trial, and
point out briefly the decision below rendered.
496
The bill and exhibits, covering one hundred and seventy pages of the printed
record, was filed on November 15, 1906. Corporations known as Standard
Oil Company of New Jersey, Standard Oil Company of California, Standard
Oil Company of Indiana, Standard Oil Company of Iowa, Standard Oil
Company of Kansas, Standard Oil Company of Kentucky, Standard Oil
Company of Nebraska, Standard Oil Company of New York, Standard Oil
Company of Ohio, and sixty-two other corporations and partnerships, as also
seven individuals were named as defendants. The bill was divided into thirty
numbered sections, and sought relief upon the theory that the various
defendants were engaged in conspiring
"to restrain the trade and commerce in petroleum, commonly called 'crude
oil,' in refined oil, and in the other products of petroleum, among the several
States and Territories of the United States and the District of Columbia and
with foreign nations, and to monopolize the said commerce."
The conspiracy was alleged to have been formed in or about the year 1870
by three of the individual defendants, viz: John D. Rockefeller, William
Rockefeller, and Henry M. Flagler. The detailed averments concerning the
alleged conspiracy were arranged with reference to three periods, the first
from 1870 to 1882, the second from 1882 to 1899, and the third from 1899 to
the time of the filing of the bill.
The general charge concerning the period from 1870 to 1882 was as follows:
Page 221 U. S. 32
"That during said first period, the said individual defendants, in connection
with the Standard Oil Company of Ohio, purchased and obtained interests
through stock ownership and otherwise in, and entered into agreements with,
various persons, firms, corporations, and limited partnerships engaged in
purchasing, shipping, refining, and selling petroleum and its products among
the various States for the purpose of fixing the price of crude and refined oil
and the products thereof, limiting the production thereof, and controlling the
transportation therein, and thereby restraining trade and commerce among
the several States, and monopolizing the said commerce."
To establish this charge, it was averred that John D. and William Rockefeller
and several other named individuals, who, prior to 1870, composed three
separate partnerships engaged in the business of refining crude oil and
shipping its products in interstate commerce, organized in the year 1870 a
corporation known as the Standard Oil Company of Ohio and transferred to
that company the business of the said partnerships, the members thereof
becoming, in proportion to their prior ownership, stockholders in the
corporation. It was averred that the other individual defendants soon
afterwards became participants in the illegal combination and either
transferred property to the corporation or to individuals to be held for the
benefit of all parties in interest in proportion to their respective interests in the
combination; that is, in proportion to their stock ownership in the Standard Oil
Company of Ohio. By the means thus stated, it was charged that, by the year
1872, the combination had acquired substantially all but three or four of the
thirty-five or forty oil refineries located in Cleveland, Ohio. By reason of the
power thus obtained and in further execution of the intent and purpose to
restrain trade and to monopolize the commerce, interstate as well as
intrastate, in petroleum and its products, the bill alleged that the combination
and its members
Page 221 U. S. 33
obtained large preferential rates and rebates in many and devious ways over
their competitors from various railroad companies, and that, by means of the
advantage thus obtained, many, if not virtually all, competitors were forced
either to become members of the combination or were driven out of
business, and thus, it was alleged, during the period in question, the
following results were brought about: a. that the combination, in addition to
the refineries in Cleveland which it had acquired as previously stated, and
which it had either dismantled to limit production or continued to operate,
also from time to time acquired a large number of refineries of crude
petroleum, situated in New York, Pennsylvania, Ohio and elsewhere. The
properties thus acquired, like those previously obtained, although belonging
to and being held for the benefit of the combination, were ostensibly
divergently controlled, some of them being put in the name of the Standard
Oil Company of Ohio, some in the name of corporations or limited
partnerships affiliated therewith, or some being left in the name of the original
497
owners, who had become stockholders in the Standard Oil Company of Ohio,
and thus members of the alleged illegal combination. b. That the combination
had obtained control of the pipelines available for transporting oil from the oil
fields to the refineries in Cleveland, Pittsburgh, Titusville, Philadelphia, New
York and New Jersey. c. That the combination during the period named had
obtained a complete mastery over the oil industry, controlling 90 percent of
the business of producing, shipping, refining and selling petroleum and its
products, and thus was able to fix the price of crude and refined petroleum
and to restrain and monopolize all interstate commerce in those products.
The averments bearing upon the second period (1882 to 1899) had relation
to the claim:
"That, during the said second period of conspiracy, the defendants entered
into a contract and trust agreement
Page 221 U. S. 34
by which various independent firms, corporations, limited partnerships and
individuals engaged in purchasing, transporting, refining, shipping and selling
oil and the products thereof among the various States turned over the
management of their said business, corporations and limited partnerships to
nine trustees, composed chiefly of certain individuals defendant herein,
which said trust agreement was in restraint of trade and commerce and in
violation of law, as hereinafter more particularly alleged."
The trust agreement thus referred to was set out in the bill. It was made in
January, 1882. By its terms, the stock of forty corporations, including the
Standard Oil Company of Ohio, and a large quantity of various properties
which had been previously acquired by the alleged combination and which
was held in diverse forms, as we have previously indicated, for the benefit of
the members of the combination, was vested in the trustees and their
successors, "to be held for all parties in interest jointly." In the body of the
trust agreement was contained a list of the various individuals and
corporations and limited partnerships whose stockholders and members, or a
portion thereof, became parties to the agreement. This list is in the margin.
[Footnote 1]
Page 221 U. S. 35
The agreement made provision for the method of controlling and managing
the property by the trustees, for the formation of additional manufacturing,
etc., corporations
Page 221 U. S. 36
in various States, and the trust, unless terminated by a mode specified, was
to continue "during the lives of the survivors and survivor of the trustees
named in the agreement and for twenty-one years thereafter." The
agreement provided for the issue of Standard Oil Trust certificates to
represent the interest arising under the trust in the properties affected by the
trust, which, of course, in view of the provisions of the agreement and the
subject to which it related, caused the interest in the certificates to be
coincident with and the exact representative of the interest in the
combination, that is, in the Standard Oil Company of Ohio. Soon afterwards,
it was alleged, the trustees organized the Standard Oil Company of New
Jersey and the Standard Oil Company of New York, the former having a
capital stock of $3,000,000 and the latter a capital stock of $5,000,000,
subsequently increased to $10,000,000 and $15,000,000, respectively. The
bill alleged
498
"that, pursuant to said trust agreement, the said trustees caused to be
transferred to themselves the stocks of all corporations and limited
partnerships named in said trust agreement, and caused various of the
individuals and copartnerships, who owned apparently independent refineries
and other properties employed in the business of refining and transporting
and selling oil in and among said various States and Territories
Page 221 U. S. 37
of the United States as aforesaid, to transfer their property situated in said
several States to the respective Standard Oil Companies of said States of
New York, New Jersey, Pennsylvania and Ohio, and other corporations
organized or acquired by said trustees from time to time. . . ."
For the stocks and property so acquired, the trustees issued trust certificates.
It was alleged that, in 1888, the trustees
"unlawfully controlled the stock and ownership of various corporations and
limited partnerships engaged in such purchase and transportation, refining,
selling, and shipping of oil,"
as per a list which is excerpted in the margin. [Footnote 2]
Page 221 U. S. 38
The bill charged that, during the second period, quo warranto proceedings
were commenced against the Standard Oil Company of Ohio, which resulted
in the entry by the Supreme Court of Ohio, on March 2, 1892, of a decree
Page 221 U. S. 39
adjudging the trust agreement to be void, not only because the Standard Oil
Company of Ohio was a party to the same, but also because the agreement,
in and of itself,
Page 221 U. S. 40
was in restraint of trade and amounted to the creation of an unlawful
monopoly. It was alleged that shortly after this decision, seemingly for the
purpose of complying therewith, voluntary proceedings were had apparently
to dissolve the trust, but that these proceedings were a subterfuge and a
sham, because they simply amounted to a transfer of the stock held by the
trust in 64 of the companies which it controlled to some of the remaining 20
companies, it having controlled before the decree 84 in all, thereby, while
seemingly in part giving up its dominion, yet in reality preserving the same by
means of the control of the companies as to which it had retained complete
authority. It was charged that especially was this the case as the stock in the
companies selected for transfer was virtually owned by the nine trustees or
the members of their immediate families or associates. The bill further
alleged that, in 1897, the Attorney-General of Ohio instituted contempt
proceedings in the quo warranto case based upon the claim that the trust
had not been dissolved as required by the decree in that case. About the
same time also, proceedings in quo warranto were commenced to forfeit the
charter of a pipeline known as the Buckeye Pipe Line Company, an
Page 221 U. S. 41
Ohio corporation, whose stock, it was alleged, was owned by the members of
the combination, on the ground of its connection with the trust which had
been held to be illegal.
The result of these proceedings, the bill charged, caused a resort to the
alleged wrongful acts asserted to have been committed during the third
period, as follows:
"That during the third period of said conspiracy and in pursuance thereof, the
said individual defendants operated through the Standard Oil Company of
New Jersey, as a holding corporation, which corporation obtained and
acquired the majority of the stocks of the various corporations engaged in
purchasing, transporting, refining, shipping, and selling oil into and among
the various States and Territories of the United States and the District of
499
Columbia and with foreign nations, and thereby managed and controlled the
same, in violation of the laws of the United States, as hereinafter more
particularly alleged."
It was alleged that, in or about the month of January, 1899, the individual
defendants caused the charter of the Standard Oil Company of New Jersey
to be amended
"so that the business and objects of said company were stated as follows, to-
wit: 'To do all kinds of mining, manufacturing, and trading business;
transporting goods and merchandise by land or water in any manner; to buy,
sell, lease, and improve land; build houses, structures, vessels, cars,
wharves, docks, and piers; to lay and operate pipelines; to erect lines for
conducting electricity; to enter into and carry out contracts of every kind
pertaining to its business; to acquire, use, sell, and grant licenses under
patent rights; to purchase or otherwise acquire, hold, sell, assign, and
transfer shares of capital stock and bonds or other evidences of
indebtedness of corporations, and to exercise all the privileges of ownership,
including voting upon the stock so held; to carry on its business and have
offices and agencies therefor in all parts of the world, and
Page 221 U. S. 42
to hold, purchase, mortgage, and convey real estate and personal property
outside the State of New Jersey.'"
The capital stock of the company -- which, since March 19, 1892, had been
$10,000,000 -- was increased to $110,000,000, and the individual
defendants, as theretofore, continued to be a majority of the board of
directors.
Without going into detail, it suffices to say that it was alleged in the bill that,
shortly after these proceedings, the trust came to an end, the stock of the
various corporations which had been controlled by it being transferred by its
holders to the Standard Oil Company of New Jersey, which corporation
issued therefor certificates of its common stock to the amount of
$97,250,000. The bill contained allegations referring to the development of
new oil fields, for example, in California, southeastern Kansas, northern
Indian Territory, and northern Oklahoma, and made reference to the building
or otherwise acquiring by the combination of refineries and pipelines in the
new fields for the purpose of restraining and monopolizing the interstate
trade in petroleum and its products.
Reiterating in substance the averments that both the Standard Oil Trust from
1882 to 1899 and the Standard Oil Company of New Jersey since 1899 had
monopolized and restrained interstate commerce in petroleum and its
products, the bill at great length additionally set forth various means by
which, during the second and third periods, in addition to the effect
occasioned by the combination of alleged previously independent concerns,
the monopoly and restraint complained of was continued. Without attempting
to follow the elaborate averments on these subjects spread over fifty-seven
pages of the printed record, it suffices to say that such averments may
properly be grouped under the following heads: rebates, preferences and
other discriminatory practises in favor of the combination by railroad
companies; restraint and monopolization by control of pipelines, and unfair
practises against competing
Page 221 U. S. 43
pipelines; contracts with competitors in restraint of trade; unfair methods of
competition, such as local price-cutting at the points where necessary to
suppress competition; espionage of the business of competitors, the
operation of bogus independent companies, and payment of rebates on oil,
with the like intent; the division of the United States into districts and the
limiting of the operations of the various subsidiary corporations as to such
districts so that competition in the sale of petroleum products between such
corporations had been entirely eliminated and destroyed, and, finally,
reference was made to what was alleged to be the "enormous and
unreasonable profits" earned by the Standard Oil Trust and the Standard Oil
Company as a result of the alleged monopoly, which presumably was
averred as a means of reflexly inferring the scope and power acquired by the
alleged combination.
500
Coming to the prayer of the bill, it suffices to say that, in general terms, the
substantial relief asked was, first, that the combination in restraint of
interstate trade and commerce and which had monopolized the same, as
alleged in the bill, be found to have existence, and that the parties thereto be
perpetually enjoined from doing any further act to give effect to it; second,
that the transfer of the stocks of the various corporations to the Standard Oil
Company of New Jersey, as alleged in the bill, be held to be in violation of
the first and second sections of the Antitrust Act, and that the Standard Oil
Company of New Jersey be enjoined and restrained from in any manner
continuing to exert control over the subsidiary corporations by means of
ownership of said stock or otherwise; third, that specific relief by injunction be
awarded against further violation of the statute by any of the acts specifically
complained of in the bill. There was also a prayer for general relief.
Of the numerous defendants named in the bill, the Waters-Pierce Oil
Company was the only resident of the
Page 221 U. S. 44
district in which the suit was commenced and the only defendant served with
process therein. Contemporaneous with the filing of the bill, the court made
an order, under 5 of the Anti-Trust Act, for the service of process upon all
the other defendants, wherever they could be found. Thereafter, the various
defendants unsuccessfully moved to vacate the order for service on
nonresident defendants or filed pleas to the jurisdiction. Joint exceptions
were likewise unsuccessfully filed, upon the ground of impertinence, to many
of the averments of the bill of complaint, particularly those which related to
acts alleged to have been done by the combination prior to the passage of
the Anti-Trust Act and prior to the year 1899.
Certain of the defendants filed separate answers, and a joint answer was
filed on behalf of the Standard Oil Company of New Jersey and numerous of
the other defendants. The scope of the answers will be adequately indicated
by quoting a summary on the subject made in the brief for the appellants.
"It is sufficient to say that, whilst admitting many of the alleged acquisitions of
property, the formation of the so-called trust of 1882, its dissolution in 1892,
and the acquisition by the Standard Oil Company of New Jersey of the
stocks of the various corporations in 1899, they deny all the allegations
respecting combinations or conspiracies to restrain or monopolize the oil
trade, and particularly that the so-called trust of 1882, or the acquisition of
the shares of the defendant companies by the Standard Oil Company of New
Jersey in 1899, was a combination of independent or competing concerns or
corporations. The averments of the petition respecting the means adopted to
monopolize the oil trade are traversed either by a denial of the acts alleged
or of their purpose, intent or effect."
On June 24, 1907, the cause being at issue, a special examiner was
appointed to take the evidence, and his report was filed March 22, 1909. It
was heard on April 5
Page 221 U. S. 45
to 10, 1909, under the expediting act of February 11, 1903, before a Circuit
Court consisting of four judges.
The court decided in favor of the United States. In the opinion delivered, all
the multitude of acts of wrongdoing charged in the bill were put aside, insofar
as they were alleged to have been committed prior to the passage of the
Anti-Trust Act, "except as evidence of their (the defendants') purpose, of their
continuing conduct and of its effect." (173 Fed.Rep. 177.)
By the decree which was entered, it was adjudged that the combining of the
stocks of various companies in the hands of the Standard Oil Company of
New Jersey in 1899 constituted a combination in restraint of trade and also
an attempt to monopolize and a monopolization under 2 of the Anti-Trust
Act. The decree was against seven individual defendants, the Standard Oil
Company of New Jersey, thirty-six domestic companies, and one foreign
company which the Standard Oil Company of New Jersey controls by stock
ownership; these 38 corporate defendants being held to be parties to the
combination found to exist. [Footnote 3]
501
The bill was dismissed as to all other corporate defendants, 33 in number, it
being adjudged by 3 of the decree that they "have not been proved to be
engaged in the operation or carrying out of the combination." [Footnote 4]
Page 221 U. S. 46
The Standard Oil Company of New Jersey was enjoined from voting the
stocks or exerting any control over the said 37 subsidiary companies, and the
subsidiary companies were enjoined from paying any dividends as to the
Standard Oil Company or permitting it to exercise any control over them by
virtue of the stock ownership or power acquired by means of the
combination. The individuals and corporations were also enjoined from
entering into or carrying into effect any like combination which would evade
the decree. Further, the individual defendants, the Standard Oil Company,
and the 37 subsidiary corporations were enjoined from engaging or
continuing in interstate commerce in petroleum or its products during the
continuance of the illegal combination.
At the outset a question of jurisdiction requires consideration, and we shall,
also, as a preliminary, dispose of another question, to the end that our
attention may be completely concentrated upon the merits of the controversy
when we come to consider them.
First. We are of opinion that, in consequence of the presence within the
district of the Waters-Pierce Oil Company, the court, under the authority of
5 of the Anti-Trust Act, rightly took jurisdiction over the cause and properly
ordered notice to be served upon the nonresident defendants.
Second. The overruling of the exceptions taken to so much of the bill as
counted upon facts occurring prior to the passage of the Anti-Trust Act --
whatever may be the view as an original question of the duty to restrict the
controversy to a much narrower area than that propounded by the bill -- we
think by no possibility in the present stage of the case can the action of the
court be treated as prejudicial error justifying reversal. We say this because
the court, as we shall do, gave no weight to the testimony adduced under the
averments complained of except insofar as it tended to throw light upon the
acts done after the
Page 221 U. S. 47
passage of the Anti-Trust Act and the results of which it was charged were
being participated in and enjoyed by the alleged combination at the time of
the filing of the bill.
We are thus brought face to face with the merits of the controversy.
Both as to the law and as to the facts, the opposing contentions pressed in
the argument are numerous, and, in all their aspects, are so irreconcilable
that it is difficult to reduce them to some fundamental generalization which,
by being disposed of, would decide them all. For instance, as to the law.
While both sides agree that the determination of the controversy rests upon
the correct construction and application of the first and second sections of
the Anti-Trust Act, yet the views as to the meaning of the act are as wide
apart as the poles, since there is no real point of agreement on any view of
the act. And this also is the case as to the scope and effect of authorities
relied upon, even although, in some instances, one and the same authority is
asserted to be controlling.
So also is it as to the facts. Thus, on the one hand, with relentless pertinacity
and minuteness of analysis, it is insisted that the facts establish that the
assailed combination took its birth in a purpose to unlawfully acquire wealth
by oppressing the public and destroying the just rights of others, and that its
entire career exemplifies an inexorable carrying out of such wrongful intents,
since, it is asserted, the pathway of the combination, from the beginning to
502
the time of the filing of the bill, is marked with constant proofs of wrong
inflicted upon the public, and is strewn with the wrecks resulting from
crushing out, without regard to law, the individual rights of others. Indeed, so
conclusive, it is urged, is the proof on these subjects that it is asserted that
the existence of the principal corporate defendant -- the Standard Oil
Company of New Jersey -- with the vast accumulation of property which it
owns or controls, because of its infinite potency
Page 221 U. S. 48
for harm and the dangerous example which its continued existence affords,
is an open and enduring menace to all freedom of trade, and is a byword and
reproach to modern economic methods. On the other hand, in a powerful
analysis of the facts, it is insisted that they demonstrate that the origin and
development of the vast business which the defendants control was but the
result of lawful competitive methods, guided by economic genius of the
highest order, sustained by courage, by a keen insight into commercial
situations, resulting in the acquisition of great wealth, but at the same time
serving to stimulate and increase production, to widely extend the distribution
of the products of petroleum at a cost largely below that which would have
otherwise prevailed, thus proving to be, at one and the same time, a
benefaction to the general public as well as of enormous advantage to
individuals. It is not denied that, in the enormous volume of proof contained
in the record in the period of almost a lifetime to which that proof is
addressed, there may be found acts of wrongdoing, but the insistence is that
they were rather the exception than the rule, and, in most cases, were either
the result of too great individual zeal in the keen rivalries of business or of the
methods and habits of dealing which, even if wrong, were commonly
practised at the time. And, to discover and state the truth concerning these
contentions, both arguments call for the analysis and weighing, as we have
said at the outset, of a jungle of conflicting testimony covering a period of
forty years, a duty difficult to rightly perform and, even if satisfactorily
accomplished, almost impossible to state with any reasonable regard to
brevity.
Duly appreciating the situation just stated, it is certain that only one point of
concord between the parties is discernable, which is that the controversy in
every aspect is controlled by a correct conception of the meaning of the first
and second sections of the Anti-Trust Act. We shall
Page 221 U. S. 49
therefore -- departing from what otherwise would be the natural order of
analysis -- make this one point of harmony the initial basis of our examination
of the contentions, relying upon the conception that, by doing so, some
harmonious resonance may result adequate to dominate and control the
discord with which the case abounds. That is to say, we shall first come to
consider the meaning of the first and second sections of the Anti-Trust Act by
the text, and, after discerning what by that process appears to be its true
meaning, we shall proceed to consider the respective contentions of the
parties concerning the act, the strength or weakness of those contentions, as
well as the accuracy of the meaning of the act as deduced from the text in
the light of the prior decisions of this court concerning it. When we have done
this, we shall then approach the facts. Following this course, we shall make
our investigation under four separate headings: First. The text of the first and
second sections of the act originally considered, and its meaning in the light
of the common law and the law of this country at the time of its adoption.
Second. The contentions of the parties concerning the act, and the scope
and effect of the decisions of this court upon which they rely. Third. The
application of the statute to facts, and, Fourth. The remedy, if any, to be
afforded as the result of such application.
First. The text of the act and its meaning.
We quote the text of the first and second sections of the act, as follows:
"SECTION 1. Every contract, combination in the form of trust or otherwise, or
conspiracy, in restraint of trade or commerce, among the several States, or
with foreign nations, is hereby declared to be illegal. Every person who shall
make any such contract, or engage in any such combination or conspiracy,
shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be
punished by fine not exceeding five thousand dollars, or by
503
Page 221 U. S. 50
imprisonment not exceeding one year, or by both said punishments, in the
discretion of the court."
"SEC. 2. Every person who shall monopolize, or attempt to monopolize, or
combine or conspire with any other person or persons, to monopolize any
part of the trade or commerce among the several States, or with foreign
nations, shall be deemed guilty of a misdemeanor, and, on conviction
thereof, shall be punished by fine not exceeding five thousand dollars, or by
imprisonment not exceeding one year, or by both said punishments, in the
discretion of the court."
The debates show that doubt as to whether there was a common law of the
United States which governed the subject in the absence of legislation was
among the influences leading to the passage of the act. They conclusively
show, however, that the main cause which led to the legislation was the
thought that it was required by the economic condition of the times, that is,
the vast accumulation of wealth in the hands of corporations and individuals,
the enormous development of corporate organization, the facility for
combination which such organizations afforded, the fact that the facility was
being used, and that combinations known as trusts were being multiplied,
and the widespread impression that their power had been and would be
exerted to oppress individuals and injure the public generally. Although
debates may not be used as a means for interpreting a statute (United
States v. Trans-Missouri Freight Association, 166 U. S. 318, and cases cited)
that rule, in the nature of things, is not violated by resorting to debates as a
means of ascertaining the environment at the time of the enactment of a
particular law, that is, the history of the period when it was adopted.
There can be no doubt that the sole subject with which the first section deals
is restraint of trade as therein contemplated, and that the attempt to
monopolize and monopolization is the subject with which the second section
Page 221 U. S. 51
is concerned. It is certain that those terms, at least in their rudimentary
meaning, took their origin in the common law, and were also familiar in the
law of this country prior to and at the time of the adoption of the act in
question.
We shall endeavor then, first to seek their meaning not by indulging in an
elaborate and learned analysis of the English law and of the law of this
country, but by making a very brief reference to the elementary and
indisputable conceptions of both the English and American law on the subject
prior to the passage of the Anti-Trust Act.
a. It is certain that, at a very remote period, the words "contract in restraint of
trade" in England came to refer to some voluntary restraint put by contract by
an individual on his right to carry on his trade or calling. Originally all such
contracts were considered to be illegal, because it was deemed they were
injurious to the public, as well as to the individuals who made them. In the
interest of the freedom of individuals to contract, this doctrine was modified
so that it was only when a restraint by contract was so general as to be
coterminous with the kingdom that it was treated as void. That is to say, if the
restraint was partial in its operation and was otherwise reasonable, the
contract was held to be valid.
b. Monopolies were defined by Lord Coke as follows:
"A monopoly is an institution, or allowance by the king by his grant,
commission, or otherwise to any person or persons, bodies politic or
corporate, of or for the sole buying, selling, making, working, or using of
anything, whereby any person or persons, bodies politic or corporate, are
sought to be restrained of any freedom or liberty that they had before, or
hindered in their lawful trade."
(3 Inst. 181, c. 85.)
Hawkins thus defined them:
504
"A monopoly is an allowance by the king to a particular person or persons of
the sole buying, selling, making,
Page 221 U. S. 52
working, or using of anything whereby the subject in general is restrained
from the freedom of manufacturing or trading which he had before."
(Hawk. P. C. bk. 1, c. 29.)
The frequent granting of monopolies and the struggle which led to a denial of
the power to create them, that is to say, to the establishment that they were
incompatible with the English constitution, is known to all, and need not be
reviewed. The evils which led to the public outcry against monopolies and to
the final denial of the power to make them may be thus summarily stated: 1.
The power which the monopoly gave to the one who enjoyed it to fix the price
and thereby injure the public; 2. The power which it engendered of enabling a
limitation on production; and, 3. The danger of deterioration in quality of the
monopolized article which it was deemed was the inevitable resultant of the
monopolistic control over its production and sale. As monopoly as thus
conceived embraced only a consequence arising from an exertion of
sovereign power, no express restrictions or prohibitions obtained against the
creation by an individual of a monopoly as such. But as it was considered, at
least so far as the necessaries of life were concerned, that individuals, by the
abuse of their right to contract, might be able to usurp the power arbitrarily to
enhance prices, one of the wrongs arising from monopoly, it came to be that
laws were passed relating to offenses such as forestalling, regrating and
engrossing by which prohibitions were placed upon the power of individuals
to deal under such circumstances and conditions as, according to the
conception of the times, created a presumption that the dealings were not
simply the honest exertion of one's right to contract for his own benefit
unaccompanied by a wrongful motive to injure others, but were the
consequence of a contract or course of dealing of such a character as to give
rise to the presumption of an intent to injure others through the means, for
instance, of a monopolistic increase of prices.
Page 221 U. S. 53
This is illustrated by the definition of engrossing found in the statute, 5 and 6
Edw. VI, ch. 14, as follows:
"Whatsoever person or persons . . . shall engross or get into his or their
hands by buying, contracting, or promise-taking, other than by demise, grant,
or lease of land, or tithe, any corn growing in the fields, or any other corn or
grain, butter, cheese, fish, or other dead victual, whatsoever, within the realm
of England, to the intent to sell the same again, shall be accepted, repute,
and taken an unlawful engrosser or engrossers."
As, by the statutes providing against engrossing, the quantity engrossed was
not required to be the whole or a proximate part of the whole of an article, it
is clear that there was a wide difference between monopoly and engrossing,
etc. But, as the principal wrong which it was deemed would result from
monopoly, that is, an enhancement of the price, was the same wrong to
which it was thought the prohibited engrossment would give rise, it came to
pass that monopoly and engrossing were regarded as virtually one and the
same thing. In other words, the prohibited act of engrossing, because of its
inevitable accomplishment of one of the evils deemed to be engendered by
monopoly, came to be referred to as being a monopoly or constituting an
attempt to monopolize. Thus, Pollexfen, in his argument in East India
Company v. Sandys, Skin. 165, 169, said:
"By common law, he said that trade is free, and for that cited 3 Inst. 81; F.B.
65; 1 Roll. 4; that the common law is as much against 'monopoly' as
'engrossing;' and that they differ only, that a 'monopoly' is by patent from the
king, the other is by the act of the subject between party and party; but that
the mischiefs are the same from both, and there is the same law against
both. Moore, 673; 11 Rep. 84. The sole trade of anything is 'engrossing' ex
rei natura, for whosoever hath the sole trade of buying and selling hath
'engrossed' that trade, and whosoever
Page 221 U. S. 54
505
hath the sole trade to any country hath the sole trade of buying and selling
the produce of that country, at his own price, which is an 'engrossing.'"
And, by operation of the mental process which led to considering as a
monopoly acts which, although they did not constitute a monopoly, were
thought to produce some of its baneful effects, so also because of the
impediment or burden to the due course of trade which they produced, such
acts came to be referred to as in restraint of trade. This is shown by my Lord
Coke's definition of monopoly as being
"an institution or allowance . . . whereby any person or persons, bodies politic
or corporate, are sought to be restrained of any freedom or liberty that they
had before or hindered in their lawful trade."
It is illustrated also by the definition which Hawkins gives of monopoly
wherein it is said that the effect of monopoly is to restrain the citizen "from
the freedom of manufacturing or trading which he had before." And see
especially the opinion of Parker, C.J., in Mitchel v. Reynolds (1711), 1 P.
Williams, 181, where a classification is made of monopoly which brings it
generically within the description of restraint of trade.
Generalizing these considerations, the situation is this: 1. That, by the
common law, monopolies were unlawful because of their restriction upon
individual freedom of contract and their injury to the public. 2. That as to
necessaries of life, the freedom of the individual to deal was restricted where
the nature and character of the dealing was such as to engender the
presumption of intent to bring about at least one of the injuries which it was
deemed would result from monopoly, that is, an undue enhancement of price.
3. That, to protect the freedom of contract of the individual not only in his own
interest, but principally in the interest of the common weal, a contract of an
individual by which he put an unreasonable restraint upon himself as to
carrying on his trade or business
Page 221 U. S. 55
was void. And that, at common law, the evils consequent upon engrossing,
etc., caused those things to be treated as coming within monopoly, and
sometimes to be called monopoly, and the same considerations caused
monopoly, because of its operation and effect, to be brought within and
spoken of generally as impeding the due course of, or being in restraint of,
trade.
From the development of more accurate economic conceptions and the
changes in conditions of society, it came to be recognized that the acts
prohibited by the engrossing, forestalling, etc., statutes did not have the
harmful tendency which they were presumed to have when the legislation
concerning them was enacted, and therefore did not justify the presumption
which had previously been deduced from them, but, on the contrary, such
acts tended to fructify and develop trade. See the statutes of 12th George III,
ch. 71, enacted in 1772, and statute of 7 and 8 Victoria, ch. 24, enacted in
1844, repealing the prohibitions against engrossing, forestalling, etc., upon
the express ground that the prohibited acts had come to be considered as
favorable to the development of, and not in restraint of, trade. It is remarkable
that nowhere at common law can there be found a prohibition against the
creation of monopoly by an individual. This would seem to manifest, either
consciously or intuitively, a profound conception as to the inevitable operation
of economic forces and the equipoise or balance in favor of the protection of
the rights of individuals which resulted. That is to say, as it was deemed that
monopoly in the concrete could only arise from an act of sovereign power,
and, such sovereign power being restrained, prohibitions as to individuals
were directed not against the creation of monopoly, but were only applied to
such acts in relation to particular subjects as to which it was deemed, if not
restrained, some of the consequences of monopoly might result. After all, this
was but an instinctive recognition
Page 221 U. S. 56
of the truisms that the course of trade could not be made free by obstructing
it, and that an individual's right to trade could not be protected by destroying
such right.
506
From the review just made, it clearly results that, outside of the restrictions
resulting from the want of power in an individual to voluntarily and
unreasonably restrain his right to carry on his trade or business, and outside
of the want of right to restrain the free course of trade by contracts or acts
which implied a wrongful purpose, freedom to contract and to abstain from
contracting, and to exercise every reasonable right incident thereto, became
the rule in the English law. The scope and effect of this freedom to trade and
contract is clearly shown by the decision in Mogul Steamship Co. v.
McGregor (1892), A.C. 25. While it is true that the decision of the House of
Lords in the case in question was announced shortly after the passage of the
Anti-Trust Act, it serves reflexly to show the exact state of the law in England
at the time the Antitrust statute was enacted.
In this country also, the acts from which it was deemed there resulted a part,
if not all, of the injurious consequences ascribed to monopoly came to be
referred to as a monopoly itself. In other words, here, as had been the case
in England, practical common sense caused attention to be concentrated not
upon the theoretically correct name to be given to the condition or acts which
gave rise to a harmful result, but to the result itself, and to the remedying of
the evils which it produced. The statement just made is illustrated by an early
statute of the Province of Massachusetts, that is, chap. 31 of the laws of
1778-1779, by which monopoly and forestalling were expressly treated as
one and the same thing.
It is also true that, while the principles concerning contracts in restraint of
trade, that is, voluntary restraint put by a person on his right to pursue his
calling, hence only operating subjectively, came generally to be recognized
Page 221 U. S. 57
in accordance with the English rule, it came moreover to pass that contracts
or acts which it was considered had a monopolistic tendency, especially
those which were thought to unduly diminish competition, and hence to
enhance prices -- in other words, to monopolize -- came also in a generic
sense to be spoken of and treated, as they had been in England, as
restricting the due course of trade, and therefore as being in restraint of
trade. The dread of monopoly as an emanation of governmental power, while
it passed at an early date out of mind in this country as a result of the
structure of our Government, did not serve to assuage the fear as to the evil
consequences which might arise from the acts of individuals producing or
tending to produce the consequences of monopoly. It resulted that treating
such acts as we have said as amounting to monopoly, sometimes
constitutional restrictions, again legislative enactments or judicial decisions,
served to enforce and illustrate the purpose to prevent the occurrence of the
evils recognized in the mother country as consequent upon monopoly, by
providing against contracts or acts of individuals or combinations of
individuals or corporations deemed to be conducive to such results. To refer
to the constitutional or legislative provisions on the subject or many judicial
decisions which illustrate it would unnecessarily prolong this opinion. We
append in the margin a note to treatises, &c., wherein are contained
references to constitutional and statutory provisions and to numerous
decisions, etc., relating to the subject. [Footnote 5]
It will be found that, as modern conditions arose, the trend of legislation and
judicial decision came more and more to adapt the recognized restrictions to
new manifestations of conduct or of dealing which it was thought
Page 221 U. S. 58
justified the inference of intent to do the wrongs which it had been the
purpose to prevent from the beginning. The evolution is clearly pointed out
in National Cotton Oil Co. v. Texas, 197 U. S. 115, and Shawnee Compress
Co. v. Anderson, 209 U. S. 423; and, indeed, will be found to be illustrated in
various aspects by the decisions of this court which have been concerned
with the enforcement of the act we are now considering.
Without going into detail, and but very briefly surveying the whole field, it may
be with accuracy said that the dread of enhancement of prices and of other
wrongs which it was thought would flow from the undue limitation on
competitive conditions caused by contracts or other acts of individuals or
corporations led, as a matter of public policy, to the prohibition or treating as
illegal all contracts or acts which were unreasonably restrictive of competitive
507
conditions, either from the nature or character of the contract or act or where
the surrounding circumstances were such as to justify the conclusion that
they had not been entered into or performed with the legitimate purpose of
reasonably forwarding personal interest and developing trade, but, on the
contrary, were of such a character as to give rise to the inference or
presumption that they had been entered into or done with the intent to do
wrong to the general public and to limit the right of individuals, thus
restraining the free flow of commerce and tending to bring about the evils,
such as enhancement of prices, which were considered to be against public
policy. It is equally true to say that the survey of the legislation in this country
on this subject from the beginning will show, depending as it did upon the
economic conceptions which obtained at the time when the legislation was
adopted or judicial decision was rendered, that contracts or acts were at one
time deemed to be of such a character as to justify the inference of wrongful
intent which were, at another period, thought not to be
Page 221 U. S. 59
of that character. But this again, as we have seen, simply followed the line of
development of the law of England.
Let us consider the language of the first and second sections, guided by the
principle that, where words are employed in a statute which had at the time a
well known meaning at common law or in the law of this country, they are
presumed to have been used in that sense unless the context compels to the
contrary. [Footnote 6]
As to the first section, the words to be interpreted are:
"Every contract, combination in the form of trust or otherwise, or conspiracy
in restraint of trade or commerce . . . is hereby declared to be illegal."
As there is no room for dispute that the statute was intended to formulate a
rule for the regulation of interstate and foreign commerce, the question is
what was the rule which it adopted?
In view of the common law and the law in this country as to restraint of trade,
which we have reviewed, and the illuminating effect which that history must
have under the rule to which we have referred, we think it results:
a. That the context manifests that the statute was drawn in the light of the
existing practical conception of the law of restraint of trade, because it groups
as within that class not only contracts which were in restraint of trade in the
subjective sense, but all contracts or acts which theoretically were attempts
to monopolize, yet which, in practice, had come to be considered as in
restraint of trade in a broad sense.
b. That, in view of the many new forms of contracts and combinations which
were being evolved from existing economic conditions, it was deemed
essential by an all-embracing enumeration to make sure that no form of
contract or combination by which an undue restraint of
Page 221 U. S. 60
interstate or foreign commerce was brought about could save such restraint
from condemnation. The statute, under this view, evidenced the intent not to
restrain the right to make and enforce contracts, whether resulting from
combination or otherwise, which did not unduly restrain interstate or foreign
commerce, but to protect that commerce from being restrained by methods,
whether old or new, which would constitute an interference that is an undue
restraint.
c. And as the contracts or acts embraced in the provision were not expressly
defined, since the enumeration addressed itself simply to classes of acts,
those classes being broad enough to embrace every conceivable contract or
combination which could be made concerning trade or commerce or the
subjects of such commerce, and thus caused any act done by any of the
enumerated methods anywhere in the whole field of human activity to be
illegal if in restraint of trade, it inevitably follows that the provision necessarily
called for the exercise of judgment which required that some standard should
be resorted to for the purpose of determining whether the prohibitions
contained in the statute had or had not in any given ease been violated.
508
Thus, not specifying but indubitably contemplating and requiring a standard,
it follows that it was intended that the standard of reason which had been
applied at the common law, and in this country, in dealing with subjects of the
character embraced by the statute, was intended to be the measure used for
the purpose of determining whether, in a given case, a particular act had or
had not brought about the wrong against which the statute provided.
And a consideration of the text of the second section serves to establish that
it was intended to supplement the first, and to make sure that, by no possible
guise could the public policy embodied in the first section be frustrated or
evaded. The prohibitions of the second embrace
Page 221 U. S. 61
"Every person who shall monopolize or attempt to monopolize, or combine or
conspire with any other person or persons, to monopolize any part of the
trade or commerce among the several states, or with foreign nations, . . ."
"By reference to the terms of 8, it is certain that the word person clearly
implies a corporation, as well as an individual."
The commerce referred to by the words "any part," construed in the light of
the manifest purpose of the statute, has both a geographical and a
distributive significance, that is, it includes any portion of the United States
and anyone of the classes of things forming a part of interstate or foreign
commerce.
Undoubtedly, the words "to monopolize" and "monopolize," as used in the
section, reach every act bringing about the prohibited results. The ambiguity,
if any, is involved in determining what is intended by monopolize. But this
ambiguity is readily dispelled in the light of the previous history of the law of
restraint of trade to which we have referred, and the indication which it gives
of the practical evolution by which monopoly and the acts which produce the
same result as monopoly, that is, an undue restraint of the course of trade, all
came to be spoken of as, and to be indeed synonymous with, restraint of
trade. In other words, having, by the first section, forbidden all means of
monopolizing trade, that is, unduly restraining it by means of every contract,
combination, etc., the second section seeks, if possible, to make the
prohibitions of the act all the more complete and perfect by embracing all
attempts to reach the end prohibited by the first section, that is, restraints of
trade, by any attempt to monopolize, or monopolization thereof, even
although the acts by which such results are attempted to be brought about or
are brought about be not embraced within the general enumeration of the
first section. And, of course, when the second section is thus harmonized
with and made as it
Page 221 U. S. 62
was intended to be the complement of the first, it becomes obvious that the
criteria to be resorted to in any given case for the purpose of ascertaining
whether violations of the section have been committed is the rule of reason,
guided by the established law and by the plain duty to enforce the
prohibitions of the act, and thus the public policy which its restrictions were
obviously enacted to subserve. And it is worthy of observation, as we have
previously remarked concerning the common law, that, although the statute,
by the comprehensiveness of the enumerations embodied in both the first
and second sections, makes it certain that its purpose was to prevent undue
restraints of every kind or nature, nevertheless, by the omission of any direct
prohibition against monopoly in the concrete, it indicates a consciousness
that the freedom of the individual right to contract, when not unduly or
improperly exercised, was the most efficient means for the prevention of
monopoly, since the operation of the centrifugal and centripetal forces
resulting from the right to freely contract was the means by which monopoly
would be inevitably prevented if no extraneous or sovereign power imposed it
and no right to make unlawful contracts having a monopolistic tendency were
permitted. In other words, that freedom to contract was the essence of
freedom from undue restraint on the right to contract.
Clear as it seems to us is the meaning of the provisions of the statute in the
light of the review which we have made, nevertheless, before definitively
applying that meaning, it behooves us to consider the contentions urged on
one side or the other concerning the meaning of the statute, which, if
maintained, would give to it, in some aspects a much wider, and, in every
509
view, at least a somewhat different, significance. And to do this brings us to
the second question, which, at the outset, we have stated it was our purpose
to consider and dispose of.
Page 221 U. S. 63
Second. The contentions of the parties as to the meaning of the statute and
the decisions of this court relied upon concerning those contentions.
In substance, the propositions urged by the Government are reducible to this:
that the language of the statute embraces every contract, combination, etc.,
in restraint of trade, and hence its text leaves no room for the exercise of
judgment, but simply imposes the plain duty of applying its prohibitions to
every case within its literal language. The error involved lies in assuming the
matter to be decided. This is true because, as the acts which may come
under the classes stated in the first section and the restraint of trade to which
that section applies are not specifically enumerated or defined, it is obvious
that judgment must, in every case, be called into play in order to determine
whether a particular act is embraced within the statutory classes, and
whether, if the act is within such classes, its nature or effect causes it to be a
restraint of trade within the intendment of the act. To hold to the contrary
would require the conclusion either that every contract, act or combination, of
any kind or nature, whether it operated a restraint on trade or not, was within
the statute, and thus the statute would be destructive of all right to contract or
agree or combine in any respect whatever as to subjects embraced in
interstate trade or commerce, or if this conclusion were not reached, then the
contention would require it to be held that, as the statute did not define the
things to which it related, and excluded resort to the only means by which the
acts to which it relates could be ascertained -- the light of reason -- the
enforcement of the statute was impossible because of its uncertainty. The
merely generic enumeration which the statute makes of the acts to which it
refers and the absence of any definition of restraint of trade as used in the
statute leaves room for but one conclusion, which is that it was expressly
designed not to unduly limit the application
Page 221 U. S. 64
of the act by precise definition, but, while clearly fixing a standard, that is, by
defining the ulterior boundaries which could not be transgressed with
impunity, to leave it to be determined by the light of reason, guided by the
principles of law and the duty to apply and enforce the public policy
embodied in the statute, in every given case whether any particular act or
contract was within the contemplation of the statute.
But, it is said, persuasive as these views may be, they may not be here
applied, because the previous decisions of this court have given to the
statute a meaning which expressly excludes the construction which must
result from the reasoning stated. The cases are United States v. Freight
Association, 166 U. S. 290, and United States v. Joint Traffic
Association, 171 U. S. 505. Both the cases involved the legality of
combinations or associations of railroads engaged in interstate commerce for
the purpose of controlling the conduct of the parties to the association or
combination in many particulars. The association or combination was
assailed in each case as being in violation of the statute. It was held that they
were. It is undoubted that, in the opinion in each case, general language was
made use of which, when separated from its context, would justify the
conclusion that it was decided that reason could not be resorted to for the
purpose of determining whether the acts complained of were within the
statute. It is, however, also true that the nature and character of the contract
or agreement in each case was fully referred to, and suggestions as to their
unreasonableness pointed out, in order to indicate that they were within the
prohibitions of the statute. As the cases cannot by any possible conception
be treated as authoritative without the certitude that reason was resorted to
for the purpose of deciding them, it follows as a matter of course that it must
have been held by the light of reason, since the conclusion could not have
been otherwise reached, that the assailed
Page 221 U. S. 65
contracts or agreements were within the general enumeration of the statute,
and that their operation and effect brought about the restraint of trade which
the statute prohibited. This being inevitable, the deduction can in reason only
be this: that, in the cases relied upon, it having been found that the acts
complained of were within the statute and operated to produce the injuries
510
which the statute forbade, that resort to reason was not permissible in order
to allow that to be done which the statute prohibited. This being true, the
rulings in the cases relied upon, when rightly appreciated, were therefore
this, and nothing more: that, as considering the contracts or agreements,
their necessary effect and the character of the parties by whom they were
made, they were clearly restraints of trade within the purview of the statute,
they could not be taken out of that category by indulging in general reasoning
as to the expediency or nonexpediency of having made the contracts or the
wisdom or want of wisdom of the statute which prohibited their being made.
That is to say, the cases but decided that the nature and character of the
contracts, creating as they did a conclusive presumption which brought them
within the statute, such result was not to be disregarded by the substitution of
a judicial appreciation of what the law ought to be for the plain judicial duty of
enforcing the law as it was made.
But, aside from reasoning, it is true to say that the cases relied upon do not,
when rightly construed, sustain the doctrine contended, for is established by
all of the numerous decisions of this court which have applied and enforced
the Anti-Trust Act, since they all, in the very nature of things, rest upon the
premise that reason was the guide by which the provisions of the act were in
every case interpreted. Indeed, intermediate the decision of the two cases,
that is, after the decision in the Freight Association Case and before the
decision in the Joint Traffic Case, the case of Hopkins v. United States,171 U.
S. 578, was decided,
Page 221 U. S. 66
the opinion being delivered by Mr. Justice Peckham, who wrote both the
opinions in the Freight Association and the Joint Traffic cases. And, referring
in the Hopkins case to the broad claim made as to the rule of interpretation
announced in the Freight Association case, it was said (p. 171 U. S. 592):
"To treat as condemned by the act all agreements under which, as a result,
the cost of conducting an interstate commercial business may be increased
would enlarge the application of the act far beyond the fair meaning of the
language used. There must be some direct and immediate effect upon
interstate commerce in order to come within the act."
And, in the Joint Traffic case, this statement was expressly reiterated and
approved and illustrated by example; like limitation on the general language
used in Freight Association and Joint Traffic cases is also the clear result
of Bement v. National Harrow Co., 186 U. S. 70, 186 U. S. 92, and especially
of Cincinnati Packet Co. v. Bay, 200 U. S. 179.
If the criterion by which it is to be determined in all cases whether every
contract, combination, etc., is a restraint of trade within the intendment of the
law is the direct or indirect effect of the acts involved, then, of course, the rule
of reason becomes the guide, and the construction which we have given the
statute, instead of being refuted by the cases relied upon, is by those cases
demonstrated to be correct. This is true because, as the construction which
we have deduced from the history of the act and the analysis of its text is
simply that, in every case where it is claimed that an act or acts are in
violation of the statute, the rule of reason, in the light of the principles of law
and the public policy which the act embodies, must be applied. From this it
follows, since that rule and the result of the test as to direct or indirect, in
their ultimate aspect, come to one and the same thing, that the difference
between the two is therefore only that which obtains between things which do
not differ at all.
Page 221 U. S. 67
If it be true that there is this identity of result between the rule intended to be
applied in the Freight Association Case, that is, the rule of direct and indirect,
and the rule of reason which, under the statute as we construe it, should be
here applied, it may be asked how was it that, in the opinion in the Freight
Association Case, much consideration was given to the subject of whether
the agreement or combination which was involved in that case could be
taken out of the prohibitions of the statute upon the theory of its
511
reasonableness. The question is pertinent, and must be fully and frankly met,
for if it be now deemed that the Freight Association Case was mistakenly
decided or too broadly stated, the doctrine which it announced should be
either expressly overruled or limited.
The confusion which gives rise to the question results from failing to
distinguish between the want of power to take a case which, by its terms, or
the circumstances which surrounded it, considering among such
circumstances the character of the parties, is plainly within the statute, out of
the operation of the statute by resort to reason in effect to establish that the
contract ought not to be treated as within the statute, and the duty in every
case where it becomes necessary, from the nature and character of the
parties, to decide whether it was within the statute to pass upon that question
by the light of reason. This distinction, we think, serves to point out what, in
its ultimate conception, was the thought underlying the reference to the rule
of reason made in the Freight Association Case, especially when such
reference is interpreted by the context of the opinion and in the light of the
subsequent opinion in the Hopkins Case and in Cincinnati Packet Company
v. Bay, 200 U. S. 179.
And in order not in the slightest degree to be wanting in frankness, we say
that, insofar, however, as by separating the general language used in the
opinions in the Freight Association and Joint Traffic cases from the context
Page 221 U. S. 68
and the subject and parties with which the cases were concerned, it may be
conceived that the language referred to conflicts with the construction which
we give the statute, they are necessarily now limited and qualified. We see
no possible escape from this conclusion if we are to adhere to the many
cases decided in this court in which the Anti-Trust Law has been applied and
enforced and if the duty to apply and enforce that law in the future is to
continue to exist. The first is true because the construction which we now
give the statute does not in the slightest degree conflict with a single previous
case decided concerning the Anti-Trust Law aside from the contention as to
the Freight Association and Joint Traffic cases, and because every one of
those cases applied the rule of reason for the purpose of determining
whether the subject before the court was within the statute. The second is
also true, since, as we have already pointed out, unaided by the light of
reason, it is impossible to understand how the statute may in the future be
enforced and the public policy which it establishes be made efficacious.
So far as the objections of the defendants are concerned, they are all
embraced under two headings:
a. That the act, even if the averments of the bill be true, cannot be
constitutionally applied, because to do so would extend the power of
Congress to subjects dehors the reach of its authority to regulate commerce,
by enabling that body to deal with mere questions of production of
commodities within the States. But all the structure upon which this argument
proceeds is based upon the decision in United States v. E. C. Knight
Co., 156 U. S. 1. The view, however, which the argument takes of that case
and the arguments based upon that view have been so repeatedly pressed
upon this court in connection with the interpretation and enforcement of the
Anti-Trust Act, and have been so necessarily and expressly decided to be
unsound as to cause the contentions to be plainly foreclosed and to require
no express
Page 221 U. S. 69
notice. United States v. Northern Securities Co., 193 U. S. 197, 193 U. S.
334; Loewe v.Lawlor, 208 U. S. 274; Swift & Co. v. United States, 196 U. S.
375; Montague v. Lowry, 193 U. S. 38; Shawnee Compress Co. v.
Anderson, 209 U. S. 423.
b. Many arguments are pressed in various forms of statement which, in
substance, amount to contending that the statute cannot be applied under
the facts of this case without impairing rights of property and destroying the
freedom of contract or trade, which is essentially necessary to the wellbeing
of society and which it is insisted is protected by the constitutional guaranty
of due process of law. But the ultimate foundation of all these arguments is
the assumption that reason may not be resorted to in interpreting and
512
applying the statute, and therefore that the statute unreasonably restricts the
right to contract and unreasonably operates upon the right to acquire and
hold property. As the premise is demonstrated to be unsound by the
construction we have given the statute, of course, the propositions which rest
upon that premise need not be further noticed.
So far as the arguments proceed upon the conception that, in view of the
generality of the statute, it is not susceptible of being enforced by the courts
because it cannot be carried out without a judicial exertion of legislative
power, they are clearly unsound. The statute certainly generically
enumerates the character of acts which it prohibits and the wrong which it
was intended to prevent. The propositions therefore but insist that,
consistently with the fundamental principles of due process of law, it never
can be left to the judiciary to decide whether, in a given case, particular acts
come within a generic statutory provision. But to reduce the propositions,
however, to this their final meaning makes it clear that, in substance, they
deny the existence of essential legislative authority and challenge the right of
the judiciary to perform duties which that department of the government has
exerted from
Page 221 U. S. 70
the beginning. This is so clear as to require no elaboration. Yet let us
demonstrate that which needs no demonstration by a few obvious examples.
Take, for instance, the familiar cases where the judiciary is called upon to
determine whether a particular act or acts are within a given prohibition,
depending upon wrongful intent. Take questions of fraud. Consider the power
which must be exercised in every case where the courts are called upon to
determine whether particular acts are invalid which are, abstractly speaking,
in and of themselves valid, but which are asserted to be invalid because of
their direct effect upon interstate commerce.
We come then to the third proposition requiring consideration, viz:
Third. The facts and the application of the statute to them.
Beyond dispute, the proofs establish substantially as alleged in the bill the
following facts:
1. The creation of the Standard Oil Company of Ohio;
2. The organization of the Standard Oil Trust of 1882, and also a previous
one of 1879, not referred to in the bill, and the proceedings in the Supreme
Court of Ohio, culminating in a decree based upon the finding that the
company was unlawfully a party to that trust; the transfer by the trustees of
stocks in certain of the companies; the contempt proceedings; and, finally,
the increase of the capital of the Standard Oil Company of New Jersey and
the acquisition by that company of the shares of the stock of the other
corporations in exchange for its certificates.
The vast amount of property and the possibilities of far-reaching control
which resulted from the facts last stated are shown by the statement which
we have previously annexed concerning the parties to the trust agreement of
1882, and the corporations whose stock was held by the trustees under the
trust and which came therefore to be held by the New Jersey corporation.
But these statements do not with accuracy convey an appreciation of the
Page 221 U. S. 71
situation as it existed at the time of the entry of the decree below, since,
during the more than ten years which elapsed between the acquiring by the
New Jersey corporation of the stock and other property which was formerly
held by the trustees under the trust agreement, the situation, of course, had
somewhat changed, a change which, when analyzed in the light of the proof,
we think establishes that the result of enlarging the capital stock of the New
Jersey company and giving it the vast power to which we have referred
produced its normal consequence, that is, it gave to the corporation, despite
enormous dividends and despite the dropping out of certain corporations
enumerated in the decree of the court below, an enlarged and more perfect
sway and control over the trade and commerce in petroleum and its
products. The ultimate situation referred to will be made manifest by an
513
examination of 2 and 4 of the decree below, which are excerpted in the
margin. [Footnote 7]
Page 221 U. S. 72
Giving to the facts just stated, the weight which it was deemed they were
entitled to, in the light afforded by the
Page 221 U. S. 73
proof of other cognate facts and circumstances, the court below held that the
acts and dealings established by the
Page 221 U. S. 74
proof operated to destroy the "potentiality of competition" which otherwise
would have existed to such an extent as to cause the transfers of stock which
were made to the New Jersey corporation and the control which resulted
over the many and various subsidiary corporations to be a combination or
conspiracy in restraint of trade in violation of the first section of the act, but
also to be an attempt to monopolize and a monopolization bringing about a
perennial violation of the second section.
We see no cause to doubt the correctness of these conclusions, considering
the subject from every aspect, that is, both in view of the facts established by
the record and the necessary operation and effect of the law as we have
Page 221 U. S. 75
construed it upon the inferences deducible from the facts, for the following
reasons:
a. Because the unification of power and control over petroleum and its
products which was the inevitable result of the combining in the New Jersey
corporation by the increase of its stock and the transfer to it of the stocks of
so many other corporations, aggregating so vast a capital, gives rise, in and
of itself, in the absence of countervailing circumstances, to say the least, to
the prima facie presumption of intent and purpose to maintain the dominancy
over the oil industry, not as a result of normal methods of industrial
development, but by new means of combination which were resorted to in
order that greater power might be added than would otherwise have arisen
had normal methods been followed, the whole with the purpose of excluding
others from the trade, and thus centralizing in the combination a perpetual
control of the movements of petroleum and its products in the channels of
interstate commerce.
b. Because the prima facie presumption of intent to restrain trade, to
monopolize, and to bring about monopolization resulting from the act of
expanding the stock of the New Jersey corporation and vesting it with such
vast control of the oil industry, is made conclusive by considering, 1, the
conduct of the persons or corporations who were mainly instrumental in
bringing about the extension of power in the New Jersey corporation before
the consummation of that result and prior to the formation of the trust
agreements of 1879 and 1882 2, by considering the proof as to what was
done under those agreements and the acts which immediately preceded the
vesting of power in the New Jersey corporation, as well as by weighing the
modes in which the power vested in that corporation has been exerted and
the results which have arisen from it.
Recurring to the acts done by the individuals or corporations who were
mainly instrumental in bringing about the
Page 221 U. S. 76
expansion of the New Jersey corporation during the period prior to the
formation of the trust agreements of 1879 and 1882, including those
agreements, not for the purpose of weighing the substantial merit of the
numerous charges of wrongdoing made during such period, but solely as an
aid for discovering intent and purpose, we think no disinterested mind can
survey the period in question without being irresistibly driven to the
conclusion that the very genius for commercial development and
514
organization which it would seem was manifested from the beginning soon power to control the other, and if the inferences which this situation suggests
begot an intent and purpose to exclude others which was frequently were developed, which we deem it unnecessary to do, they might well serve
manifested by acts and dealings wholly inconsistent with the theory that they to add additional cogency to the presumption of intent to monopolize which
were made with the single conception of advancing the development of we have found arises from the unquestioned proof on other subjects.
business power by usual methods, but which, on the contrary, necessarily
involved the intent to drive others from the field, and to exclude them from We are thus brought to the last subject which we are called upon to
their right to trade, and thus accomplish the mastery which was the end in consider, viz:
view. And, considering the period from the date of the trust agreements of
1879 and 1882 up to the time of the expansion of the New Jersey Fourth. The remedy to be administered.
corporation, the gradual extension of the power over the commerce in oil
which ensued, the decision of the Supreme Court of Ohio, the tardiness or
It may be conceded that, ordinarily, where it was found that acts had been
reluctance in conforming to the commands of that decision, the method first
done in violation of the statute, adequate measure of relief would result from
adopted and that which finally culminated in the plan of the New Jersey
restraining the doing of such acts in the future. Swift v. United States, 196 U.
corporation, all additionally serve to make manifest the continued existence
S. 375. But in a case like this, where the condition which has been brought
of the intent which we have previously indicated and which, among other
about in violation of the statute, in and of itself, is not only a continued
things, impelled the expansion of the New Jersey corporation. The exercise
attempt to monopolize, but also a monopolization, the duty to enforce the
of the power which resulted from that organization fortifies the foregoing
statute requires the application of broader and more controlling remedies. As
conclusions, since the development which came, the acquisition here and
penalties which are not authorized by law may not be inflicted by judicial
there which ensued of every efficient means by which competition could have
authority, it follows that, to meet the situation with which we are confronted,
been asserted, the slow but resistless methods which followed by which
means of transportation were absorbed and brought under control,
Page 221 U. S. 78
Page 221 U. S. 77
the application of remedies two-fold in character becomes essential: 1st. To
forbid the doing in the future of acts like those which we have found to have
the system of marketing which was adopted by which the country was
been done in the past which would be violative of the statute. 2d. The
divided into districts and the trade in each district in oil was turned over to a
exertion of such measure of relief as will effectually dissolve the combination
designated corporation within the combination and all others were excluded,
found to exist in violation of the statute, and thus neutralize the extension and
all lead the mind up to a conviction of a purpose and intent which we think is
continually operating force which the possession of the power unlawfully
so certain as practically to cause the subject not to be within the domain of
obtained has brought and will continue to bring about.
reasonable contention.

In applying remedies for this purpose, however, the fact must not be
The inference that no attempt to monopolize could have been intended, and
overlooked that injury to the public by the prevention of an undue restraint
that no monopolization resulted from the acts complained of, since it is
on, or the monopolization of, trade or commerce is the foundation upon
established that a very small percentage of the crude oil produced was
which the prohibitions of the statute rest, and, moreover, that one of the
controlled by the combination, is unwarranted. As substantial power over the
fundamental purposes of the statute is to protect, not to destroy, rights of
crude product was the inevitable result of the absolute control which existed
property.
over the refined product, the monopolization of the one carried with it the

515
Let us then, as a means of accurately determining what relief we are to
afford, first come to consider what relief was afforded by the court below, in
order to fix how far it is necessary to take from or add to that relief, to the end
that the prohibitions of the statute may have complete and operative force.
The court below, by virtue of 1, 2, and 4 of its decree, which we have in
part previously excerpted in the margin, adjudged that the New Jersey
corporation, insofar as it held the stock of the various corporations recited in
2 and 4 of the decree or controlled the same was a combination in
violation of the first section of the act, and an attempt to monopolize or a
monopolization contrary to the second section of the act. It commanded the
dissolution of the combination, and therefore, in effect, directed the transfer
by the New Jersey corporation back to the stockholders of the various
subsidiary corporations entitled to the same of the stock which had been
turned over to the New Jersey company in exchange for its stock. To
Page 221 U. S. 79
make this command effective, 5 of the decree forbade the New Jersey
corporation from in any form or manner exercising any ownership or exerting
any power directly or indirectly in virtue of its apparent title to the stocks of
the subsidiary corporations, and prohibited those subsidiary corporations
from paying any dividends to the New Jersey corporation or doing any act
which would recognize further power in that company, except to the extent
that it was necessary to enable that company to transfer the stock. So far as
the owners of the stock of the subsidiary corporations and the corporations
themselves were concerned, after the stock had been transferred, 6 of the
decree enjoined them from in any way conspiring or combining to violate the
act or to monopolize or attempt to monopolize in virtue of their ownership of
the stock transferred to them, and prohibited all agreements between the
subsidiary corporations or other stockholders in the future, tending to
produce or bring about further violations of the act.
By 7, pending the accomplishment of the dissolution of the combination by
the transfer of stock and until it was consummated, the defendants named in
2, constituting all the corporations to which we have referred, were
enjoined from engaging in or carrying on interstate commerce. And, by 9,
among other things, a delay of thirty days was granted for the carrying into
effect of the directions of the decree.
So far as the decree held that the ownership of the stock of the New Jersey
corporation constituted a combination in violation of the first section and an
attempt to create a monopoly or to monopolize under the second section and
commanded the dissolution of the combination, the decree was clearly
appropriate. And this also is true of 5 of the decree, which restrained both
the New Jersey corporation and the subsidiary corporations from doing
anything which would recognize or give effect to further ownership
Page 221 U. S. 80
in the New Jersey corporation of the stocks which were ordered to be
retransferred.
But the contention is that, insofar as the relief by way of injunction which was
awarded by 6 against the stockholders of the subsidiary corporations or the
subsidiary corporations themselves after the transfer of stock by the New
Jersey corporation was completed in conformity to the decree, the relief
awarded was too broad: a. Because it was not sufficiently specific and
tended to cause those who were within the embrace of the order to cease to
be under the protection of the law of the land and required them to thereafter
conduct their business under the jeopardy of punishments for contempt for
violating a general injunction. New Haven R.R. v. Interstate Commerce
Commission, 200 U. S. 404. Besides, it is said that the restraint imposed by
6 -- even putting out of view the consideration just stated -- was moreover
calculated to do injury to the public, and, it may be, in and of itself, to produce
the very restraint on the due course of trade which it was intended to prevent.
We say this since it does not necessarily follow, because an illegal restraint
of trade or an attempt to monopolize or a monopolization resulted from the
combination and the transfer of the stocks of the subsidiary corporations to
the New Jersey corporation, that a like restraint or attempt to monopolize or
monopolization would necessarily arise from agreements between one or
more of the subsidiary corporations after the transfer of the stock by the New
516
Jersey corporation. For illustration, take the pipelines. By the effect of the
transfer of the stock, the pipelines would come under the control of various
corporations, instead of being subjected to a uniform control. If various
corporations owning the lines determined in the public interests to so
combine as to make a continuous line, such agreement or combination would
not be repugnant to the act, and yet it might be restrained by the decree. As
another example, take the
Page 221 U. S. 81
Our conclusion is that the decree below was right, and
Page 221 U. S. 82
should be affirmed except as to the minor matters concerning which we have
indicated the decree should be modified. Our order will therefore be one of
affirmance, with directions, however, to modify the decree in accordance with
this opinion. The court below to retain jurisdiction to the extent necessary to
compel compliance in every respect with its decree.

Union Tank Line Company, one of the subsidiary corporations, the owner And it is so ordered.
practically of all the tank cars in use by the combination. If no possibility
existed of agreements for the distribution of these cars among the subsidiary
corporations, the most serious detriment to the public interest might result.
Conceding the merit, abstractly considered, of these contentions, they are
irrelevant. We so think, since we construe the sixth paragraph of the decree
not as depriving the stockholders or the corporations, after the dissolution of
the combination, of the power to make normal and lawful contracts or
agreements, but as restraining them from, by any device whatever,
recreating directly or indirectly the illegal combination which the decree
dissolved. In other words, we construe the sixth paragraph of the decree not
as depriving the stockholders or corporations of the right to live under the law
of the land, but as compelling obedience to that law. As therefore the sixth
paragraph, as thus construed, is not amenable to the criticism directed
against it, and cannot produce the harmful results which the arguments
suggest it was obviously right. We think that, in view of the magnitude of the
interests involved and their complexity, that the delay of thirty days allowed
for executing the decree was too short, and should be extended so as to
embrace a period of at least six months. So also, in view of the possible
serious injury to result to the public from an absolute cessation of interstate
commerce in petroleum and its products by such vast agencies as are
embraced in the combination, a result which might arise from that portion of
the decree which enjoined carrying on of interstate commerce not only by the
New Jersey corporation, but by all the subsidiary companies until the
dissolution of the combination by the transfer of the stocks in accordance
with the decree, the injunction provided for in 7 thereof should not have
been awarded.

517
[G.R. No. 131214. July 27, 2000]

BA SAVINGS BANK, petitioner, vs. ROGER T. SIA, TACIANA U. SIA and

JOHN DOE, respondents.

DECISION

PANGANIBAN, J.:

518
 The certificate of non-forum shopping required by Supreme Court
Circular 28-91 may be signed, for and on behalf of a corporation, by a
specifically authorized lawyer who has personal knowledge of the facts
required to be disclosed in such document. Unlike natural persons,
corporations may perform physical actions only through properly delegated
individuals; namely, its officers and/or agents.
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court, assailing the August 6, 1997 Resolution [1] of the Court of
Appeals (CA) in CA-GR SP No. 43209.[2]
Also challenged by petitioner is the October 24, 1997 CA
Resolution[3] denying its Motion for Reconsideration.
The Facts
On August 6, 1997, the Court of Appeals issued a Resolution denying
due course to a Petition for Certiorari filed by BA Savings Bank, on the
ground that the Certification on anti-forum shopping incorporated in the
petition was signed not by the duly authorized representative of the
petitioner, as required under Supreme Court Circular No. 28-91, but by its
counsel, in contravention of said circular x x x.
A Motion for Reconsideration was subsequently filed by the petitioner,
attached to which was a BA Savings Bank Corporate Secretarys Certificate,
[4]
dated August 14, 1997. The Certificate showed that the petitioners Board
of Directors approved a Resolution on May 21, 1996, authorizing the
petitioners lawyers to represent it in any action or proceeding before any
court, tribunal or agency; and to sign, execute and deliver the Certificate of
Non-forum Shopping, among others.
On October 24, 1997, the Motion for Reconsideration was denied by the
Court of Appeals on the ground that Supreme Court Revised Circular No. 28-
91 requires that it is the petitioner, not the counsel, who must certify under
oath to all of the facts and undertakings required therein.
Hence, this appeal.[5]
Issue
In its Memorandum, petitioner submits the following issues for the
consideration of the Court:
I Whether or not petitioner-corporations lawyers are authorized to
execute and sign the certificate of non-forum shopping. x x x
II Whether or not the certification of petitioners authorized lawyers will
bind the corporation.
III Whether or not the certification by petitioner corporations lawyers is in
compliance with the requirements on non-forum shopping. [6]
Simply stated, the main issue is whether Supreme Court Revised
Circular No. 28-91 allows a corporation to authorize its counsel to execute a
certificate of non-forum shopping for and on its behalf.
The Courts Ruling
The Petition is meritorious.
Main Issue:
Authority of Counsel
A corporation, such as the petitioner, has no powers except those
expressly conferred on it by the Corporation Code and those that are implied
519
by or are incidental to its existence. In turn, a corporation exercises said
powers through its board of directors and/or its duly authorized officers and
agents. Physical acts, like the signing of documents, can be performed only
by natural persons duly authorized for the purpose by corporate bylaws or by
a specific act of the board of directors. All acts within the powers of a
corporation may be performed by agents of its selection; and, except so far
as limitations or restrictions which may be imposed by special charter, by-
law, or statutory provisions, the same general principles of law which govern
the relation of agency for a natural person govern the officer or agent of a
corporation, of whatever status or rank, in respect to his power to act for the
corporation; and agents once appointed, or members acting in their stead,
are subject to the same rules, liabilities and incapacities as are agents of
individuals and private persons.[7]
In the present case, the corporations board of directors issued a
Resolution specifically authorizing its lawyers to act as their agents in any
action or proceeding before the Supreme Court, the Court of Appeals, or any
other tribunal or agency[;] and to sign, execute and deliver in connection
therewith the necessary pleadings, motions, verification, affidavit of
merit, certificate of non-forum shopping and other instruments necessary for
such action and proceeding. The Resolution was sufficient to vest such
persons with the authority to bind the corporation and was specific enough as
to the acts they were empowered to do.
In the case of natural persons, Circular 28-91 requires the parties
themselves to sign the certificate of non-forum shopping. However, such
requirement cannot be imposed on artificial persons, like corporations, for the
simple reason that they cannot personally do the task themselves. As
already stated, corporations act only through their officers and duly
authorized agents. In fact, physical actions, like the signing and the delivery
of documents, may be performed, on behalf of the corporate entity, only by
specifically authorized individuals.
It is noteworthy that the Circular does not require corporate officers to
sign the certificate. More important, there is no prohibition against authorizing
agents to do so.
In fact, not only was BA Savings Bank authorized to name an agent to
sign the certificate; it also exercised its appointing authority reasonably
well. For who else knows of the circumstances required in the Certificate but
its own retained counsel. Its regular officers, like its board chairman and
president, may not even know the details required therein.
Consistent with this rationale, the Court en banc in Robern Development
Corporation v. Judge Jesus Quitain[8] has allowed even an acting regional
counsel of the National Power Corporation to sign, among others, the
certificate of non-forum shopping required by Circular 28-91. The Court held
that the counsel was in the best position to verify the truthfulness and the
correctness of the allegations in the Complaint and to know and to certify if
an action x x x had already been filed and pending with the courts. [9]
Circular 28-91 was prescribed by the Supreme Court to prohibit and
penalize the evils of forum shopping. We see no circumvention of this
rationale if the certificate was signed by the corporations specifically
authorized counsel, who had personal knowledge of the matters required in
the Circular. In Bernardo v. NLRC,[10] we explained that a literal interpretation
of the Circular should be avoided if doing so would subvert its very
rationale. Said the Court:
x x x. Indeed, while the requirement as to certificate of non-forum shopping is
mandatory, nonetheless the requirements must not be interpreted too literally
and thus defeat the objective of preventing the undesirable practice of forum-
shopping.
Finally, we stress that technical rules of procedure should be used to
promote, not frustrate, justice.[11] While the swift unclogging of court dockets
is a laudable objective, the granting of substantial justice is an even more
urgent ideal.
WHEREFORE, the Petition is GRANTED and the appealed Resolution
is REVERSED and SET ASIDE. The case is REMANDED to the Court of
Appeals, which is directed to continue the proceedings in CA-GR SP No.
43209 with all deliberate speed. No costs.
520
SO ORDERED.

Melo, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.

G.R. No. L-48237

521
MADRIGAL & COMPANY, INC., petitioner,
vs.
HON. RONALDO B. ZAMORA, PRESIDENTIAL ASSISTANT FOR LEGAL
AFFAIRS, THE HON. SECRETARY OF LABOR, and MADRIGAL
CENTRAL OFFICE EMPLOYEES UNION, respondents.
June 30, 1987
No. L-49023
MADRIGAL & COMPANY, INC., petitioner,
vs.
HON. MINISTER OF LABOR and MADRIGAL CENTRAL OFFICE
EMPLOYEES UNION, respondents.
SARMIENTO, J.:
These are two petitions for certiorari and prohibition filed by the
petitioner, the Madrigal & Co., Inc. The facts are undisputed.
The petitioner was engaged, among several other corporate objectives,
in the management of Rizal Cement Co., Inc. 1 Admittedly, the petitioner
and Rizal Cement Co., Inc. are sister companies. 2 Both are owned by the
same or practically the same stockholders. 3 On December 28, 1973, the
respondent, the Madrigal Central Office Employees Union, sought for the
renewal of its collective bargaining agreement with the petitioner, which was
due to expire on February 28, 1974. 4 Specifically, it proposed a wage
increase of P200.00 a month, an allowance of P100.00 a month, and other
economic benefits.5 The petitioner, however, requested for a deferment in the
negotiations.
On July 29, 1974, by an alleged resolution of its stockholders, the petitioner
reduced its capital stock from 765,000 shares to 267,366 shares. 6 This was
effected through the distribution of the marketable securities owned by the
petitioner to its stockholders in exchange for their shares in an equivalent
amount in the corporation.7
On August 22, 1975, by yet another alleged stockholders' action, the
petitioner reduced its authorized capitalization from 267,366 shares to
110,085 shares, again, through the same scheme.8
After the petitioner's failure to sit down with the respondent union, the latter,
on August 28, 1974, commenced Case No. LR-5415 with the National Labor
Relations Commission on a complaint for unfair labor practice. 9 In due time,
the petitioner filed its position paper, 10 alleging operational losses. Pending
the resolution of Case No. LR-5415, the petitioner, in a letter dated
November 17, 1975, 11 informed the Secretary of Labor that Rizal Cement
Co., Inc., "from which it derives income" 12 "as the General Manager or
Agent" 13 had "ceased operating temporarily." 14 "In addition, "because of the
desire of the stockholders to phase out the operations of the Madrigal & Co.,
Inc. due to lack of business incentives and prospects, and in order to prevent
further losses," 15it had to reduce its capital stock on two occasions "As the
situation, therefore, now stands, the Madrigal & Co., Inc. is without
substantial income to speak of, necessitating a reorganization, by way of
retrenchment, of its employees and operations." 16 The petitioner then
requested that it "be allowed to effect said reorganization gradually
considering all the circumstances, by phasing out in at least three (3) stages,
or in a manner the Company deems just, equitable and convenient to all
concerned, about which your good office will be apprised accordingly." 17 The
letter, however, was not verified and neither was it accompanied by the
proper supporting papers. For this reason, the Department of Labor took no
action on the petitioner's request.
On January 19, 1976, the labor arbiter rendered a decision 18 granting,
among other things, a general wage increase of P200.00 a month beginning
March 1, 1974 plus a monthly living allowance of P100.00 monthly in favor of
the petitioner's employees. The arbiter specifically found that the petitioner
"had been making substantial profits in its operation" 19 since 1972 through
1975. The petitioner appealed.
522
On January 29, 1976, the petitioner applied for clearance to terminate the
services of a number of employees pursuant supposedly to its retrenchment
program. On February 3, 1976, the petitioner applied for clearance to
terminate 18 employees more. 20 On the same date, the respondent union
went to the Regional Office (No. IV) of the Department of Labor (NLRC Case
No. R04-2-1432-76) to complain of illegal lockout against the
petitioner. 21Acting on this complaint, the Secretary of 22 Labor, in a decision
dated December 14, 1976, 22 found the dismissals "to be contrary to
law" 23 and ordered the petitioner to reinstate some 40 employees, 37 of
them with backwages. 24 The petitioner then moved for reconsideration,
which the Acting Labor Secretary, Amado Inciong, denied. 25
Thereafter, the petitioner filed an appeal to the Office of the President. The
respondent, the Presidential Assistant on Legal Affairs, affirmed with
modification the Labor Department's decision, thus:
xxx xxx xxx
1. Eliseo Dizon, Eugenio Evangelista and Benjamin Victorio are
excluded from the order of reinstatement.
2. Rogelio Meneses and Roberto Taladro who appear to have
voluntarily retired and paid their retirement pay, their cases are left to
the judgment of the Secretary of Labor who is in a better position to
assess appellant's allegation as to their retirement.
3. The rest are hereby reinstated with six (6) months backwages,
except Aleli Contreras, Teresita Eusebio and Norma Parlade who are
to be reinstated without backwages.
SO ORDERED. 26
xxx xxx xxx
On May 15, 1978, the petitioner came to this court. (G.R. No. 48237.)
Meanwhile, on May 25, 1977, the National Labor Relations Commission
rendered a decision affirming the labor arbiter's judgment in Case No. LR-
5415. 27 The petitioner appealed to the Secretary of Labor. On June 9, 1978,
the Secretary of Labor dismissed the appeal. 28 Following these successive
reversals, the petitioner came anew to this court. (G.R. No. 49023.)
By our resolution dated October 9, 1978, we consolidated G.R. No. 48237
with G.R. No. 49023. 29 We likewise issued temporary restraining orders. 30
In G.R. No. 48237, the petitioner argues, that.
xxx xxx xxx
I. SAID RESPONDENTS ERRED IN HOLDING THAT THERE WAS NO
VALID COMPLIANCE WITH THE CLEARANCE REQUIREMENT.
II. SAID RESPONDENTS ERRED IN NOT HOLDING THAT THERE IS NO
LOCKOUT HERE IN LEGAL CONTEMPLATION, MUCH LESS FOR UNION-
BUSTING PURPOSES.
III. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN ORDERING
THE REINSTATEMENT OF THE REST OF AFFECTED MEMBERS OF
RESPONDENT UNION WITH SIX (6) MONTHS BACKWAGES, EXCEPT
ALELI CONTRERAS, TERESITA EUSEBIO AND NORMA PARLADE WHO
ARE TO BE REINSTATED WITHOUT BACKWAGES.
IV. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN LEAVING TO
THE JUDGMENT OF RESPONDENT SECRETARY THE CASES OF
ROGELIO MENESES AND ROBERTO TALADRO WHO HAD
VOLUNTARILY RETIRED AND PAID THEIR RETIREMENT PAY.31
xxx xxx xxx
while in G.R. No. 49023, it submits that:
523
 xxx xxx xxx
1. RESPONDENT MINISTER ERRED IN AFFIRMING THE DECISION EN
BANC OF THE NATIONAL LABOR RELATIONS COMMISSION DESPITE
CLEAR INDICATIONS IN THE RECORD THAT THE AWARD WAS
PREMATURE IN THE ABSENCE OF A DEADLOCK IN NEGOTIATION AND
THE FAILURE ON THE PART OF THE LABOR ARBITER TO RESOLVE
THE MAIN IF NOT ONLY ISSUE OF REFUSAL TO BARGAIN, THEREBY
DEPRIVING PETITIONER OF ITS RIGHT TO DUE PROCESS.
2. ASSUMING ARGUENDO THAT THERE WAS A DEADLOCK IN
NEGOTIATION, RESPONDENT MINISTER ERRED NEVERTHELESS IN
NOT FINDING THAT THE ECONOMIC BENEFITS GRANTED IN THE
FORM OF SALARY INCREASES ARE UNFAIR AND VIOLATIVE OF THE
MANDATORY GUIDELINES PRESCRIBED UNDER PRESIDENTIAL
DECREE NO. 525 AND IGNORING THE UNDISPUTED FACT THAT
PETITIONER HAD VIRTUALLY CEASED OPERATIONS AFTER HAVING
TWICE DECREASED ITS CAPITAL STOCKS AND, THEREFORE, NOT
FINANCIALLY CAPABLE TO ABSORB SUCH AWARD OF BENEFITS. 32
xxx xxx xxx
There is no merit in these two (2) petitions.
As a general rule, the findings of administrative agencies are accorded not
only respect but even finality. 33 This is especially true with respect to the
Department of Labor, which performs not only a statutory function but carries
out a Constitutional mandate as well. 34 Our jurisdiction, as a rule, is confined
to cases of grave abuse of discretion. 35 But for certiorari to lie, there must be
such arbitrary and whimsical exercise of power, or that discretion was
exercised despotically. 36
In no way can the questioned decisions be seen as arbitrary. The decisions
themselves show why.
Anent Case No. R04-2-1432-76 (G.R. No. 48237), we are satisfied with the
correctness of the respondent Presidential Assistant for Legal Affairs'
findings. We quote:
xxx xxx xxx
In urging reversal of the appealed decision, appellant contends that
(1) its letter dated November 17, 1975, constitute "substantial
compliance with the clearance requirement to terminate;" and (2)
individual appellees' dismissal had no relation to any union activities,
but was the result of an honest-to-goodness retrenchment policy
occasioned by loss of income due to cessation of operation.
We find the first contention to be without merit. Aside from the fact
that the controversial letter was unverified, with not even a single
document submitted in support thereof, the same failed to specify the
individual employees to be affected by the intended retrenchment.
Not only this, but the letter is so vague and indefinite regarding the
manner of effecting appellant's retrenchment plan as to provide the
Secretary of (sic) a reasonable basis on which to determine whether
the request for retrenchment was valid or otherwise, and whether the
mechanics in giving effect thereto was just or unjust to the
employees concerned. In fact, to be clearly implied from the letter is
that the implementary measures needed to give effect to the
intended retrenchment are yet to be thought of or concretized in the
indefinite future, measures about which the office of the Secretary
"will be apprised accordingly." All these, and more, as correctly found
by the Acting Secretary, cannot but show that the letter is insufficient
in form and substance to constitute a valid compliance with the
clearance requirement. That being so, it matters little whether or not
complainant union or any of its members failed to interpose any
opposition thereto.
It cannot be over-emphasized that the purpose in requiring a prior
clearance by the Secretary of Labor, in cases of shutdown or
dismissal of employees, is to afford said official ample opportunity to
524
examine and determine the reasonableness of the request. This is
made imperative in order to give meaning and substance to the
constitutional mandate that the State must "afford protection to
labor," and guarantee their "security of tenure." Indeed, the rules
require that the application for clearance be filed ten (10) days before
the intended shutdown or dismissal, serving a copy thereof to the
employees affected in order that the latter may register their own
individual objections against the grant of the clearance. But how
could this requirement of notice to the employees have been
complied with, when, as observed by the Acting Secretary in his
modificatory decision dated June 30, 1977 "the latter of November
17, 1975 does not even state definitely the employees involved"
upon whom service could be made.
With respect to appellant's second contention, we agree with the
Acting Secretary's findings that individual appellee's dismissal was
an offshoot of the union's demand for a renegotiation of the then
validly existing collective bargaining Agreement.
xxx xxx xxx
The pattern of appellant's acts after the decision of the Labor Arbiter
in Case No. LR-5415 has convinced us that its sole objective was to
render moot and academic the desire of the union to exercise its
right to bargain collectively with management, especially so when it
is considered in the light of the fact that under the said decision the
demand by the union for wage increase and allowances was
granted. What renders appellant's motive suspect was its haste in
terminating the services of individual appellees, without waiting the
outcome of its appeal in Case No. LR-5415. The amount involved by
its offer to pay double separation could very well have been used to
pay the salaries of those employees whose services were sought to
be terminated, until the resolution of its appeal with the NLRC, since
anyway, if its planned retrenchment is found to be justifiable and
done in good faith, its only liability is to answer for the separation pay
provided by law. By and large, therefore, we agree with the Acting
Secretary that, under the circumstances obtaining in this case,
"respondent's action [was] a systematic and deliberate attempt to get
rid of complainants because of their union activities.
We now come to the individual cases of Aleli Contreras, Teresita
Eusebio and Norma Parlade. It is appellant's claim that these three
(3) should not be reinstated inasmuch as they have abandoned their
work by their continued absences, and moreover in the case of
Contreras, she failed to oppose the application for clearance filed
against her on October 24, 1975. However, appellant's payrolls for
December 16-31, 1975, January 1-15, 1976 and January 16-31,
1976, show that the three (3) were "on leave without pay." As
correctly appreciated by the Acting Secretary, these "payrolls prove,
first, that "leave" has been granted to these employees, and, second,
that it is a practice in the company to grant "leaves without pay"
without loss of employment status, to those who have exhausted
their authorized leaves." As regards, Norma Parlade, the records
show that she "truly incurred illness and actually underwent surgery
in Oct., 1975." As to Aleli Contreras, there is no showing that the
Secretary of Labor or appellant ever acted on the clearance. If we
were to follow the logic of appellant, Contreras should not have been
included in the application for clearance filed on Feb. 3, 1976. The
fact that she was included shows that up to that time, she was still
considered as a regular employee. It was for these reasons, coupled
with the length of service that these employees have rendered
appellant, that the Acting Secretary ordered their reinstatement but
without backwages. 37
xxx xxx xxx
With respect Lo Case No. LR-5415 (G.R. No. 49023), we are likewise
content with the findings of the National Labor Relations Commission. Thus:
xxx xxx xxx
Appellant now points that the only issue certified to compulsory
arbitration is "refusal to bargain" and it is, therefore, premature to
525
dictate the terms of the CBA on the assumption that there was
already a deadlock in negotiation. Appellant further contends that,
assuming there was deadlock in negotiation, the economic benefits
granted are unreasonable and violative of the guideline prescribed
by P.D. 525.
On the other hand, it is the union's stance that its economic demands
are justified by, the persistent increase in the cost of living and the
substantial earnings of the company from 1971 to 1975.
It bears to stress that although the union's petition was precipitated
by the company's refusal to bargain, there are glaring circumstances
pointing out that the parties also submitted "deadlock" to arbitration.
The petition itself is couched in general terms, praying for arbitration
of the union's "dispute" with the respondent concerning proposed
changes in the collective bargaining agreement." It is supported with
a copy of the proposed changes which just goes to show that the
union, aside from the issue concerning respondent's refusal to
bargain, sought determination of the merit of its proposals. On the
part of the appellant company, it pleaded financial incapacity to
absorb the proposed economic benefits during the initial stage of the
proceedings below. Even the evidence and arguments proferred
below by both parties are relevant to deadlock issue. In the face of
these factual environment, it is our view that the Labor Arbiter below
did not commit a reversible error in rendering judgment on the
proposed CBA changes. At any rate, the minimum requirements of
due process was satisfied because as heretofore stated, the
appellant was given Opportunity, and had in fact, presented evidence
and argument in avoidance of the proposed CBA changes.
We do not also subscribe to appellant's argument that by reducing its
capital, it is made evident that it is phasing out its operations. On the
contrary, whatever may be the reason behind such reductions, it is
indicative of an intention to keep the company a going concern. So
much so that until now almost four (4) years later, it is still very much
in existence and operational as before.
We now come to the question concerning the equitableness of the
economic benefits granted below. It requires no evidence to show
that the employees concerned deserve some degree of upliftment
due to the unabated increase in the cost of living especially in Metro
Manila. Of course the company would like us to believe that it is
losing and is therefore not financially capable of improving the
present CBA to favor its employees. In support of such assertion, the
company points that the profits reflected in its yearly Statement of
Income and Expenses are dividends from security holdings. We,
however, reject as puerile its suggestion to dissociate the dividends it
received from security holdings on the pretext that they belong
exclusively to its stockholders. The dividends received by the
company are corporate earnings arising from corporate investment
which no doubt are attended to by the employees involved in this
proceedings. Otherwise. it would not have been reflected as part of
profits in the company's yearly financial statements. In determining
the reasonableness of the economic grants below, we have,
therefore, scrutinized the company's Statement of Income and
Expenses from 1972 to 1975 and after equating the welfare of the
employees with the substantial earnings of the company, we find the
award to be predicated on valid justifications.
The salary increase we herein sanction is also in keeping with the
rational that made imperative the enactment of the Termination Pay
Law since in case the respondent company really closes down, the
employees will receive higher separation pay or retirement benefits
to tide them over while seeking another employment. 38
What clearly emerges from the recorded facts is that the petitioner, awash
with profits from its business operations but confronted with the demand of
the union for wage increases, decided to evade its responsibility towards the
employees by a devised capital reduction. While the reduction in capital
stock created an apparent need for retrenchment, it was, by all indications,
just a mask for the purge of union members, who, by then, had agitated for
wage increases. In the face of the petitioner company's piling profits, the
unionists had the right to demand for such salary adjustments.
526
That the petitioner made quite handsome profits is clear from the records.
The labor arbiter stated in his decision in the collective agreement case
(Case No. LR-5415):
xxx xxx xxx
A clear scrutiny of the financial reports of the respondent [herein
petitioner] reveals that it had been making substantial profits in the
operation.
In 1972, when it still had 765,000 common shares, of which 305,000
were unissued and 459,000 outstanding capitalized at
P16,830,000.00, the respondent made a net profit of P2,403,211.58.
Its total assets were P70,821,317.81.
In 1973, based on the same capitalization, its profit increased to
P2,724,465.33. Its total assets increased to P83,240,473.73.
In 1974, although its capitalization was reduced from
P16,830,000.00 to P11,230,459.36, its profits were further increased
to P2,922,349.70. Its assets were P78,842,175.75.
The reduction in its assets by P4,398,297.98 was due to the fact that
its capital stock was reduced by the amount of P5,599,540.54.
In 1975, for the period of only six months, the respondent reported a
net profit of P547,414.72, which when added to the surplus of
P5,591.214.19, makes a total surplus of P6,138,628.91 as of June
30, 1975. 39
xxx xxx xxx
The petitioner would, however, have us believe that it in fact sustained
losses. Whatever profits it earned, so it claims were in the nature of
dividends "declared on its shareholdings in other companies in the earning of
which the employees had no participation whatsoever." 40 "Cash dividends,"
according to it, "are the absolute property of the stockholders and cannot be
made available for disposition if only to meet the employees' economic
demands." 41
There is no merit in this contention. We agree with the National Labor
Relations Commission that "[t]he dividends received by the company are
corporate earnings arising from corporate investment." 42 Indeed, as found by
the Commission, the petitioner had entered such earnings in its financial
statements as profits, which it would not have done if they were not in fact
profits. 43
Moreover, it is incorrect to say that such profits in the form of dividends
are beyond the reach of the petitioner's creditors since the petitioner had
received them as compensation for its management services in favor of the
companies it managed as a shareholder thereof. As such shareholder, the
dividends paid to it were its own money, which may then be available for
wage increments. It is not a case of a corporation distributing dividends in
favor of its stockholders, in which case, such dividends would be the
absolute property of the stockholders and hence, out of reach by creditors of
the corporation. Here, the petitioner was acting as stockholder itself, and in
that case, the right to a share in such dividends, by way of salary increases,
may not be denied its employees.
Accordingly, this court is convinced that the petitioner's capital reduction
efforts were, to begin with, a subterfuge, a deception as it were, to
camouflage the fact that it had been making profits, and consequently, to
justify the mass layoff in its employee ranks, especially of union members.
They were nothing but a premature and plain distribution of corporate assets
to obviate a just sharing to labor of the vast profits obtained by its joint efforts
with capital through the years. Surely, we can neither countenance nor
condone this. It is an unfair labor practice.
As we observed in People's Bank and Trust Company v. People's Bank and
Trust Co. Employees Union: 44
xxx xxx xxx
527
 As has been held by this Court in Insular Lumber Company vs. CA, the clearance required under Presidential Decree No. 850 has been done
et al., L-23875, August 29, 1969, 29 SCRA 371, retrenchment can away with by Batas Blg. 130, approved on August 21, 1981.
only be availed of if the company is losing or meeting financial
reverses in its operation, which certainly is not the case at bar. During the pendency of these petitions, the petitioner submitted
Undisputed is the fact, that the Bank "at no time incurred losses. " As manifestations to the effect that certain employees have accepted retirement
a matter of fact, "the net earnings of the Bank would be in the benefits pursuant to its retrenchment scheme. 50 This is a matter of defense
average of P2,000,000.00 a year from 1960 to 1969 and, during this that should be raised before the National Labor Relations Commission.
period of nine (9) years, the Bank continuously declared dividends to
its stockholders." Thus the mass lay-off or dismissal of the 65 To do away with the protracted process of determining the earnings acquired
employees under the guise of retrenchment policy of the Bank is a by the employees as a result of ad interim employment, and to erase any
lame excuse and a veritable smoke-screen of its scheme to bust the doubt as to the amount of backwages due them, this court, in line with the
Union and thus unduly disturb the employment tenure of the precedent set in Mercury Drug Co., Inc. v. Court of Industrial
employees concerned, which act is certainly an unfair labor Relations, 51 affirmed in a long line of decisions that came later, 52 hereby
practice. 45 fixes the amount of backwages at three (3) years pay reckoned at the
increased rates decreed by the labor arbiter in Case No. LR-5415 without
Yet, at the same tune, the petitioner would claim that "the phasing out of its deduction or qualification.
operations which brought about the retrenchment of the affected employees
was mainly dictated be the necessity of its stockholders in their capacity as WHEREFORE, the petitions are hereby DISMISSED. Subject to the
heirs of the late Don Vicente Madrigal to partition the estate left by him." 46 It modification as to the amount of backwages hereby awarded, the challenged
must be noted, however, that the labor cases were tried on the theory of decisions are AFFIRMED. The temporary restraining orders are LIFTED.
losses the petitioner was supposed to have incurred to justify retrenchment. With costs against the petitioner.
The petitioner cannot change its theory in the Supreme Court. Moreover,
there is nothing in the records that will substantiate this claim. But what is
This decision is IMMEDIATELY EXECUTORY.
more important is the fact that it is not impossible to partition the Madrigal
estate assuming that the estate is up for partition without the
petitioner's business closing shop and inevitably, without the petitioner laying SO ORDERED.
off its employees.
Yap (Chairman), Narvasa, Melencio-Herrera, Cruz, Feliciano and Gancayco,
As regards the question whether or not the petitioner's letter dated November JJ., concur.
17, 1975 47 was in substantial compliance with legal clearance requirements,
suffice it to state that apart from the Secretary of Labor's valid observation
that the same "did not constitute a sufficient clearance as contemplated by
law, " 48 the factual circumstances show that the letter in question was itself a
part of the "systematic and deliberate attempt to get rid of [the union
members] because of their union activities." 49 Hence, whether or not the said
letter complied with the legal formalities is beside the point since under the
circumstances, retrenchment was, in all events, unjustified. Parenthetically,

528
 ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and
SECURITIES & EXCHANGE COMMISSION, petitioners,
vs.
COURT OF APPEALS and IGLESIA NI CRISTO, respondents.

HERMOSISIMA, JR., J.:

The subject of this petition for review is the Decision of the public respondent
Court of Appeals, 1 dated October 28, 1994, setting aside the portion of the
Decision of the Securities and Exchange Commission (SEC, for short) in
SEC Case No. 4012 which declared null and void the sale of two (2) parcels
of land in Quezon City covered by the Deed of Absolute Sale entered into by
and between private respondent Iglesia Ni Cristo (INC, for short) and the
Islamic Directorate of the Philippines, Inc., Carpizo Group, (IDP, for short).

The following facts appear of record.

Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders

of all Muslim major tribal groups in the Philippines headed by Dean Cesar
Adib Majul organized and incorporated the ISLAMIC DIRECTORATE OF
THE PHILIPPINES (IDP), the primary purpose of which is to establish an
Islamic Center in Quezon City for the construction of a "Mosque (prayer
place), Madrasah (Arabic School), and other religious infrastructures" so as
to facilitate the effective practice of Islamic faith in the area. 2

Towards this end, that is, in the same year, the Libyan government donated
money to the IDP to purchase land at Culiat, Tandang Sora, Quezon City, to
be used as a Center for the Islamic populace. The land, with an area of
49,652 square meters, was covered by two titles: Transfer Certificate of Title
Nos. RT-26520 (176616) 3 and RT-26521 (170567), 4 both registered in the
name of IDP.

G.R. No. 117897 May 14, 1997

It appears that in 1971, the Board of Trustees of the IDP was composed of
the following per Article 6 of its Articles of Incorporation:

529
 Senator Mamintal Tamano 5 and void, a vacuum is created as to who should adopt the
Congressman Ali Dimaporo by-laws and certify its adoption. To remedy this unfortunate
Congressman Salipada Pendatun situation that the association has found itself in, the
Dean Cesar Adib Majul members of the petitioning corporation are hereby
Sultan Harun Al-Rashid Lucman authorized to prepare and adopt their by-laws for submission
Delegate Ahmad Alonto to the Commission. Once approved, an election of the
Commissioner Datu Mama Sinsuat members of the Board of Trustees shall immediately be
Mayor Aminkadra Abubakar 6 called pursuant to the approved by-laws.

According to the petitioner, in 1972, after the purchase of the land by the
Libyan government in the name of IDP, Martial Law was declared by the late
President Ferdinand Marcos. Most of the members of the 1971 Board of
Trustees like Senators Mamintal Tamano, Salipada Pendatun, Ahmad Alonto,
and Congressman Al-Rashid Lucman flew to the Middle East to escape
political persecution.
Thereafter, two Muslim groups sprung, the Carpizo Group, headed by
Engineer Farouk Carpizo, and the Abbas Group, led by Mrs. Zorayda
Tamano and Atty. Firdaussi Abbas. Both groups claimed to be the legitimate
IDP. Significantly, on October 3, 1986, the SEC, in a suit between these two
contending groups, came out with a Decision in SEC Case No. 2687
declaring the election of both the Carpizo Group and the Abbas Group as
IDP board members to be null and void. The dispositive portion of the SEC
Decision reads:
WHEREFORE, judgment is hereby rendered declaring the
elections of both the petitioners 7 and respondents 8 as null
and void for being violative of the Articles of Incorporation of
petitioner corporation. With the nullification of the election of
the respondents, the approved by-laws which they certified
to this Commission as members of the Board of Trustees
must necessarily be likewise declared null and void.
However, before any election of the members of the Board of
Trustees could be conducted, there must be an approved by-
laws to govern the internal government of the association
including the conduct of election. And since the election of
both petitioners and respondents have been declared null
SO ORDERED. 9
Neither group, however, took the necessary steps prescribed by the SEC in
its October 3, 1986 Decision, and, thus, no valid election of the members of
the Board of Trustees of IDP was ever called. Although the Carpizo
Group 10 attempted to submit a set of by-laws, the SEC found that, aside
from Engineer Farouk Carpizo and Atty. Musib Buat, those who prepared and
adopted the by-laws were not bona fide members of the IDP, thus rendering
the adoption of the by-laws likewise null and void.
On April 20, 1989, without having been properly elected as new members of
the Board of Trustee of IDP, the Carpizo Group caused to be signed an
alleged Board Resolution 11 of the IDP, authorizing the sale of the subject two
parcels of land to the private respondent INC for a consideration of
P22,343,400.00, which sale was evidenced by a Deed of Absolute
Sale 12 dated April 20, 1989.
On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by
former Senator Mamintal Tamano, or the Tamano Group, filed a petition
before the SEC, docketed as SEC Case No. 4012, seeking to declare null
and void the Deed of Absolute Sale signed by the Carpizo Group and the
INC since the group of Engineer Carpizo was not the legitimate Board of
Trustees of the IDP.
Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale
executed in its favor, filed an action for Specific Performance with Damages
against the vendor, Carpizo Group, before Branch 81 of the Regional Trial

530
Court of Quezon City, docketed as Civil Case No. Q-90-6937, to compel said
group to clear the property of squatters and deliver complete and full physical
possession thereof to INC. Likewise, INC filed a motion in the same case to
compel one Mrs. Leticia P. Ligon to produce and surrender to the Register of
Deeds of Quezon City the owner's duplicate copy of TCT Nos. RT-26521 and
RT-26520 covering the aforementioned two parcels of land, so that the sale
in INC's favor may be registered and new titles issued in the name of INC.
Mrs. Ligon was alleged to be the mortgagee of the two parcels of land
executed in her favor by certain Abdulrahman R.T. Linzag and Rowaida
Busran-Sampaco claimed to be in behalf of the Carpizo Group.
The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case
No. Q-90-6937 averring, inter alia:
xxx xxx xxx
2. That the Intervenor has filed a case before the Securities
and Exchange Commission (SEC) against Mr. Farouk
Carpizo, et. al., who, through false schemes and
machinations, succeeded in executing the Deed of Sale
between the IDP and the Iglesia Ni Kristo (plaintiff in the
instant case) and which Deed of Sale is the subject of the
case at bar;
3. That the said case before the SEC is docketed as Case
No. 04012, the main issue of which is whether or not the
aforesaid Deed of Sale between IDP and the Iglesia ni Kristo
is null and void, hence, Intervenor's legal interest in the
instant case. A copy of the said case is hereto attached as
Annex "A";
4. That, furthermore, Intervenor herein is the duly constituted
body which can lawfully and legally represent the Islamic
Directorate of the Philippines;
xxx xxx xxx 13
Private respondent INC opposed the motion arguing, inter alia, that the issue
sought to be litigated by way of intervention is an intra-corporate dispute
which falls under the jurisdiction of the SEC. 14
Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City,
denied petitioner's motion to intervene on the ground of lack of juridical
personality of the IDP-Tamano Group and that the issues being raised by
way of intervention are intra-corporate in nature, jurisdiction thereto properly
pertaining to the SEC. 15
Apprised of the pendency of SEC Case No. 4012 involving the controverted
status of the IDP-Carpizo Group but without waiting for the outcome of said
case, Judge Reyes, on September 12, 1991, rendered Partial Judgment in
Civil Case No. Q-90-6937 ordering the IDP-Carpizo Group to comply with its
obligation under the Deed of Sale of clearing the subject lots of squatters and
of delivering the actual possession thereof to INC. 16
Thereupon, Judge Reyes in another Order, dated March 2, 1992, pertaining
also to Civil Case No. Q-90-6937, treated INC as the rightful owner of the
real properties and disposed as follows:
WHEREFORE, Leticia P. Ligon is hereby ordered to produce
and/or surrender to plaintiff 17 the owner's copy of RT-26521
(170567) and RT-26520 (176616) in open court for the
registration of the Deed of Absolute Sale in the latter's name
and the annotation of the mortgage executed in her favor by
herein defendant Islamic Directorate of the Philippines on
the new transfer certificate of title to be issued to plaintiff.
SO ORDERED. 18
On April 6, 1992, the above Order was amended by Judge Reyes directing
Ligon "to deliver the owner's duplicate copies of TCT Nos. RT-26521
(170567) and RT-26520 (176616) to the Register of Deeds of Quezon
City for the purposes stated in the Order of March 2, 1992." 19
531
Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari,
docketed as CA-G.R No. SP-27973, assailing the foregoing Orders of Judge
Reyes. The appellate court dismissed her petition on October 28, 1992. 20
Undaunted, Ligon filed a petition for review before the Supreme Court which
was docketed as G.R. No. 107751.
In the meantime, the SEC, on July 5, 1993, finally came out with a Decision
in SEC Case No. 4012 in this wise:
1. Declaring the by-laws submitted by the respondents
unauthorized, and hence, null and void.
2. Declaring the sale of the two (2) parcels of land in Quezon
City covered by the Deed of Absolute Sale entered into by
Iglesia ni Kristo and the Islamic Directorate of the
Philippines, Inc. 22 null and void;
23
3. Declaring the election of the Board of Directors,
corporation from 1986 to 1991 as null and void;
4. Declaring the acceptance of the respondents, except
Farouk Carpizo and Musnib Buat, as members of the IDP
null and void.
No pronouncement as to cost.
SO ORDERED. 24
Private respondent INC filed a Motion for Intervention, dated September 7,
1993, in SEC Case No. 4012, but the same was denied on account of the
fact that the decision of the case had become final and executory, no appeal
having been taken therefrom. 25
INC elevated SEC Case No. 4012 to the public respondent Court of Appeals
by way of a special civil action for certiorari, docketed as CA-G.R SP No.
33295. On October 28, 1994, the court a quo promulgated a Decision in CA-
G.R. SP No. 33295 granting INC's petition. The portion of the SEC Decision
in SEC Case No. 4012 which declared the sale of the two (2) lots in question
to INC as void was ordered set aside by the Court of Appeals.
Thus, the IDP-Tamano Group brought the instant petition for review, dated
December 21, 1994, submitting that the Court of Appeals gravely erred in:
21
as 1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale;
2) Encouraging multiplicity of suits; and
26
3) Not applying the principles of estoppel and laches.
While the above petition was pending, however, the Supreme Court rendered
judgment in G.R. No. 107751 on the petition filed by Mrs. Leticia P. Ligon.
of the The Decision, dated June 1, 1995, denied the Ligon petition and affirmed the
October 28, 1992 Decision of the Court of Appeals in CA-G.R. No. SP-27973
which sustained the Order of Judge Reyes compelling mortgagee Ligon to
surrender the owner's duplicate copies of TCT Nos. RT-26521 (170567) and
RT-26520 (176616) to the Register of Deeds of Quezon City so that the
Deed of Absolute Sale in INC's favor may be properly registered.
Before we rule upon the main issue posited in this petition, we would like to
point out that our disposition in G.R. No. 107751 entitled, "Ligon v. Court of
Appeals," promulgated on June 1, 1995, in no wise constitutes res
judicatasuch that the petition under consideration would be barred if it were
the ease. Quite the contrary, the requisites or res judicata do not obtain in the
case at bench.
Section 49, Rule 39 of the Revised Rules of Court lays down the dual
aspects of res judicata in actions in personam, to wit:
532
 Effect of judgment. The effect of a judgment or final order
rendered by a court or judge of the Philippines, having
jurisdiction to pronounce the judgment or order, may be as
follows:
xxx xxx xxx
(b) In other cases the judgment or order is, with respect to
the matter directly adjudged or as to any other matter that
could have been raised in relation thereto, conclusive
between the parties and their successors in interest by title
subsequent to the commencement of the action or special
proceeding, litigating for the same thing and under the same
title and in the same capacity;
(c) In any other litigation between the same parties or their
successors in interest, that only is deemed to have been
adjudged in a former judgment which appears upon its face
to have been so adjudged, or which was actually and
necessarily included therein or necessary thereto.
Section 49(b) enunciates the first concept of res judicata known as "bar by
prior judgment," whereas, Section 49(c) is referred to as "conclusiveness of
judgment."
There is "bar by former judgment" when, between the first case where the
judgment was rendered, and the second case where such judgment is
invoked, there is identity of parties, subject matter and cause of action. When
the three identities are present, the judgment on the merits rendered in the
first constitutes an absolute bar to the subsequent action. But where between
the first case wherein judgment is rendered and the second case wherein
such judgment is invoked, there is only identity of parties but there is no
identity of cause of action, the judgment is conclusive in the second case,
only as to those matters actually and directly controverted and determined,
and not as to matters merely involved therein. This is what is termed
"conclusiveness of judgment." 27
Neither of these concepts of res judicata find relevant application in the case
at bench. While there may be identity of subject matter (IDP property) in both
cases, there is no identity of parties. The principal parties in G.R. No. 107751
were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as
private respondent. The IDP, as represented by the 1971 Board of Trustees
or the Tamano Group, was only made an ancillary party in G.R. No. 107751
as intervenor. 28 It was never originally a principal party thereto. It must be
noted that intervention is not an independent action, but is merely collateral,
accessory, or ancillary to the principal action. It is just an interlocutory
proceeding dependent on or subsidiary to the case between the original
parties. 29 Indeed, the IDP-Tamano Group cannot be considered a principal
party in G.R. No. 107751 for purposes of applying the principle of res
judicata since the contrary goes against the true import of the action of
intervention as a mere subsidiary proceeding without an independent life
apart from the principal action as well as the intrinsic character of the
intervenor as a mere subordinate party in the main case whose right may be
said to be only in aid of the right of the original party. 30 It is only in the
present case, actually, where the IDP-Tamano Group became a principal
party, as petitioner, with the Iglesia Ni Cristo, as private respondent. Clearly,
there is no identity of parties in both cases.
In this connection, although it is true that Civil Case No. Q-90-6937, which
gave rise to G.R. No. 107751, was entitled, "Iglesia Ni Kristo, Plaintiff
v. Islamic Directorate of the Philippines, Defendant," 31 the IDP can not be
considered essentially a formal party thereto for the simple reason that it was
not duly represented by a legitimate Board of Trustees in that case. As a
necessary consequence, Civil Case No. Q-90-6937, a case for Specific
Performance with Damages, a mere action in personam, did not become
final and executory insofar as the true IDP is concerned since petitioner
corporation, for want of legitimate representation, was effectively deprived of
its day in court in said case. Res inter alios judicatae nullum allis
praejudicium faciunt. Matters adjudged in a cause do not prejudice those
who were not parties to it. 32 Elsewise put, no person (natural or juridical)
shall be affected by a proceeding to which he is a stranger. 33
Granting arguendo, that IDP may be considered a principal party in Ligon,
res judicata as a "bar by former judgment" will still not set in on the ground
533
that the cause of action in the two cases are different. The cause of action in
G.R. No. 107751 is the surrender of the owner's duplicate copy of the
transfer certificates of title to the rightful possessor thereof, whereas the
cause of action in the present case is the validity of the Carpizo Group-INC
Deed of Absolute Sale.
Res Judicata in the form of "conclusiveness of judgment" cannot likewise
apply for the reason that any mention at all in Ligon as to the validity of the
disputed Carpizo Board-INC sale may only be deemed incidental to the
resolution of the primary issue posed in said case which is: Who between
Ligon and INC has the better right of possession over the owner's duplicate
copy of the TCTs covering the IDP property? G.R. No. 107751 cannot be
considered determinative and conclusive on the matter of the validity of the
sale for this particular issue was not the principal thrust of Ligon. To rule
otherwise would be to cause grave and irreparable injustice to IDP which
never gave its consent to the sale, thru a legitimate Board of Trustees.
In any case, while it is true that the principle of res judicata is a fundamental
component of our judicial system, it should be disregarded if its rigid
application would involve the sacrifice of justice to technicality. 34
The main question though in this petition is: Did the Court of Appeals commit
reversible error in setting aside that portion of the SEC's Decision in SEC
Case No. 4012 which declared the sale of two (2) parcels of land in Quezon
City between the IDP-Carpizo Group and private respondent INC null and
void?
We rule in the affirmative.
There can be no question as to the authority of the SEC to pass upon the
issue as to who among the different contending groups is the legitimate
Board of Trustees of the IDP since this is a matter properly falling within the
original and exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c)
of Presidential Decree No. 902-A:
Sec. 3. The Commission shall have absolute jurisdiction,
supervision and control over all corporations, partnership or
associations, who are the grantees of primary franchises
and/or a license or permit issued by the government to
operate in the Philippines . . . .
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws
and decrees, it shall have original and exclusive jurisdiction
to hear and decide cases involving:
xxx xxx xxx
c) Controversies in the selection or appointment of directors,
trustees, officers, or managers of such corporations,
partnerships or associations. . . . .
If the SEC can declare who is the legitimate IDP Board, then by
parity of reasoning, it can also declare who is not the legitimate IDP
Board. This is precisely what the SEC did in SEC Case No. 4012
when it adjudged the election of the Carpizo Group to the IDP Board
of Trustees to be null and
void. 35 By this ruling, the SEC in effect made the unequivocal finding
that the IDP-Carpizo Group is a bogus Board of Trustees.
Consequently, the Carpizo Group is bereft of any authority
whatsoever to bind IDP in any kind of transaction including the sale
or disposition of ID property.
It must be noted that SEC Case No. 4012 is not the first case wherein the
SEC had the opportunity to pass upon the status of the Carpizo Group. As far
back as October 3, 1986, the SEC, in Case No. 2687, 36 in a suit between the
Carpizo Group and the Abbas Group, already declared the election of the
534
Carpizo Group (as well as the Abbas Group) to the IDP Board as null and
void for being violative of the Articles of Incorporation. 37 Nothing thus
becomes more settled than that the IDP-Carpizo Group with whom private
respondent INC contracted is a fake Board.
Premises considered, all acts carried out by the Carpizo Board, particularly
the sale of the Tandang Sora property, allegedly in the name of the IDP, have
to be struck down for having been done without the consent of the IDP thru a
legitimate Board of Trustees. Article 1318 of the New Civil Code lays down
the essential requisites of contracts:
There is no contract unless the following requisites concur:
(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.
All these elements must be present to constitute a valid contract. For,
where even one is absent, the contract is void. As succinctly put by
Tolentino, consent is essential for the existence of a contract, and
where it is wanting, the contract is non-existent. 38 In this case, the
IDP, owner of the subject parcels of land, never gave its consent,
thru a legitimate Board of Trustees, to the disputed Deed of Absolute
Sale executed in favor of INC. This is, therefore, a case not only of
vitiated consent, but one where consent on the part of one of the
supposed contracting parties is totally wanting. Ineluctably, the
subject sale is void and produces no effect whatsoever.
The Carpizo Group-INC sale is further deemed null and void ab
initio because of the Carpizo Group's failure to comply with Section 40 of the
Corporation Code pertaining to the disposition of all or substantially all assets
of the corporation:
Sec. 40. Sale or other disposition of assets. Subject to the
provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially
all of its property and assets, including its goodwill, upon
terms and conditions and for such consideration, which may
be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its
board of directors or trustees may deem expedient, when
authorized by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock; or in
case of non-stock corporation, by the vote of at least two-
thirds (2/3) of the members, in a stockholders' or members'
meeting duly called for the purpose. Written notice of the
proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if thereby
the corporation would be rendered incapable of continuing
the business or accomplishing the purpose for which it was
incorporated.
xxx xxx xxx
The Tandang Sora property, it appears from the records, constitutes the only
property of the IDP. Hence, its sale to a third-party is a sale or disposition of
all the corporate property and assets of IDP falling squarely within the
contemplation of the foregoing section. For the sale to be valid, the majority
vote of the legitimate Board of Trustees, concurred in by the vote of at least
2/3 of the bona fide members of the corporation should have been obtained.
535
These twin requirements were not met as the Carpizo Group which voted to
sell the Tandang Sora property was a fake Board of Trustees, and those
whose names and signatures were affixed by the Carpizo Group together
with the sham Board Resolution authorizing the negotiation for the sale were,
from all indications, not bona fide members of the IDP as they were made to
appear to be. Apparently, there are only fifteen (15) official members of the
petitioner corporation including the eight (8) members of the Board of
Trustees. 39
All told, the disputed Deed of Absolute Sale executed by the fake Carpizo
Board and private respondent INC was intrinsically void ab initio.
Private respondent INC nevertheless questions the authority of the SEC to
nullify the sale for being made outside of its jurisdiction, the same not being
an intra-corporate dispute.
The resolution of the question as to whether or not the SEC had jurisdiction
to declare the subject sale null and void is rendered moot and academic by
the inherent nullity of the highly dubious sale due to lack of consent of the
IDP, owner of the subject property. No end of substantial justice will be
served if we reverse the SEC's conclusion on the matter, and remand the
case to the regular courts for further litigation over an issue which is already
determinable based on what we have in the records.
It is unfortunate that private respondent INC opposed the motion for
intervention filed by the 1971 Board of Trustees in Civil Case. No. Q-90-
6937, a case for Specific Performance with Damages between INC and the
Carpizo Group on the subject Deed of Absolute Sale. The legitimate IDP
Board could have been granted ample opportunity before the regional trial
court to shed light on the true status of the Carpizo Board and settled the
matter as to the validity of the sale then and there. But INC, wanting to
acquire the property at all costs and threatened by the participation of the
legitimate IDP Board in the civil suit, argued for the denial of the motion
averring, inter alia, that the issue sought to be litigated by the movant is intra-
corporate in nature and outside the jurisdiction of the regional trial court. 40 As
a result, the motion for intervention was denied. When the Decision in SEC
Case No. 4012 came out nullifying the sale, INC came forward, this time,
quibbling over the issue that it is the regional trial court, and not the SEC,
which has jurisdiction to rule on the validity of the sale. INC is here trifling
with the courts. We cannot put a premium on this clever legal maneuverings
of private respondent which, if countenanced, would result in a failure of
justice.
Furthermore, the Court observes that the INC bought the questioned
property from the Carpizo Group without even seeing the owner's duplicate
copy of the titles covering the property. This is very strange considering that
the subject lot is a large piece of real property in Quezon City worth millions,
and that under the Torrens System of Registration, the minimum requirement
for one to be a good faith buyer for value is that the vendee at least sees the
owner's duplicate copy of the title and relies upon the same. 41 The private
respondent, presumably knowledgeable on the aforesaid workings of the
Torrens System, did not take heed of this and nevertheless went through with
the sale with undue haste. The unexplained eagerness of INC to buy this
valuable piece of land in Quezon City without even being presented with the
owner's copy of the titles casts very serious doubt on the rightfulness of its
position as vendee in the transaction.
WHEREFORE, the petition is GRANTED. The Decision of the public
respondent Court of Appeals dated October 28, 1994 in CA-G.R. SP No.
33295 is SET ASIDE. The Decision of the Securities and Exchange
Commission dated July 5, 1993 in SEC Case No. 4012 is REINSTATED. The
Register of Deeds of Quezon City is hereby ordered to cancel the registration
of the Deed of Absolute Sale in the name of respondent Iglesia Ni Cristo, if
one has already been made. If new titles have been issued in the name of
Iglesia Ni Cristo, the Register of Deeds is hereby ordered to cancel the
same, and issue new ones in the name of petitioner Islamic Directorate of the
Philippines. Petitioner corporation is ordered to return to private respondent
whatever amount has been initially paid by INC as consideration for the
property with legal interest, if the same was actually received by IDP.
Otherwise, INC may run after Engineer Farouk Carpizo and his group for the
amount of money paid.
SO ORDERED.
536
G.R. No. L-56655 July 25, 1983
DATU TAGORANAO BENITO, petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION and JAMIATUL
PHILIPPINE-AL ISLAMIA, INC., respondents.
The Solicitor General for respondent.
Tacod D. Macaraya for private respondent.
RELOVA, J.:
On February 6, 1959, the Articles of Incorporation of respondent Jamiatul
Philippine-Al Islamia, Inc. (originally Kamilol Islam Institute, Inc.) were filed
with the Securities and Exchange Commission (SEC) and were approved on
December 14, 1962. The corporation had an authorized capital stock of
P200,000.00 divided into 20,000 shares at a par value of P10.00 each. Of
the authorized capital stock, 8,058 shares worth P80,580.00 were subscribed
and fully paid for. Herein petitioner Datu Tagoranao Benito subscribed to 460
shares worth P4,600.00.
On October 28, 1975, the respondent corporation filed a certificate of
increase of its capital stock from P200,000.00 to P1,000,000.00. It was
shown in said certificate that P191,560.00 worth of shares were represented
in the stockholders' meeting held on November 25, 1975 at which time the
increase was approved. Thus, P110,980.00 worth of shares were
subsequently issued by the corporation from the unissued portion of the
authorized capital stock of P200,000.00. Of the increased capital stock of
P1,000,000.00, P160,000.00 worth of shares were subscribed by Mrs.
Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto.
On November 18, 1976, petitioner Datu Tagoranao filed with respondent
Securities and Exchange Commission a petition alleging that the additional
issue (worth P110,980.00) of previously subscribed shares of the corporation
was made in violation of his pre-emptive right to said additional issue and
that the increase in the authorized capital stock of the corporation from
P200,000.00 to P1,000,000.00 was illegal considering that the stockholders
of record were not notified of the meeting wherein the proposed increase was
in the agenda. Petitioner prayed that the additional issue of shares of
previously authorized capital stock as well as the shares issued from the
increase in capital stock of respondent corporation be cancelled; that the
secretary of respondent corporation be ordered to register the 2,540 shares
acquired by him (petitioner) from Domocao Alonto and Moki-in Alonto; and
that the corporation be ordered to render an accounting of funds to the
stockholders.
In their answer, respondents denied the material allegations of the petition
and, by way of special defense, claimed that petitioner has no cause of
action and that the stock certificates covering the shares alleged to have
been sold to petitioner were only given to him as collateral for the loan of
Domocao Alonto and Moki-in Alonto.
On July 11, 1980, Hearing Officer Ledor E. Macalalag of the Securities and
Exchange Commission, after due proceedings, rendered a decision which
was affirmed by the Commission En Banc during its executive session held
on March 9, 1981, as follows:
RESOLVED, That the decision of the hearing Officer in SEC
Case No. 1392, dated July 11, 1980, the dispositive portion
of which reads as follows:
WHEREFORE, in view of the foregoing
considerations, this Commission hereby
rules: (a) That the issuance by the
corporation of its unissued shares was
validly made and was not subject to the pre-
emptive rights of stockholders, including the
petitioner, herein; (b) That there is no
sufficient legal basis to set aside the
537
certificate issued by this Commission
authorizing the increase in capital stock of
respondent corporation from P200,000.00 to
Pl,000,000.00. Considering, however, that
petitioner has not waived his pre-emptive
right to subscribe to the increased
capitalization, respondent corporation is
hereby directed to allow petitioner to
subscribe thereto, at par value,
proportionate to his present shareholdings,
adding thereto the 2,540 shares transferred
to him by Mr. Domocao Alonto and Mrs.
Moki-in Alonto; (c) To direct as it hereby
directs, the respondent corporation to
immediately cancel Certificates of Stock
Nos. 216, 223, 302, all in the name of
Domocao Alonto, and Certificate of Stock
No. 217, in the name of Moki-in Alonto, upon
their presentation by the petitioner and to
issue new certificates corresponding thereto
in the name of petitioner herein; (d) To
direct, as it hereby directs, respondent
corporation to religiously comply with the
requirement of filing annual financial
statements under pain of a more drastic
action; (e) To declare, as it hereby declares,
as irregular, the election of the nine (9)
members of the Board of Trustees of
respondent corporation on October 30,
1976, for which reason, respondent
corporation is hereby ordered to call a
stockholders' meeting to elect a new set of
five (5) members of the Board of Trustees,
unless in the meantime the said number is
accordingly increased and the requirement
of law to make such increase effective have
been complied with. It is understood that the
said stockholders' meeting be called within
thirty (30) days from the time petitioner shall
have subscribed to the increased
capitalization.'
be, as the same is hereby AFFIRMED, the same being in
accordance with law and the facts of the case. (pp. 28-29,
Reno)
Hence, this petition for review by way of appeal from the aforementioned
decision of the Securities and Exchange Commission, petitioner contending
that (1) the issuance of the 11,098 shares without the consent of the
stockholders or of the Board of Directors, and in the absence of
consideration, is null and void; (2) the increase in the authorized capital stock
from P200,000.00 to P1,000,000.00 without the consent or express waiver of
the stockholders, is null and void; (3) he is entitled to attorneys' fees,
damages and expenses of litigation in filing this suit against the directors of
respondent corporation.
We are not persuaded. As aptly stated by the Securities and Exchange
Commission in its decision:
xxx xxx xxx
... the questioned issuance of the unsubscribed portion of
the capital stock worth P110,980.00 is ' not invalid even if
assuming that it was made without notice to the stockholders
as claimed by petitioner. The power to issue shares of stocks
in a corporation is lodged in the board of directors and no
stockholders' meeting is necessary to consider it because
additional issuance of shares of stocks does not need
approval of the stockholders. The by-laws of the corporation
itself states that 'the Board of Trustees shall, in accordance
with law, provide for the issue and transfer of shares of stock
of the Institute and shall prescribe the form of the certificate
of stock of the Institute. (Art. V, Sec. 1).
538
 Petitioner bewails the fact that in view of the lack of notice to
him of such subsequent issuance, he was not able to
exercise his right of pre-emption over the unissued shares.
However, the general rule is that pre-emptive right is
recognized only with respect to new issue of shares, and not
with respect to additional issues of originally authorized
shares. This is on the theory that when a corporation at its
inception offers its first shares, it is presumed to have offered
all of those which it is authorized to issue. An original
subscriber is deemed to have taken his shares knowing that
they form a definite proportionate part of the whole number
of authorized shares. When the shares left unsubscribed are
later re-offered, he cannot therefore claim a dilution of
interest. (Campos and Lopez-Campos Selected Notes and
Cases on Corporation Law, p. 855, citing Yasik V. Wachtel
25 Del. Ch. 247,17A. 2d 308 (1941). (pp. 33-34, Rollo)
With respect to the claim that the increase in the authorized capital stock was
without the consent, expressed or implied, of the stockholders, it was the
finding of the Securities and Exchange Commission that a stockholders'
meeting was held on November 25,1975, presided over by Mr. Ahmad
Domocao Alonto, Chairman of the Board of Trustees and, among the many
items taken up then were the change of name of the corporation from Kamilol
Islam Institute Inc. to Jamiatul Philippine-Al Islamia, Inc., the increase of its
capital stock from P200,000.00 to P1,000,000.00, and the increase of the
number of its Board of Trustees from five to nine. "Despite the insistence of
petitioner, this Commission is inclined to believe that there was a
stockholders' meeting on November 25, 1975 which approved the increase.
The petitioner had not sufficiently overcome the evidence of respondents that
such meeting was in fact held. What petitioner successfully proved, however,
was the fact that he was not notified of said meeting and that he never
attended the same as he was out of the country at the time. The
documentary evidence of petitioner conclusively proved that he was
attending the Mecca pilgrimage when the meeting was held on November
25, 1975. (Exhs. 'Q', 'Q-14', 'R', 'S' and 'S-l'). While petitioner doubts the
authenticity of the alleged minutes of the proceedings (Exh. '4'), the
Commission notes with significance that said minutes contain numerous
details of various items taken up therein that would negate any claim that it
was not authentic. Another thing that petitioner was able to disprove was the
allegation in the certificate of increase (Exh. 'E-l') that all stockholders who
did not subscribe to the increase of capital stock have waived their pre-
emptive right to do so. As far as the petitioner is concerned, he had not
waived his pre-emptive right to subscribe as he could not have done so for
the reason that he was not present at the meeting and had not executed a
waiver, thereof. Not having waived such right and for reasons of equity, he
may still be allowed to subscribe to the increased capital stock proportionate
to his present shareholdings." (pp. 36-37, Rollo)
Well-settled is the rule that the findings of facts of administrative bodies will
not be interfered with by the courts in the absence of grave abuse of
discretion on the part of said agencies, or unless the aforementioned findings
are not supported by substantial evidence. (Gokongwei, Jr. vs. SEC, 97
SCRA 78). In a long string of cases, the Supreme Court has consistently
adhered to the rule that decisions of administrative officers are not to be
disturbed by the courts except when the former have acted without or in
excess of their jurisdiction or with grave abuse of discretion (Sichangco vs.
Board of Commissioners of Immigration, 94 SCRA 61). Thus, in the case
of Deluao vs. Casteel ( L-21906, Dec. 24, 1968, 26 SCRA 475, 496, citing
Pajo vs. Ago, et al., L-15414, June 30, 1960) and Genitano vs. Secretary of
Agriculture and Natural Resources, et al. (L-2ll67, March 31, 1966), the
Supreme Court held that:
... Findings of fact by an administrative board or official,
following a hearing, are binding upon the courts and win not
be disturbed except where the board or official has gone
beyond his statutory authority, exercised unconstitutional
powers or clearly acted arbitrarily and without regard to his
duty or with grave abuse of discretion. ...
ACCORDINGLY, this petition is hereby dismissed for lack of merit.
SO ORDERED.
539
Plana, Escolin and Gutierrez, Jr., JJ., concur.
Teehankee, J., concurs in the result.
Melencio-Herrera and Vasquez, JJ., are on leave.
purpose of recovering a balance of P22,500, alleged to be due upon
defendant's subscription to the capital stock of said insolvent corporation.
The trial judge having given judgment in favor of the plaintiff for the amount
sued for, the defendant appealed.
It appears in evidence that in 1918 the Cooperativa Naval Filipina was duly
incorporated under the laws of the Philippine Islands, with a capital of
P100,000, divided into one thousand shares of a par value of P100 each.
Among the incorporators of this company was numbered the defendant
Mariano Rivera, who subscribed for 450 shares representing a value of
P45,000, the remainder of the stock being taken by other persons. The
articles of incorporation were duly registered in the Bureau of Commerce and
Industry on October 30 of the same year.

In the course of time the company became insolvent and went into the hands
of the Philippine Trust Company, as assignee in bankruptcy; and by it this
action was instituted to recover one-half of the stock subscription of the
defendant, which admittedly has never been paid.

The reason given for the failure of the defendant to pay the entire
subscription is, that not long after the Cooperativa Naval Filipina had been
G.R. No. L-19761 January 29, 1923 incorporated, a meeting of its stockholders occurred, at which a resolution
was adopted to the effect that the capital should be reduced by 50 per
PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La centum and the subscribers released from the obligation to pay any unpaid
Cooperativa Naval Filipina," plaintiff-appellee, balance of their subscription in excess of 50 per centum of the same. As a
vs. result of this resolution it seems to have been supposed that the subscription
MARCIANO RIVERA, defendant-appellant. of the various shareholders had been cancelled to the extent stated; and fully
paid certificate were issued to each shareholders for one-half of his
subscription. It does not appear that the formalities prescribed in section 17
Araneta and Zaragoza for appellant.
of the Corporation Law (Act No. 1459), as amended, relative to the reduction
Ross and Lawrence for appellee.
of capital stock in corporations were observed, and in particular it does not
appear that any certificate was at any time filed in the Bureau of Commerce
STREET, J.: and Industry, showing such reduction.

This action was instituted on November 21, 1921, in the Court of First
Instance of Manila, by the Philippine Trust Company, as assignee in
insolvency of La Cooperativa Naval Filipina, against Marciano Rivera, for the

540
His Honor, the trial judge, therefore held that the resolution relied upon the
defendant was without effect and that the defendant was still liable for the
unpaid balance of his subscription. In this we think his Honor was clearly
right.
It is established doctrine that subscription to the capital of a corporation
constitute a find to which creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment of its
debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to
release an original subscriber to its capital stock from the obligation of paying
for his shares, without a valuable consideration for such release; and as
against creditors a reduction of the capital stock can take place only in the
manner an under the conditions prescribed by the statute or the charter or
the articles of incorporation. Moreover, strict compliance with the statutory
regulations is necessary (14 C. J., 498, 620).
In the case before us the resolution releasing the shareholders from their
obligation to pay 50 per centum of their respective subscriptions was an
attempted withdrawal of so much capital from the fund upon which the
company's creditors were entitled ultimately to rely and, having been effected
without compliance with the statutory requirements, was wholly ineffectual.
Renato J. Dilag for private respondent.
GRIO-AQUINO, J.:
The only issue in this case is whether or not a suit brought by a withdrawing
stockholder against the corporation to enforce payment of the balance due
on the consideration (evidenced by a corporate promissory note) for the
surrender of his shares of stock and interests in the corporation, involves an
intra-corporate dispute. The resolution of that issue will determine whether
the Securities and Exchange Commission (SEC) or a regular court has
jurisdiction over the action.
On May 7, 1984, respondent Nilcar Y. Fajilan offered in writing to resign as
President and Member of the Board of Directors of petitioner, Boman
Environmental Development Corporation (BEDECO), and to sell to the
company all his shares, rights, and interests therein for P 300,000 plus the
transfer to him of the company's Isuzu pick-up truck which he had been
using. The letter-offer (Exh. A-1) reads as follows:
07 May 1984

The judgment will be affirmed with cost, and it is so ordered.

THE BOARD OF DIRECTORS,
BOMAN ENVIRONMENTAL DEVELOPMENT
Araullo, C. J., Malcolm, Avancea, Villamor, Ostrand, Johns, and CORPORATION
Romualdez, JJ., concur. 2nd Floor, AGS Building,
466 EDSA, Makati,
G.R. No. 77860 November 22, 1988 Metro Manila

BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION, petitioners, Gentlemen:

vs.
HON. COURT OF APPEALS and NILCAR Y. FAJILAN, respondents. With deepest regrets, I am tendering my resignation as
member of the Board of Directors and President of the
Lim, Duran & Associates for petitioner. Company effective as soon as my shares and interests
thereto are sold and fully paid.

541
 It is really painful to leave the Company which we
painstakingly labored and nortured for years to attain its
success today, however, family interests and other
considerations dictate me otherwise.
Thank you for your interest of buying my shares and other
interests on the Company. It is really my intention to divest
myself of these investments and sell them all for PESOS:
THREE HUNDRED THOUSAND (P 300,000) payable in
cash in addition to the Isuzu pick up I am presently using for
and in behalf of the Company.
interest in the company at the price of P300,000.00,
inclusive of your unpaid salary from February 1984 to May
31, 1984, loan principal, interest on loan, profit sharing and
share on book value of the corporation as at May 31, 1984.
Payment of the P300,000.00 shall be as follows:
July 15, 1984 P
100,000.00

Thank you.
September 15, 1984 P
75,000.00
NILCAR Y. FAJILAN
Director/President (p. 239, Rollo.)

At a meeting of the Board of Directors of BEDECO on June 14, 1984,

October 15, 1984 P
Fajilan's resignation as president was accepted and new officers were
62,500.00
elected. Fajilan's offer to sell his shares back to the corporation was
approved, the Board promising to pay for them on a staggered basis from
July 15, 1984 to December 15, 1984 (Annex B).<re||an1w>The
resolution of the Board was communicated to Fajilan in the following letter-
agreement dated June 25, 1984 to which he affixed his conformity (Annex December 15, 1984 P
C): 62,500.00

June 25, 1984

Mr. Nilcar Y. Fajilan P

No. 159 Aramismis Street 300,000.00.
Project 7, Quezon City

Dear Mr. Fajilan: To assure you of payment of the above amount on

respective due dates, the company will execute the
Please be informed that after due deliberation the Board of necessary promissory note.
Directors has accepted your offer to sellyour share and

542
 In addition to the above, the Ford Courier Pick-up will belong 1984
to you subject to your assumption of the outstanding PTR No.
obligation thereof with Fil-Invest. It is understood that upon Issued
your full payment of the pick-up, arrangement will be made on January
and negotiated with Fil-Invest regarding the transfer of the at
ownership of the vehicle to your name. Makati,
Manila
If the above meets your requirements, kindly signify your conformity/approval
by signing below. Doc. No. 392
Page No. 80
Very truly yours, Book No. X
(SGD) JAMES C. Series of 1984. (p. 245, Rollo.)
PERALTA
Corporate
A Secretary
promissory note dated July 3, 1984, was signed by BEDECO'S new
president, Alfredo Pangilinan, in the presence of two directors, committing
CONFORME: BEDECO to pay him P300,000 over a six-month period from July 15, 1984 to
December 15, 1984. The promissory note (Exh. D) provided as follows:
(SGD) NILCAR Y. FAJILAN
PROMISSORY NOTE
Noted:
Makati,
(SGD) ALFREDO S. PANGILINAN (SGD) MAXIMO R. July 3, 1984
REBALDO (SGD) BENEDICTO M. EMPAYNADO
FOR VALUE RECEIVED, BOMAN ENVIRONMENTAL
SUBSCRIBED AND SWORN TO before me, this 3rd day of DEVELOPMENT CORPORATION, a domestic corporation
July, 1984, Alfredo S. Pangilinan exhibiting to me his duly registered with the Securities and Exchange
Residence Certificate No. 1696224 issued at Makati, Metro Commission, with office at Rm. 608, Metro Bank Bldg., Ayala
Manila on January 24, 1984, in his capacity as President of Blvd., Makati, Metro Manila, promise to pay NILCAR Y.
Boman Environmental Development Corporation with FAJILAN of 17 Aramismis St., Project 7, Quezon City, the
Corporate Residence Certificate No. 207911 issued at sum of PESOS: THREE HUNDRED THOUSAND
Makati, Metro Manila on March 26, 1984. (P300,000.00), Philippine Currency payable as follows:

(SGD) ERNESTO B.
DURAN P J
NOTARY PUBLIC 1 u
Until December 31,

543
0 l ,
0, y 1
0 1 9
0 5 8
0. , 4
0 1
0 9
8
4 6 D
2, e
5 c
0 .
7 S 0. 1
5, e 0 5
0 p 0 ,
0 t. 1
0. 1 9
0 5 8
0 , 4
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4 P300,000.00

6 O BO
2, c MA
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544

Signed in the presence of:
(SGD) MAXIMO R. REBALDO
(SGD) BENEDICTO
(Annex D, p. 247, Rollo.)
However, BEDECO paid only P50,000 on July 15, 1984 and another P50,000
on August 31, 1984 and defaulted in paying the balance of P200,000.
DE On April 30, 1985, Fajilan filed a complaint in the Regional Trial Court of
VEL Makati for collection of that balance from BEDECO.
OP
ME In an order dated September 9, 1985, the trial court, through Judge Ansberto
NT Paredes, dismissed the complaint for lack of jurisdiction. It ruled that the
CO controversy arose out of intracorporate relations, hence, the Securities and
RP Exchange Commission has original and exclusive jurisdiction to hear and
OR decide it.
ATI
ON His motion for reconsideration of that order having been denied, Fajilan filed
By: a "Petition for Certiorari, and mandamus with Preliminary Attachment" in the
(SG Intermediate Appellate Court.
D)
ALF
In a decision dated March 2, 1987, the Court of Appeals set aside Judge
RE
Paredes' order of dismissal and directed him to take cognizance of the case.
DO
BEDECO's motion for reconsideration was denied in a resolution dated
S.
March 24, 1987 of the Court of Appeals.
PAN
GILI
NA In its decision, the Appellate Court characterized the case as a suit for
N collection of a sum of money as Fajilan "was merely suing on the balance of
Pre the promissory note" (p. 4, Decision; p. 196, Rollo) which BEDECO failed
side and refused to pay in full. More particularly, the Court of Appeals held:
nt
While it is true that the circumstances which led to the
execution of the promissory note by the Board of Directors of
respondent corporation was an intra- corporate matter, there
arose no controversy as to the sale of petitioner's interests
and rights as well as his shares as Member of the Board of
Directors and President of respondent corporation. The intra-
M. EMPAYNADO corporate matter of the resignation of petitioner as Member
of the Board of Directors and President of respondent
corporation has long been settled without issue.
The Board of Directors of respondent corporation has
likewise long settled the sale by petitioner of all his shares,
rights and interests in favor of the corporation. No
545
 controversy arose out of this transaction. The jurisdiction of
the Securities and Exchange Commission therefore need not
be invoked on this matter. (p. 196, Rollo.)
The petition is impressed with merit.
Section 5(b) of P.D. No. 902-A, as amended, grants the SEC original and
exclusive jurisdiction to hear and decide cases involving
b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders members, or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members or associates, respectively; ... (Emphasis
supplied.)
This case involves an intra-corporate controversy because the parties are a
stockholder and the corporation. As correctly observed by the trial court, the
perfection of the agreement to sell Fajilan's participation and interests in
BEDECO and the execution of the promissory note for payment of the price
of the sale did not remove the dispute from the coverage of Section 5(b) of
P.D. No. 902, as amended, for both the said agreement (Annex C) and the
promissory note (Annex D) arose from intra-corporate relations. Indeed, all
the signatories of both documents were stockholders of the corporation at the
time of signing the same. It was an intra-corporate transaction, hence, this
suit is an intra-corporate controversy.
Fajilan's offer to resign as president and director "effective as soon as my
shares and interests thereto (sic) are sold and fully paid" (Annex A-1, p. 239,
Rollo) implied that he would remain a stockholder until his shares and
interests were fully paid for, for one cannot be a director or president of a
corporation unless he is also a stockholder thereof. The fact that he was
replaced as president of the corporation did not necessaryily mean that he
ceased to be a stockholder considering how the corporation failed to
complete payment of the consideration for the purchase of his shares of
stock and interests in the goodwill of the business. There has been no actual
transfer of his shares to the corporation. In the books of the corporation he is
still a stockholder.
Fajilan's suit against the corporation to enforce the latter's promissory note or
compel the corporation to pay for his shareholdings is cognizable by the SEC
alone which shall determine whether such payment will not constitute a
distribution of corporate assets to a stockholder in preference over creditors
of the corporation. The SEC has exclusive supervision, control and
regulatory jurisdiction to investigate whether the corporation has unrestricted
retained earnings to cover the payment for the shares, and whether the
purchase is for a legitimate corporate purpose as provided in Sections 41
and 122 of the Corporation Code, which reads as follows:
SEC. 41. Power to acquire own shares.A stock corporation
shall have the power to purchase or acquire its own shares
for a legitimate corporate purpose or purposes, including but
not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired;
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code,
Sec. 12. Corporate liquidation. ...
xxx xxx xxx
546
 Except by decrease of capital stock and as otherwise
allowed by this Code, no corporation shall distribute any of
its assets or property except upon lawful dissolution and
after payment of all its debts and liabilities, (77a, 89a, 16a).
G.R. No. L-17504 & L-17506 February 28, 1969
These provisions of the Corporation Code should be deemed written into the
agreement between the corporation and the stockholders even if there is no RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA SALAS,
express reference to them in the promissory note. The principle is well PAZ SALAS and PATRIA SALAS, heirs of Magdalena Salas, as
settled that an existing law enters into and forms part of a valid contract stockholders on their own behalf and for the benefit of the Ma-ao Sugar
without need for the parties' expressly making reference to it (Lakas ng Central Co., Inc., and other stockholders thereof who may wish to join
Manggagawang Makabayan vs. Abiera, 36 SCRA 437). in this action, plaintiffs-appellants,
vs.
The requirement of unrestricted retained earnings to cover the shares is MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS.
based on the trust fund doctrine which means that the capital stock, property RAMON S. ARANETA, ROMUALDO M. ARANETA, and RAMON A. YULO,
and other assets of a corporation are regarded as equity in trust for the defendants-appellants.
payment of corporate creditors. The reason is that creditors of a corporation
are preferred over the stockholders in the distribution of corporate assets. San Juan, Africa and Benedicto for plaintiffs-appellants.
There can be no distribution of assets among the stockholders without first Vicente Hilado and Gianzon, Sison, Yulo and Associates for defendants-
paying corporate creditors. Hence, any disposition of corporate funds to the appellants.
prejudice of creditors is null and void. "Creditors of a corporation have the
right to assume that so long as there are outstanding debts and liabilities, the
CAPISTRANO, J.:
board of directors will not use the assets of the corporation to purchase its
own stock ..."(Steinberg vs. Velasco, 52 Phil. 953.)
This was a representative or derivative suit commenced on October 20,
1953, in the Court of First Instance of Manila by four minority stockholders
WHEREFORE, the petition for certiorari is granted. The decision of the Court
against the Ma-ao Sugar Central Co., Inc. and J. Amado Araneta and three
of Appeals is reversed and set aside. The order of the trial court dismissing
other directors of the corporation.
the complaint for lack of jurisdiction is hereby reinstated. No costs.

The complaint comprising the period November, 1946 to October, 1952,

SO ORDERED.
stated five causes of action, to wit: (1) for alleged illegal and ultra-vires acts
consisting of self-dealing irregular loans, and unauthorized investments; (2)
Narvasa, Cruz, Gancayco and Medialdea, JJ., concur. for alleged gross mismanagement; (3) for alleged forfeiture of corporate
rights warranting dissolution; (4) for alleged damages and attorney's fees;
and (5) for receivership.

Plaintiffs prayed, in substance, as follows:

547
Under the FIRST CAUSE OF ACTION, that the defendant J. Amado Araneta
and his individual co-defendants be ordered to render an accounting of all
transactions made and carried out by them for defendant corporation, and "to
collect, produce and/or pay to the defendant corporation the outstanding
balance of the amounts so diverted and still unpaid to defendant
corporation";
Under the SECOND CAUSE OF ACTION, that the individual defendants be
held liable and be ordered to pay to the defendant corporation "whatever
amounts may be recovered by the plaintiffs in Civil Case No. 20122, entitled
'Francisco Rodriguez vs. Ma-ao Sugar Central Co.'"; to return to the
defendant corporation all amounts withdrawn by way of discretionary funds
or backpay, and to account for the difference between the corporation's crop
loan accounts payable and its crop loan accounts receivable;
Under the THIRD CAUSE OF ACTION, that the corporation be dissolved and
its net assets be distributed to the stockholders; and
Under the FOURTH CAUSE OF ACTION, that the defendants be ordered "to
pay the sum of P300,000.00 by way of compensatory, moral and exemplary
damages and for expenses of litigation, including attorney's fees and costs of
the suit."
THE FIFTH CAUSE OF ACTION was an application for the provisional
remedy of receivership.
In their answer originally filed on December 1, 1953, and amended on
February 1, 1955, defendants denied "the allegations regarding the
supposed gross mismanagement, fraudulent use and diversion of corporate
funds, disregard of corporate requirements, abuse of trust and violation of
fiduciary relationship, etc., supposed to have been discovered by plaintiffs, all
of which are nothing but gratuitous, unwarranted, exaggerated and distorted
conclusions not supported by plain and specific facts and transactions
alleged in the complaint."
BY WAY OF SPECIAL DEFENSES, the defendants alleged, among other
things: (1) that the complaint "is premature, improper and unjustified"; (2) that
plaintiffs did not make an "earnest, not simulated effort" to exhaust first their
remedies within the corporation before filing their complaint; (3) that no actual
loss had been suffered by the defendant corporation on account of the
transactions questioned by plaintiffs; (4) that the payments by the debtors of
all amounts due to the defendant corporation constituted a full, sufficient and
adequate remedy for the grievances alleged in the complaint and (5) that the
dissolution and/or receivership of the defendant corporation would violate
and impair the obligation of existing contracts of said corporation.
BY WAY OF COUNTERCLAIM, the defendants in substance further alleged,
among others, that the complaint was premature, improper and malicious,
and that the language used was "unnecessarily vituperative abusive and
insulting, particularly against defendant J. Amado Araneta who appears to be
the main target of their hatred." Wherefore, the defendant sought to recover
"compensation for damages, actual, moral, exemplary and corrective,
including reasonable attorney's fees."
After trial, the Lower Court rendered its Decision (later supplemented by an
Order resolving defendants' Motion for Reconsideration), the dispositive
portion of which reads:
IN VIEW WHEREOF, the Court dismisses the petition for dissolution
but condemns J. Amado Araneta to pay unto Ma-ao Sugar Central
Co., Inc. the amount of P46,270.00 with 8% interest from the date of
the filing of this complaint, plus the costs; the Court reiterates the
preliminary injunction restraining the Ma-ao Sugar Central Co., Inc.
management to give any loans or advances to its officers and orders
that this injunction be as it is hereby made, permanent; and orders it
to refrain from making investments in Acoje Mining, Mabuhay
Printing, and any other company whose purpose is not connected
with the Sugar Central business; costs of plaintiffs to be borne by the
Corporation and J. Amado Araneta.
From this judgment both parties appealed directly to the Supreme Court.
548
Before taking up the errors respectively, assigned by the parties, we should
state that the following findings of the Lower Court on the commission of
corporate irregularities by the defendants have not been questioned by the
defendants:

1. Failure to hold stockholders' meetings regularly. No stockholders' General Securities 86,743.65

meetings were held in 1947, 1950 and 1951;

2. Irregularities in the keeping of the books. Untrue entries were

made in the books which could not simply be considered as innocent Bacolod Murcia 501,030.61
errors;

3. Illegal investments in the Mabuhay Printing, P2,280,00, and the

Acoje Mining, P7,000.00. The investments were made not in Central Azucarera del Danao 97,884.42
pursuance of the corporate purpose and without the requisite
authority of two-thirds of the stockholders;

4. Unauthorized loans to J. Amado Araneta totalling P132,082.00 Talisay-Silay 4,365.90

(which, according to the defendants, had been fully paid), in violation
of the by-laws of the corporation which prohibits any director from
borrowing money from the corporation;
5. Diversion of corporate funds of the Ma-ao Sugar Central Co., Inc.
to:
The Court found that sums were taken out of the funds of the Ma-ao Sugar
Central Co., Inc. and delivered to these affiliated companies, and vice versa,
without the approval of the Ma-ao Board of Directors, in violation of Sec. III,
Art. 6-A of the by-laws.

The errors assigned in the appeal of the plaintiffs, as appellants, are as

J. Amado Araneta & Co. P243,415.62 follows:

I.

Luzon Industrial Corp.
Associated Sugar
585,918.17 THE LOWER COURT ERRED IN HOLDING THAT THE
INVESTMENT OF CORPORATE FUNDS OF THE MA-AO SUGAR
CENTRAL CO., INC., IN THE PHILIPPINE FIBER PROCESSING
CO., INC. WAS NOT A VIOLATION OF SEC. 17- OF THE
463,860.36 CORPORATION LAW.

549
 II.
THE LOWER COURT ERRED IN NOT FINDING THAT THE MA-AO
SUGAR CENTRAL CO., INC. WAS INSOLVENT.
III.
THE LOWER COURT ERRED IN HOLDING THAT THE
DISCRIMINATORY ACTS COMMITTED AGAINST PLANTERS DID
NOT CONSTITUTE MISMANAGEMENT.
IV.
THE LOWER COURT ERRED IN HOLDING THAT ITS CULPABLE
ACTS WERE INSUFFICIENT FOR THE DISSOLUTION OF THE
CORPORATION.
The portions of the Decision of the Lower Court assailed by the plaintiffs as
appellants are as follows:
(1) ".... Finally, as to the Philippine Fiber, the Court takes it that
defendants admit having invested P655,000.00 in shares of stock of
this company but that this was ratified by the Board of Directors in
Resolutions 60 and 80, Exhibits "R" and "R-2"; more than that,
defendants contend that since said company was engaged in the
manufacture of sugar bags it was perfectly legitimate for Ma-ao
Sugar either to manufacture sugar bags or invest in another
corporation engaged in said manufacture, and they quote authorities
for the purpose, pp. 28-31, memorandum; the Court is persuaded to
believe that the defendants on this point are correct, because while
Sec. 17-1/2 of the Corporation Law provides that:
No corporation organized under this act shall invest its funds
in any other corporation or business or for any purpose other
than the main purpose for which it was organized unless its
board of directors has been so authorized in a resolution by
the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of
the voting power on such proposal at the stockholders'
meeting called for the purpose.
the Court is convinced that that law should be understood to mean
as the authorities state, that it is prohibited to the Corporation to
invest in shares of another corporation unless such an investment is
authorized by two-thirds of the voting power of the stockholders, if
the purpose of the corporation in which investment is made is foreign
to the purpose of the investing corporation because surely there is
more logic in the stand that if the investment is made in a corporation
whose business is important to the investing corporation and would
aid it in its purpose, to require authority of the stockholders would be
to unduly curtail the Power of the Board of Directors; the only trouble
here is that the investment was made without any previous authority
of the Board of Directors but was only ratified afterwards; this of
course would have the effect of legalizing the unauthorized act but it
is an indication of the manner in which corporate business is
transacted by the Ma-ao Sugar administration, the fact that off and
on, there would be passed by the Board of Directors, resolutions
ratifying all acts previously done by the management, e.g.
resolutions passed on February 25, 1947, and February 25, 1952, by
the Board of Directors as set forth in the affidavit of Isidro T. Dunca p.
127, etc. Vol. 1. (Decision, pp. 239-241 of Record on Appeal.)
xxx xxx xxx
(2) "On the other hand, the Court has noted against plaintiffs that
their contention that Ma-ao Sugar is on the verge of bankruptcy has
not been clearly shown; against this are Exh. C to Exh. C-3 perhaps
the best proof that insolvency is still far is that this action was filed in
1953 and almost seven years have passed since then without the
company apparently getting worse than it was before; ..." (Decision,
pp. 243-244, supra.)
550
xxx xxx xxx
(3) "As to the crop loan anomalies in that instead of giving unto the
planters the entire amount alloted for that, the Central withheld a
certain portion for their own use, as can be seen in Appendix A of
Exh. C-1, while the theory of plaintiffs is that since between the
amount of P3,791,551.78 the crop loan account payable, and the
amount of P1,708,488.22, the crop loan receivable, there is a
difference of P2,083,063.56, this would indicate that this latter sum
had been used by the Central itself for its own purposes; on the other
hand, defendants contend that the first amount did not represent the
totality of the crop loans obtained from the Bank for the purpose of
relending to the planters, but that it included the Central's own credit
line on its 40% share in the standing crop; and that this irregularity
amounts to a grievance by plaintiffs as planters and not as
stockholders, the Court must find that as to this count, there is really
reason to find that said anomaly is not a clear basis for the derivative
suit, first, because plaintiffs' evidence is not very sufficient to prove
clearly the alleged diversion in the face of defendants' defense; there
should have been a showing that the Central had no authority to
make the diversion; and secondly, if the anomaly existed, there is
ground to hold with defendants that it was an anomaly pernicious not
to the Central but to the planters; it was not even pernicious to the
stockholders.
On the other hand, the errors assigned in the appeal of the defendants as
appellants are as follows:
Going to the discriminatory acts of J. Amado Araneta, namely,
manipulation of cane allotments, withholding of molasses and
alcohol shares, withholding of trucking allowance, formation of rival
planters associations, refusal to deal with legitimate planters group,
Exh. S; the Court notices that as to the failure to provide hauling
transportation, this in a way is corroborated by Exh. 7, that part
containing the decision of the Court of First Instance of Manila, civil
20122, Francisco Rodriguez v. Ma-ao Sugar; for the reason,
however, that even if these were true, those grievances were
grievances of plaintiffs as planters and not as stockholders just as
the grievance as to the crop loans already adverted to, this Court
will find insufficient merit on this count. (Decision, pp. 230-
231, supra.)
xxx xxx xxx
(4) "...; for the Court must admit its limitations and confess that it
cannot pretend to know better than the Board in matters where the
Board has not transgressed any positive statute or by-law especially
where as here, there is the circumstance that presumably, an
impartial representative in the Board of Directors, the one from the
Philippine National Bank, against whom apparently plaintiffs have
no quarrel, does not appear to have made any protest against the
same; the net result will be to hold that the culpable acts proved are
not enough to secure a dissolution; the Court will only order the
correction of abuses, proved as already mentioned; nor will the Court
grant any more damages one way or the other. (Decision, p.
244, supra.)
I.
THE LOWER COURT ERRED IN ADJUDGING J. AMADO
ARANETA TO PAY TO MA-AO SUGAR CENTRAL CO., INC., THE
551
 AMOUNT OF P46,270.00, WITH 8% INTEREST FROM THE DATE
OF FILING OF THE COMPLAINT.
II.
THE LOWER COURT ERRED IN NOT ORDERING THE
PLAINTIFFS TO PAY THE DEFENDANTS, PARTICULARLY J.
AMADO ARANETA, THE DAMAGES PRAYED FOR IN THE
COUNTERCLAIM OF SAID DEFENDANTS.
The portions of the Decision of the Lower Court assailed by the defendants
as appellants are as follows:
(1) "As to the alleged juggling of books in that the personal account
of J. Amado Araneta of P46,270.00 was closed on October 31, 1947
by charges transferred to loans receivable nor was interest paid on
this amount, the Court finds that this is related to charge No. 1,
namely, the granting of personal loans to J. Amado Araneta; it is
really true that according to the books, and as admitted by
defendants, J. Amado Araneta secured personal loans; in 1947, the
cash advance to him was P132,082.00 (Exh. A); the Court has no
doubt that this was against the By-Laws which provided that:
The Directors shall not in any case borrow money from the
Company. (Sec. III, Art. 7);
the Court therefore finds this count to be duly proved; worse, the
Court also finds that as plaintiffs contend, while the books of the
Corporation would show that the last balance of P46,270.00 was
written off as paid, as testified to by Auditor Mr. Sanchez, the
payment appeared to be nothing more than a transfer of his loan
receivable account, stated otherwise, the item was only transferred
from the personal account to the loan receivable account, so that
again the Court considers established the juggling of the books; and
then again, it is also true that the loans were secured without any
interest and while it is true that in the Directors' meeting of 21
October, 1953, it was resolved to collect 8%, the Court does not see
how such a unilateral action of the Board could bind the borrowers.
Be it stated that defendants have presented in evidence Exh. 5
photostatic copy of the page in loan receivable and it is sought to be
proved that J. Amado Araneta's debt was totally paid on 31 October,
1953; to the Court, in the absence of definite primary proof of actual
payment having found out that there had already been a juggling of
books, it cannot just believe that the amount had been paid as noted
in the books. (Decision, pp. 233-235 of Record on Appeal.)
(2) "With respect to the second point in the motion for
reconsideration to the effect that the Court did not make any findings
of fact on the counterclaim of defendants, although the Court did not
say that in so many words, the Court takes it that its findings of fact
on pages 17 to 21 of its decision were enough to justify a dismissal
of the counterclaim, because the counterclaims were based on the
fact that the complaint was premature, improper, malicious and that
the language is unnecessarily vituperative abusive and insulting; but
the Court has not found that the complaint is premature; nor has the
Court found that the complaint was malicious; these findings can be
gleaned from the decision with respect to the allegation that the
complaint was abusive and insulting, the Court does not concur; for it
has not seen anything in the evidence that would justify a finding that
plaintiffs and been actuated by bad faith, nor is there anything in the
complaint essentially libelous; especially as the rule is that
allegations in pleading where relevant, are privileged even though
they may not clearly proved afterwards; so that the Court has not
seen any merit in the counterclaims; and the Court had believed that
the decision already carried with it the implication of the dismissal of
the counterclaims, but if that is not enough, the Court makes its
position clear on this matter in this order, and clarifies that it has
dismissed the counterclaims of defendant; ..." (Order of September
3, 1960, pp. 248-249, supra.)
Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief of the
plaintiffs as appellants, it appears to us that the Lower Court was correct in
its appreciation (1) that the evidence presented did not show that the
552
defendant Ma-ao Sugar Company was insolvent (2) that the alleged
discriminatory acts committed by the defendant Central against the planters
were not a proper subject of derivative suit, but, at most, constituted a cause
of action of the individual planters; and (3) that the acts of mismanagement
complained of and proved do not justify a dissolution of the corporation.
Whether insolvency exists is usually a question of fact, to be
determined from an inventory of the assets and their value, as well
as a consideration of the liabilities.... But the mere impairment of
capital stock alone does not establish insolvency there being other
evidence as to the corporation being a going concern with sufficient
assets. Also, the excess of liabilities over assets does not establish
insolvency, when other assets are available. (Fletcher Cyc. of the
Law of Private Corporations, Vol. 15A, 1938 Ed pp. 34-37; Emphasis
supplied).
But relief by dissolution will be awarded in such cases only where no
other adequate remedy is available, and is not available where the
rights of the stockholders can be, or are, protected in some other
way. (16 Fletcher Cyc. Corporations, 1942 Ed., pp. 812-813, citing
"Thwing v. McDonald", 134 Minn. 148, 156 N.W. 780, 158 N.W. 820,
159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell v. Bank of St. Paul, 7
Minn. 252).
The First Assignment of Error in the brief of the plaintiffs as appellants,
contending that the investment of corporate funds by the Ma-ao Sugar Co.,
Inc., in another corporation (the Philippine Fiber Processing Co., Inc.)
constitutes a violation of Sec. 17- of the Corporation Law, deserves
consideration.
Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central Co., Inc.,
through its President, J. Amado Araneta,, subscribed for P300,000.00 worth
of capital stock of the Philippine Fiber Processing Co. Inc., that payments on
the subscription were made on September 20, 1950, for P150,000.00, on
April 30, 1951, for P50,000.00, and on March 6, 1952, for P100,000.00; that
at the time the first two payments were made there was no board resolution
authorizing the investment; and that it was only on November 26, 1951, that
the President of Ma-ao Sugar Central Co., Inc., was so authorized by the
Board of Directors.
In addition, 355,000 shares of stock of the same Philippine Fiber Processing
Co., Inc., owned by Luzon Industrial, corporation were transferred on May
31, 1952, to the defendant Ma-ao Sugar Central Co., Inc., with a valuation of
P355,000.00 on the basis of P1.00 par value per share. Again the
"investment" was made without prior board resolution, the authorizing
resolution having been subsequentIy approved only on June 4, 1952.
Plaintiffs-appellants also contend that even assuming, arguendo, that the
said Board Resolutions are valid, the transaction, is still wanting in legality,
no resolution having been approved by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least two-thirds
of the voting power, as required in Sec. 17- of the Corporation Law.
The legal provision invoked by the plaintiffs, as appellants, Sec. 17- of the
Corporation Law, provides:
No corporation organized under this act shall invest its funds in any
other corporation or business, or for any purpose other than the main
purpose for which it was organized, unless its board of directors has
been so authorized in a resolution by the affirmative vote of
stockholders holding shares in the corporation entitling them to
exercise at least two-thirds of the voting power on such proposal at a
stockholders' meeting called for the purpose ....
On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of
the Corporation Law, which provides:
SEC. 13. Every corporation has the power:
xxx xxx xxx
553
 (9) To enter into any obligation or contract essential to the proper
administration of its corporate affairs or necessary for the proper
transaction of the business or accomplishment of the purpose for
which the corporation was organized;
(10) Except as in this section otherwise provided, and in order to
accomplish its purpose as stated in the articles of incorporation, to
acquire, hold, mortgage, pledge or dispose of shares, bonds,
securities and other evidences of indebtedness of any domestic or
foreign corporation.
A reading of the two afore-quoted provisions shows that there is need for
interpretation of the apparent conflict.
In his work entitled "The Philippine Corporation Law," now in its 5th edition,
Professor Sulpicio S. Guevara of the University of the Philippines, College of
Law, a well-known authority in commercial law, reconciled these two
apparently conflicting legal provisions, as follows:
j. Power to acquire or dispose of shares or securities. A private
corporation, in order to accomplish its purpose as stated in its
articles of incorporation, and subject to the limitations imposed by the
Corporation Law, has the power to acquire, hold, mortgage, pledge
or dispose of shares, bonds, securities, and other evidences of
indebtedness of any domestic or foreign corporation. Such an act, if
done in pursuance of the corporate purpose, does not need the
approval of the stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of approval of
the stockholders is necessary. In any case, the purchase of such
shares or securities must be subject to the limitations established by
the Corporation Law; namely, (a) that no agricultural or mining
corporation shall in anywise be interested in any other agricultural or
mining corporation; or (b) that a non-agricultural or non-mining
corporation shall be restricted to own not more than 15% of the
voting stock of any agricultural or mining corporation; and (c) that
such holdings shall be solely for investment and not for the purpose
of bringing about a monopoly in any line of commerce or combination
in restraint of trade. (The Philippine Corporation Law by Sulpicio S.
Guevara, 1967 Ed., p. 89.) (Emphasis ours.)lawphi1.nt
40. Power to invest corporate funds. A private corporation has the
power to invest its corporate funds in any other corporation or
business, or for any purpose other than the main purpose for which it
was organized, provided that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such a proposal at a stockholders'
meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in
any other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in it
articles of incorporation, the approval of the stockholders is not
necessary. (Id., p. 108.) (Emphasis ours.)
We agree with Professor Guevara.
We therefore agree with the finding of the Lower Court that the investment in
question does not fall under the purview of Sec. 17- of the Corporation
Law.
With respect to the defendants' assignment of errors, the second (referring to
the counterclaim) is clearly without merit. As the Lower Court aptly ruled in its
Order of September 3, 1960 (resolving the defendants' Motion for
Reconsideration) the findings of fact were enough to justify a dismissal of the
counterclaim, "because the counterclaims were based on the fact that the
complaint was premature, improper, malicious and that the language is
unnecessarily vituperative abusive and insulting; but the Court has not found
that the complaint is premature; nor has the Court found that the complaint
was malicious; these findings can be gleaned from the decision; with respect
to the allegation that the complaint was abusive and insulting, the Court does
not concur; for it has not seen anything in the evidence that would justify a
554
finding that plaintiffs had been actuated by bad faith, nor is there anything in
the complaint essentially libelous especially as the rule is that allegations in
pleadings where relevant, are privileged even though they may not be clearly
proved afterwards; ..."
G.R. No. 76801 August 11, 1995
As regards defendants' first assignment of error, referring to the status of the
account of J. Amado Araneta in the amount of P46,270.00, this Court LOPEZ REALTY, INC., AND ASUNCION LOPEZ GONZALES, petitioners,
likewise agrees with the finding of the Lower Court that Exhibit 5, photostatic vs.
copy of the page on loans receivable does not constitute definite primary FLORENTINA FONTECHA, ET AL., AND THE NATIONAL LABOR
proof of actual payment, particularly in this case where there is evidence that RELATIONS COMMISSION, respondents.
the account in question was transferred from one account to another. There
is no better substitute for an official receipt and a cancelled check as
evidence of payment.

In the judgment, the lower court ordered the management of the Ma-ao
Sugar Central Co., Inc. "to refrain from making investments in Acoje Mining,
Mabuhay Printing and any other company whose purpose is not connected
with the sugar central business." This portion of the decision should be
reversed because, Sec. 17- of the Corporation Law allows a corporation to
"invest its fund in any other corporation or business, or for any purpose other
than the main purpose for which it was organized," provided that its board of
directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting
power.
IN VIEW OF ALL THE FOREGOING, that part of the judgment which orders
the Ma-ao Sugar Central Co., Inc. "to refrain from making investments in
Acoje Mining, Mabuhay Printing, and any other: company whose purpose is
not connected with the sugar central business," is reversed. The other parts
of the judgment are, affirmed. No special pronouncement as to costs.
PUNO, J.:
The controversy at bench arose from a complaint filed by private
respondents, 1 namely, Florentina Fontecha, Mila Refuerzo, Marcial Mamaril,
Perfecto Bautista, Edward Mamaril, Marissa Pascual and Allan Pimentel,
against their employer Lopez Realty Incorporated (petitioner) and its majority
stockholder, Asuncion Lopez Gonzales, for alleged non-payment of their
gratuity pay and other benefits. 2 The case was docketed as NLRC-NCR
Case No. 2-2176-82.
Lopez Realty, Inc., is a corporation engaged in real estate business, while
petitioner Asuncion Lopez Gonzales is one of its majority shareholders. Her
interest in the company vis-a-vis the other shareholders is as follows:
1 Asuncion Lopez Gonzales 7831 shares

Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Castro, Fernando and

Barredo, JJ., concur.
2 Teresita Lopez Marquez 7830 shares
Makalintal, Sanchez and Teehankee, JJ., took no part.

555

3 Arturo F. Lopez 7830 shares
4 Rosendo de Leon 4 shares
5 Benjamin Bernardino 1 share
6 Leo Rivera 1 share
Except for Arturo F. Lopez, the rest of the shareholders also sit as
members of the Board of Directors.
As found by the Labor arbiter. 3 sometime in 1978, Arturo Lopez
submitted a proposal relative to the distribution of certain assets of
petitioner corporation among its three (3) main shareholders. The
proposal had three (3) aspects, viz: (1) the sale of assets of the
company to pay for its obligations; (2) the transfer of certain assets
of the company to its three (3) main shareholders, while some other
assets shall remain with the company; and (3) the reduction of
employees with provision for their gratuity pay. The proposal was
deliberated upon and approved in a special meeting of the board of
directors held on April 17, 1978.
It appears that petitioner corporation approved two (2) resolutions
providing for the gratuity pay of its employees, viz: (a) Resolution
No. 6, Series of 1980, passed by the stockholders in a special
meeting held on September 8, 1980, resolving to set aside, twice a
year, a certain sum of money for the gratuity pay of
its retiring employees and to create a Gratuity Fund for the said
contingency; and (b) Resolution No. 10,Series of 1980, setting aside
the amount of P157,750.00 as Gratuity Fund covering the period
from 1950 up to 1980.
Meanwhile, on July 28, 1981, board member and majority
stockholder Teresita Lopez Marquez died.
On August 17, 1981, except for Asuncion Lopez Gonzales who was
then abroad, the remaining members of the Board of Directors,
namely: Rosendo de Leon, Benjamin Bernardino, and Leo Rivera,
convened a special meeting and passed a resolution which reads:
Resolved, as it is hereby resolved that the gratuity (pay) of
the employees be given as follows:
(a) Those who will be laid off be given the full amount of
gratuity;
(b) Those who will be retained will receive 25% of their
gratuity (pay) due on September 1, 1981, and another 25%
on January 1, 1982, and 50% to be retained by the office in
the meantime. (emphasis supplied)
Private respondents were the retained employees of petitioner
corporation. In a letter, dated August 31, 1981, private respondents
requested for the full payment of their gratuity pay. Their request was
granted in a special meeting held on September 1, 1981. The
relevant, portion of the minutes of the said board meeting reads:
In view of the request of the employees contained in the
letter dated August 31, 1981, it was also decided that, all
those remaining employees will receive another 25% (of
their gratuity) on or before October 15, 1981 and another
25% on or before the end of November, 1981 of their
respective gratuity.
556
At that, time, however, petitioner Asuncion Lopez Gonzales was still
abroad. Allegedly, while she was still out of the country, she sent a
cablegram to the corporation, objecting to certain matters taken up
by the board in her absence, such as the sale of some of the assets
of the corporation. Upon her return, she flied a derivative suit with the
Securities and Exchange Commission (SEC) against majority
shareholder Arturo F. Lopez.
Notwithstanding the "corporate squabble" between petitioner
Asuncion Lopez Gonzales and Arturo Lopez, the first two (2)
installments of the gratuity pay of private respondents Florentina
Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista
were paid by petitioner corporation.
Also, petitioner corporation had prepared the cash vouchers and
checks for the third installments of gratuity pay of said private
respondents (Florentina Fontecha, Mila Refuerzo, Marcial Mamaril
and Perfecto Bautista). For some reason, said vouchers were
cancelled by petitioner Asuncion Lopez Gonzales.
Likewise, the first, second and third installments of gratuity pay of the
rest of private respondents, particularly, Edward Mamaril, Marissa
Pascual and Allan Pimentel, were prepared but cancelled by
petitioner Asuncion Lopez Gonzales. Despite private respondents'
repeated demands for their gratuity pay, corporation refused to pay
the same. 4
On July 23, 1984, Labor Arbiter Raymundo R. Valenzuela rendered
judgment in favor of private respondents. 5
Petitioners appealed the adverse ruling of the Labor arbiter to public
respondent National Labor Relations Commission. The appeal
focused on the alleged non-ratification and non-approval of the
assailed August 17, 1981 and September 1, 1981 Board Resolutions
during the Annual Stockholders' Meeting held on March 1, 1982.
Petitioners further insisted that the payment of the gratuity to some of
the private respondents was a mere "mistake" on the part of
petitioner corporation since, pursuant to Resolution No. 6, dated
September 8, 1980, and Resolution No. 10, dated October 6, 1980,
said gratuity pay should be given only upon the employees'
retirement.
On November 20, 1985, public respondent, through its Second
Division, dismissed the appeal for lack of merit, the pertinent portion
of which states: 6
We cannot agree with the contention of respondents
(petitioners') that the Labor Arbiter a quo committed abuse of
discretion in his decision.
Respondents' (petitioners') contention that, the two (2)
resolutions dated 17 August 1981 and 1 September 1981 . . .
which were not approved in the annual stockholders meeting
had no force and effect, deserves scant consideration. The
records show that the stockholders did not revoke nor nullify
these resolutions granting gratuities to complainants.
On record, it appears that the said resolutions arose from the
legitimate creation of the Board of Directors who steered the
corporate affairs of the corporation. . . .
Respondents' (petitioners') allegation that the three (3)
complainants, Mila E. Refuerzo, Marissa S. Pascual and
Edward Mamaril, who had resigned after filing the complaint
on February 8, 1982, were precluded to (sic) receive gratuity
because the said resolutions referred to
only retiring employee could not be given credence. A
reading of Resolutions dated 17 August 1981 and 1
September 1981 disclosed that there were periods
mentioned for the payment of complainants' gratuities. This
disproves respondents' argument allowing gratuities upon
retirement of employees. Additionally, the proposed
557
distribution of assets (Exh. C-1) filed by Mr. Arturo F. Lopez
also made mention of gratuity pay, " . . . (wherein) an
employee who desires to resign from the LRI will be given
the gratuity pay he or she earned." (Emphasis supplied) Let
us be reminded, too, that the complainants' resignation was
not voluntary but it was pressurized (sic) due to "power
struggle" which was evident between Arturo Lopez and
Asuncion Gonzales.
The respondents' (petitioners') contention of a mistake to
have been committed in granting the first two (2) installments
of gratuities to complainants Perfecto Bautista, Florentina
Fontecha, Marcial Mamaril and Mila Refuerzo, (has) no legal
leg to stand on. The record is bereft of any evidence that the
Board of Directors had passed a resolution nor is there any
minutes of whatever nature proving mistakes in the award of
damages (sic).
With regard to the award of service incentive leave and
others, the Commission finds no cogent reason to disturb the
appealed decision.
We affirm.
WHEREFORE, let the appealed decision be, as it is hereby,
AFFIRMED and let the instant appeal (be) dismissed for lack
of merit.
SO ORDERED.
Petitioners reconsidered. 7 In their motion for reconsideration,
petitioners assailed the validity of the board resolutions passed on
August 17, 1981 and September 1, 1981, respectively, and claimed,
for the first time, that petitioner Asuncion Lopez Gonzales was not
notified of the special board meetings held on said dates. The motion
for reconsideration was denied by the Second Division on July 24,
1986.
On September 4, 1986, petitioners filed another motion for
reconsideration. Again, the motion was denied by public respondent
in a Minute Resolution dated November 19, 1986. 8
Hence, the petition. As prayed for, we issued a Temporary
Restraining Order, 9 enjoining public respondent from enforcing or
executing the Resolution, dated November 20, 1986 (sic), in NLRC-
NCR-2-2176-82. 10
The sole issue is whether or not public respondent acted with grave
abuse of discretion in holding that private respondents are entitled to
receive their gratuity pay under the assailed board resolutions dated
August 17, 1951 and September 1, 1981.
Petitioners contend that the board resolutions passed on August 17,
1981 and September 1, 1981, granting gratuity pay to their retained
employees, are ultra vires on the ground that petitioner Asuncion
Lopez Gonzales was not duly notified of the said special meetings.
They aver, further, that said board resolutions were not ratified by the
stockholders of the corporation pursuant to Section 28 1/2 of the
Corporation Law (Section 40 of the Corporation Code). They also
insist that the gratuity pay must be given only to the retiring
employees, to the exclusion of the retained employees or those who
voluntarily resigned from their posts.
At the outset, we note that petitioners allegation on lack of notice to
petitioner Asuncion Lopez Gonzales was raised for the first time in
the in their motion for reconsideration filed before public respondent
558
National Labor Relations Commission, or after said public
respondent had affirmed the decision of the labor arbiter. To stress,
in their appeal before the NLRC, petitioners never raised the issue of
lack of notice to Asuncion Lopez Gonzales. The appeal dealt with (a)
the failure of the stockholders to ratify the assailed resolutions and
(b) the alleged "mistake" committed by petitioner corporation in
giving the gratuity pay to some of its employees who are yet to retire
from employment.
In their comment, 11 private respondents maintain that the new
ground of lack of notice was not raised before the labor arbiter,
hence, petitioners are barred from raising the same on appeal.
Private respondents claim, further, that such failure on the part of
petitioners, had deprived them the opportunity to present evidence
that, in a subsequent special board meeting held on September 29,
1981, the subject resolution dated September 1, 1981, was
unanimously approved by the board of directors of petitioner
corporation, including petitioner Asuncion Lopez Gonzales. 12
Indeed, it would be offensive to the basic rules of fair play and justice
to allow petitioners to raise questions which have not been passed
upon by the labor arbiter and the public respondent NLRC. It is well
settled that questions not raised in the lower courts cannot, be raised
for the first time on appeal. 13 Hence, petitioners may not invoke any
other ground, other than those it specified at the labor arbiter level, to
impugn the validity of the subject resolutions.
We now come to petitioners' argument that the resolutions passed by
the board of directors during the special meetings on August 1, 1981,
and September 1, 1981, were ultra vires for lack of notice.
The general rule is that a corporation, through its board of directors,
should act in the manner and within the formalities, if any, prescribed
by its charter or by the general law. 14 Thus, directors must act as a
body in a meeting called pursuant to the law or the corporation's by-
laws, otherwise, any action taken therein may be questioned by any
objecting director or shareholder. 15
Be that as it may, jurisprudence 16 tells us that an action of the board
of directors during a meeting, which was illegal for lack of notice,
may be ratified either expressly, by the action of the directors in
subsequent legal meeting, or impliedly, by the corporation's
subsequent course of conduct. Thus, in one case, 17 it was held:
. . . In 2 Fletcher, Cyclopedia of the Law of Private
Corporations (Perm. Ed.) sec. 429, at page 290, it is stated:
Thus, acts of directors at a meeting which
was illegal because of want of notice may be
ratified by the directors at a subsequent
legal meeting, or by the corporations course
of conduct
...
Fletcher, supra, further states in sec. 762, at page 1073-
1074:
Ratification by directors may be by an
express resolution or vote to that effect, or it
may be implied from adoption of the act,
acceptance or acquiescence. Ratification
may be effected by a resolution or vote of
the board of directors expressly ratifying
previous acts either of corporate officers or
agents; but it is not necessary, ordinarily, to
show a meeting and formal action by the
559
 board of directors in order to establish a
ratification.
In American Casualty Co., v. Dakota Tractor and Equipment
Co., 234 F. Supp. 606, 611 (D.N.D. 1964), the court stated:
Moreover, the unauthorized acts of an officer
of a corporation may be ratified by the
corporation by conduct implying approval
and adoption of the act in question. Such
ratification may be express or may be
inferred from silence and inaction.
In the case at bench, it was established that petitioner corporation
did not issue any resolution revoking nor nullifying the board
resolutions granting gratuity pay to private respondents. Instead,
they paid the gratuity pay, particularly, the first two (2) installments
thereof, of private respondents Florentina Fontecha, Mila Refuerzo,
Marcial Mamaril and Perfecto Bautista.
Despite the alleged lack of notice to petitioner Asuncion Lopez
Gonzales at that time the assailed resolutions were passed, we can
glean from the records that she was aware of the corporation's
obligation under the said resolutions. More importantly, she
acquiesced thereto. As pointed out by private respondents, petitioner
Asuncion Lopez Gonzales affixed her signature on Cash Voucher
Nos. 81-10-510 and 81-10-506, both dated October 15, 1981,
evidencing the 2nd installment of the gratuity pay of private
respondents Mila Refuerzo and Florentina Fontecha. 18
We hold, therefore, that the conduct of petitioners after the passage
of resolutions dated August, 17, 1951 and September 1, 1981, had
estopped them from assailing the validity of said board resolutions.
Assuming, arguendo, that there was no notice given to Asuncion
Lopez Gonzalez during the special meetings held on August 17,
1981 and September 1, 1981, it is erroneous to state that the
resolutions passed by the board during the said meetings were ultra
vires. In legal parlance, "ultra vires" act refers to one which is not
within the corporate powers conferred by the Corporation Code or
articles of incorporation or not necessary or incidental in the exercise
of the powers so conferred. 19
The assailed resolutions before us cover a subject which concerns
the benefit and welfare of the company's employees. To stress,
providing gratuity pay for its employees is one of the express powers
of the corporation under the Corporation Code, hence, petitioners
cannot invoke the doctrine of ultra vires to avoid any liability arising
from the issuance the subject resolutions. 20
We reject petitioners' allegation that private respondents, namely,
Mila Refuerzo, Marissa Pascual and Edward Mamaril who resigned
from petitioner corporation after the filing of the case, are precluded
from receiving their gratuity pay. Pursuant to board resolutions dated
August 17, 1981 and September 1, 1981, respectively, petitioner
corporation obliged itself to give the gratuity pay of its retained
employees in four (4) installments: on September 1, 1981; October
15, 1981; November, 1981; and January 1, 1982. Hence, at the time
the aforenamed private respondents tendered their resignation, the
aforementioned private respondents were already entitled to receive
their gratuity pay.
Petitioners try to convince us that the subject resolutions had no
force and effect in view of the non-approval thereof during the Annual
Stockholders' Meeting held on March 1, 1982. To strengthen their
position, petitioners cite section 28 1/2 of the Corporation Law
(Section 40 of the Corporation Code). We are not persuaded.
The cited provision is not applicable to the case at bench as it refers
to the sale, lease, exchange or disposition of all or substantially all of
the corporation's assets, including its goodwill. In such a case, the
560
 action taken by the board of directors requires the authorization of
the stockholders on record.
It will be observed that, except far Arturo Lopez, the stockholders of
petitioner corporation also sit as members of the board of directors.
Under the circumstances in field, it will be illogical and superfluous to
require the stockholders' approval of the subject resolutions. Thus,
even without the stockholders' approval of the subject resolutions,
petitioners are still liable to pay private respondents' gratuity pay.
IN VIEW WHEREOF, the instant petition is DISMISSED for lack of
merit and the temporary restraining order we issued on February 9,
1987 is LIFTED. Accordingly, the assailed resolution of the National
Labor Relations Commission in NLRC-NCR-2176-82 is AFFIRMED.
This decision is immediately executory. Costs against petitioners.
SO ORDERED.
Narvasa, C.J., Regalado, Mendoza and Francisco, JJ., concur.
G.R. No. L-15092 May 18, 1962
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
Taada, Teehankee and Carreon for plaintiffs-appellants.
Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First Instance of
Occidental Negros, in its Civil Case No. 2603, dismissing plaintiff's complaint
that sought to compel the defendant Milling Company to increase plaintiff's
share in the sugar produced from their cane, from 60% to 62.33%, starting
from the 1951-1952 crop year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro
Montelibano, and the Limited co-partnership Gonzaga and Company, had
been and are sugar planters adhered to the defendant-appellee's sugar
central mill under identical milling contracts. Originally executed in 1919, said
contracts were stipulated to be in force for 30 years starting with the 1920-21
crop, and provided that the resulting product should be divided in the ratio of
45% for the mill and 55% for the planters. Sometime in 1936, it was
proposed to execute amended milling contracts, increasing the planters'
share to 60% of the manufactured sugar and resulting molasses, besides
other concessions, but extending the operation of the milling contract from
the original 30 years to 45 years. To this effect, a printed Amended Milling
Contract form was drawn up. On August 20, 1936, the Board of Directors of
the appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No.
11, Acuerdo No. 1) granting further concessions to the planters over and
above those contained in the printed Amended Milling Contract. The bone of
contention is paragraph 9 of this resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx xxx xxx
Acuerdo No. 1. Previa mocion debidamente secundada, la Junta
en consideracion a una peticion de los plantadores hecha por un
561
 comite nombrado por los mismos, acuerda enmendar el contrato de
molienda enmendado medientelas siguentes:
xxx xxx xxx
9.a Que si durante la vigencia de este contrato de Molienda
Enmendado, lascentrales azucareras, de Negros Occidental, cuya
produccion anual de azucar centrifugado sea mas de una tercera
parte de la produccion total de todas lascentrales azucareras de
Negros Occidental, concedieren a sus plantadores mejores
condiciones que la estipuladas en el presente contrato, entonces
esas mejores condiciones se concederan y por el presente se
entenderan concedidas a los platadores que hayan otorgado este
Contrato de Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on
September 10, 1936, but a copy of the resolution of August 10, 1936, signed
by the Central's General Manager, was not attached to the printed contract
until April 17, 1937; with the notation
Las enmiendas arriba transcritas forman parte del contrato de
molienda enmendado, otorgado por y la Bacolod-Murcia Milling
Co., Inc.
In 1953, the appellants initiated the present action, contending that three
Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with
a total annual production exceeding one-third of the production of all the
sugar central mills in the province, had already granted increased
participation (of 62.5%) to their planters, and that under paragraph 9 of the
resolution of August 20, 1936, heretofore quoted, the appellee had become
obligated to grant similar concessions to the plaintiffs (appellants herein). The
appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended
by urging that the stipulations contained in the resolution were made without
consideration; that the resolution in question was, therefore, null and void ab
initio, being in effect a donation that was ultra vires and beyond the powers of
the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the
defendant Milling company, and dismissed the complaint. Thereupon,
plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not stand. It must
be remembered that the controverted resolution was adopted by appellee
corporation as a supplement to, or further amendment of, the proposed
milling contract, and that it was approved on August 20, 1936, twenty-one
days prior to the signing by appellants on September 10, of the Amended
Milling Contract itself; so that when the Milling Contract was executed, the
concessions granted by the disputed resolution had been already
incorporated into its terms. No reason appears of record why, in the face of
such concessions, the appellants should reject them or consider them as
separate and apart from the main amended milling contract, specially taking
into account that appellant Alfredo Montelibano was, at the time, the
President of the Planters Association (Exhibit 4, p. 11) that had agitated for
the concessions embodied in the resolution of August 20, 1936. That the
resolution formed an integral part of the amended milling contract, signed on
September 10, and not a separate bargain, is further shown by the fact that a
copy of the resolution was simply attached to the printed contract without
special negotiations or agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of
August 20, 1936 were supported by the same causa or consideration
underlying the main amended milling contract; i.e., the promises and
obligations undertaken thereunder by the planters, and, particularly, the
extension of its operative period for an additional 15 years over and beyond
the 30 years stipulated in the original contract. Hence, the conclusion of the
court below that the resolution constituted gratuitous concessions not
supported by any consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors of
the respondent sugar milling company to make a gift to the planters would be
relevant if the resolution in question had embodied a separate
agreement after the appellants had already bound themselves to the terms of
the printed milling contract. But this was not the case. When the resolution
was adopted and the additional concessions were made by the company, the
562
appellants were not yet obligated by the terms of the printed contract, since
they admittedly did not sign it until twenty-one days later, on September 10,
1936. Before that date, the printed form was no more than a proposal that
either party could modify at its pleasure, and the appellee actually modified it
by adopting the resolution in question. So that by September 10, 1936
defendant corporation already understood that the printed terms were not
controlling, save as modified by its resolution of August 20, 1936; and we are
satisfied that such was also the understanding of appellants herein, and that
the minds of the parties met upon that basis. Otherwise there would have
been no consent or "meeting of the minds", and no binding contract at all.
But the conduct of the parties indicates that they assumed, and they do not
now deny, that the signing of the contract on September 10, 1936, did give
rise to a binding agreement. That agreement had to exist on the basis of the
printed terms as modified by the resolution of August 20, 1936, or not at all.
Since there is no rational explanation for the company's assenting to the
further concessions asked by the planters before the contracts were signed,
except as further inducement for the planters to agree to the extension of the
contract period, to allow the company now to retract such concessions would
be to sanction a fraud upon the planters who relied on such additional
stipulations.
The same considerations apply to the "void innovation" theory of appellees.
There can be no novation unless two distinct and successive binding
contracts take place, with the later designed to replace the preceding
convention. Modifications introduced before a bargain becomes obligatory
can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936
was not attached to the printed contract until April 17, 1937. But, except in
the case of statutory forms or solemn agreements (and it is not claimed that
this is one), it is the assent and concurrence (the "meeting of the minds") of
the parties, and not the setting down of its terms, that constitutes a binding
contract. And the fact that the addendum is only signed by the General
Manager of the milling company emphasizes that the addition was made
solely in order that the memorial of the terms of the agreement should be full
and complete.
Much is made of the circumstance that the report submitted by the Board of
Directors of the appellee company in November 19, 1936 (Exhibit 4) only
made mention of 90%, the planters having agreed to the 60-40 sharing of the
sugar set forth in the printed "amended milling contracts", and did not make
any reference at all to the terms of the resolution of August 20, 1936. But a
reading of this report shows that it was not intended to inventory all the
details of the amended contract; numerous provisions of the printed terms
are alao glossed over. The Directors of the appellee Milling Company had no
reason at the time to call attention to the provisions of the resolution in
question, since it contained mostly modifications in detail of the printed
terms, and the only major change was paragraph 9 heretofore quoted; but
when the report was made, that paragraph was not yet in effect, since it was
conditioned on other centrals granting better concessions to their planters,
and that did not happen until after 1950. There was no reason in 1936 to
emphasize a concession that was not yet, and might never be, in effective
operation.
There can be no doubt that the directors of the appellee company had
authority to modify the proposed terms of the Amended Milling Contract for
the purpose of making its terms more acceptable to the other contracting
parties. The rule is that
It is a question, therefore, in each case of the logical relation of the
act to the corporate purpose expressed in the charter. If that act is
one which is lawful in itself, and not otherwise prohibited, is done for
the purpose of serving corporate ends, and is reasonably tributary to
the promotion of those ends, in a substantial, and not in a remote
and fanciful sense, it may fairly be considered within charter powers.
The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation's business, fairly incident to
the express powers and reasonably necessary to their exercise. If
so, the corporation has the power to do it; otherwise, not. (Fletcher
Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
As the resolution in question was passed in good faith by the board of
directors, it is valid and binding, and whether or not it will cause losses or
decrease the profits of the central, the court has no authority to review them.
563
 They hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be
controlled in the reasonable exercise and performance of such duty.
Whether the business of a corporation should be operated at a loss
during depression, or close down at a smaller loss, is a purely
business and economic problem to be determined by the directors of
the corporation and not by the court. It is a well-known rule of law
that questions of policy or of management are left solely to the
honest decision of officers and directors of a corporation, and the
court is without authority to substitute its judgment of the board of
directors; the board is the business manager of the corporation, and
so long as it acts in good faith its orders are not reviewable by the
courts. (Fletcher on Corporations, Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La Carlota,
Hawaiian Philippines, San Carlos and Binalbagan (which produce over one-
third of the entire annual sugar production in Occidental Negros) have
granted progressively increasing participations to their adhered planter at an
average rate of
63.5% for 1955-56,
the appellee Bacolod-Murcia Milling Company is, under the terms of its
Resolution of August 20, 1936, duty bound to grant similar increases to
plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and
judgment is decreed sentencing the defendant-appellee to pay plaintiffs-
appellants the differential or increase of participation in the milled sugar in
accordance with paragraph 9 of the appellee Resolution of August 20, 1936,
over and in addition to the 60% expressed in the printed Amended Milling
Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said
appellants having received an additional 2% corresponding to said
year in October, 1953;

2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year;
62.333% for the 1951-52 crop year; and to all appellants thereafter
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
64.2% for 1952-53; 3.5% for the 1955-1956 crop year;

with interest at the legal rate on the value of such differential during the time
they were withheld; and the right is reserved to plaintiffs-appellants to sue for
64.3% for 1953-54; such additional increases as they may be entitled to for the crop years
subsequent to those herein adjudged.

Costs against appellee, Bacolod-Murcia Milling Co.

64.5% for 1954-55; and
Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes and Dizon,
JJ., concur.

564
G.R. No. L-5377 December 29, 1954

MARIA CLARA PIROVANA ET AL., plaintiffs-appellees,

vs.
THE DE LA RAMA STEAMSHIP CO., defendant-appellant.

Del Rosario and Garcia for appellant.

Vicente J. Francisco for appellees.

BAUTISTA ANGELO, J.:

565
This is an appeal from a decision of the Court of First Instance of Rizal
declaring the donation made by the defendant in favor of the minor children
of the late Enrico Pirovano of the proceeds of the insurance policies taken on
his life valid and binding, and ordering said defendant to pay to said minor
children the sum of P583,813.59, with interest thereon at the rate of per cent
from the date of filing of the complaint, plus an additional amount equivalent
to 20 per cent of said sum of P538,813.59 as damages by way of attorney's
fees and the costs of action.
Plaintiffs herein are the minor children of the late Enrico Pirovano
represented by their mother and judicial guardian Estefania R. Pirovano.
They seek to enforce certain resolutions adopted by the Board of Directors
and stockholders of the defendant company giving to said minor children of
the proceeds of the insurance policies taken on the life of their deceased
father Enrico Pirovano with the company as beneficiary. Defendant's main
defense is: that said resolutions and the contract executed pursuant thereto
are ultra vires, and, if valid, the obligation to pay the amount given is not yet
due and demandable.
The trial court resolved all the issues raised by the parties in favor of the
plaintiffs and, after considering the evidence, both oral and documentary,
arrived at the following conclusions:
First. That the contract executed between the plaintiffs and the
defendant is a renumerative donation.
Second. That said contract or donation is not ultra vires, but an
act executed within the powers of the defendant corporation in
accordance with its articles of incorporation and by laws, sanctioned
and approved by its Board of Directors and stockholders; and
subsequently ratified by other subsequent acts of the defendant
company.
Third. That the said donation is in accordance with the trend of
modern and more enlightened legislation in its treatment of questions
between labor and capital.
Fourth. That the condition mentioned in the donation is null and
void because it depends on the provisions of Article 1115 of the old
Civil Code.
Fifth. That if the condition is valid, its non-fulfillment is due to the
desistance of the defendant company from obeying and doing the
wishes and mandates of the majority of the stockholders.
Sixth. That the non-payment of the debt in favor of the National
Development Company is not due to the lack of funds, nor to lack of
authority, but the desire of the President of the corporation to
preserve and continue the Government participation in the company.
Seventh. That due demands were made by the plaintiffs and their
attorneys and these demands were rejected for no justifiable or legal
grounds.
The important facts which need to be considered for purposes of this appeal
may be briefly stated as follows: Defendant is a corporation duly organized in
accordance with law with an authorized capital of P500,000, divided into
5,000 shares, with a par value of P100 each share. The stockholders were:
Esteban de la Rama, 1,800 shares, Leonor de la Rama, 100 shares,
Estefania de la Rama, 100 shares, and Eliseo Hervas, Tomas Concepcion,
Antonio G. Juanco, and Gaudencio Volasote with 5 shares each. Leonor and
Estefania are daughters of Don Esteban, while the rest his employees.
Estefania de la Rama was married to the late Enrico Pirovano and to them
four children were born who are the plaintiffs in this case.
Enrico Pirovano became the president of the defendant company and under
his management the company grew and progressed until it became a multi-
million corporation by the time Pirovano was executed by the Japanese
during the occupation. On May 13, 1941, the capital stock of the corporation
was increased to P2,000,000, after which a 100 per cent stock dividend was
declared. Subsequently, or before the outbreak of the war , new stock
dividends of 200 per cent and 33 1/3 per cent were again declared. On
December 4, 1941, the capital stock was once more increased to
566
P5,000,000. Under Pirovano's management, the assets of the company grew
and increased from an original paid up capital of around P240,000 to
P15,538,024.37 by September 30, 1941 (Exhibit HH).
In the meantime, Don Esteban de la Rama, who practically owned and
controlled the stock of the defendant corporation, distributed his shareholding
among his five daughters, namely, Leonor, Estefania, Lourdes, Lolita and
Conchita and his wife Natividad Aguilar so that, at that time, or on July 10,
1946, the stockholding of the corporation stood as follows: Esteban de la
Rama, 869 shares, Leonor de la Rama, 3,375 shares, Estefania de la Rama,
3,368 shares, Lourdes de la Rama, 3,368 shares, Lolita de la Rama, 3,368
shares, Conchita de la Rama, 3,376 shares, and Natividad Aguilar, 2,136
shares. The other stockholders , namely, Eliseo Hervas, Tomas Concepcion,
Antonio Juanco, and Jose Aguilar, who were merely employees of Don
Esteban, were given 40 shares each, while Pio Pedrosa, Marcial P. Lichauco
and Rafael Roces, one share each, because they merely represented the
National Development Company. This Company was given representation in
the Board Of Directors of the corporation because at that time the latter had
an outstanding bonded indebtedness to the National Development Company.
This bonded indebtedness was incurred on February 26, 1940 and was in
the amount of P7,500.00. The bond held by the National Development
Company was redeemable within a period of 20 years from March 1, 1940,.
bearing interest at the rate of 5 per cent per annum. To secure said bonded
indebtedness, all the assets of the De la Rama Steamship Co., Inc., and
properties of Don Esteban de la Rama, as well as those of the Hijos de I. de
la Rama and Co., Inc., a sister corporation owned by Don Esteban and his
family, were mortgaged to the National Development Company (Annexes A,
B, C, D of Exhibit 3, Deed of Trust). Payments made by the corporation
under the management of Pirovano reduced this bonded indebtedness to
P3,260,855.77.
Upon arrangement made with the National Development Company, the
outstanding bonded indebtedness was converted into non-voting preferred
shares of stock of the De la Rama company under the express condition that
they would bear affixed cumulative dividend of 6 per cent per annum and
would be redeemable within 15 years (Exhibits 5 and 7). This conversion was
carried out on September 23, 1949, when the National Development
Company executed a "Deed of Termination of Trust and Release of
Mortgage" in favor of the De la Rama company (Exhibit 6.) The immediate
effect of this conversion was the released from incumbrance of all the
properties Of Don Esteban and of the Hijos de I. de la Rama and Co., Inc.,
which was apparently favorable to the interests of the De la Rama company,
but, on the other hand, it resulted in the inconvenience that, as holder of the
preferred stock, the National Development Company, was given to the right
to 40 per cent of the membership of the Board of Directors of the De la Rama
company, which meant an increase in the representation of the National
Development Company from 2 to 4 of the 9 members of said Board of
Directors.
The first resolution granting to the Pirovano children the proceeds of the
insurance policies taken on his life by the defendant company was adopted
by the Board of Directors at a meeting held on July 10, 1946, (Exhibit B).
This grant was called in the resolution as "Special Payment to Minor Heirs of
the late Enrico Pirovano". Because of its direct hearing on the issues
involved in this case, said resolution is hereunder reproduced in toto:
SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO
PIROVANO
The President stated that the principal purpose for which the meeting
had been called was to discuss the advisability of making some form
of compensation to the minor heirs of the late Enrico Pirovano,
former President and General Manager of the Company. As every
member of the Board knows, said the President, the late Enrico
Pirovano who was largely responsible for the very successful
development of the activities of the Company prior to war was killed
by the Japanese in Manila sometime in 1944 leaving as his only
heirs four minor children, Maria Carla, Esteban, Enrico and John
Albert. Early in 1941, explained the President, the Company had
insured the life of Mr. Pirovano for a million pesos. Following the
occupation of the Philippines by Japanese forces the Company was
unable to pay the premiums on those policies issued by Filipino
companies and these policies had lapsed. But with regards to the
567
York Office of the De la Rama Steamship Co., Inc. had kept up
payment of the premiums from year to year. The payments made on
account of these premiums, however, are very small compared to the
amount which the Company will now receive as a result of Mr.
Pirovano's death. The President proposed therefore that out of the
proceeds of these policies the sum of P400,000 be set aside for the
minor children of the deceased, said sum of money to be convertible
into 4,000 shares of the stock of the Company, at par, or 1,000
shares for each child. This proposal, explained the President as
being made by him upon suggestion of President Roxas, but, he
added, that he himself was very much in favor of it also. On motion
of Miss Leonor de la Rama duly seconded by Mrs. Lourdes de la
Rama de Osmea, the following resolution was, thereupon,
unanimously approved:
Whereas, the late Enrico Pirovano, President and General Manager
of the De la Rama Steamship Company, died in Manila sometime in
November, 1944:
Whereas, the said Enrico Pirovano was largely responsible for the
rapid and very successful development of the activities of thus
company;
Whereas, early in 1941 this company insured the life of said Enrico
Pirovano in various Philippine and American Life Insurance
companies for the total sum of P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow,
Estefania Pirovano and four minor children, to wit: Esteban, Maria
Carla, Enrico and John Albert, all surnamed Pirovano;lawphil.net
Whereas, said Enrico Pirovano left practically nothing to his heirs
and it is but fit proper that this company which owes so much to the
deceased should make some provision for his children;
Whereas, this company paid premium on Mr. Pirovano's life
insurance policies for a period of only 4 years so that it will receive
from the insurance companies sums of money greatly in excess of
the premiums paid by this company.
Be it resolved, That out of the proceeds to be collected from the life
insurance policies on the life of the late Enrico Pirovano, the sum of
P400,000 be set aside for equal division among the 4 minor children
of the deceased, to wit: Esteban, Maria Carla, Enrico and John
Albert, all surnamed Pirovano, which sum of money shall be
convertible into shares of stock of the De la Rama Steamship
Company, at par and, for that purpose, that the present registered
stockholders of the corporation be requested to waive their
preemptive right to 4,000 shares of the unissued stock of the
company in order to enable each of the 4 minor heirs of the
deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano, to obtain 1,000 shares at par;
Resolved, further, that in view of the fact that under the provisions of
the indenture with the National Development Company, it is
necessary that action herein proposed to be confirmed by the Board
of Directors of that company, the Secretary is hereby instructed to
send a copy of this resolution to the proper officers of the National
Development Company for appropriate action. (Exhibit B)
The above resolution, which was adopted on July 10, 1946, was submitted to
the stockholders of the De la Rama company at a meeting properly
convened, and on that same date, July 10, 1946, the same was duly
approved.
It appears that, although Don Esteban and the Members of his family were
agreeable to giving to the Pirovano children the amount of P400,000 out of
the proceeds of the insurance policies taken on the life of Enrico Pirovano,
they did not realize that when they provided in the above referred two
resolutions that said Amount should be paid in the form of shares of stock,
they would be actually giving to the Pirovano children more than what they
568
intended to give. This came about when Lourdes de la Rama, wife of Sergio
Osmea, Jr., showed to the latter copies of said resolutions and asked him to
explain their import and meaning, and it was value then that Osmea
explained that because the value then of the shares of stock was actually 3.6
times their par value, the donation their value, the donation, although
purporting to be only P400,00, would actually amount to a total of
P1,440,000. He further explained that if the Pirovano children would given
shares of stock in lieu of the amount to be donated, the voting strength of the
five daughters of Don Esteban in the company would be adversely affected
in the sense that Mrs. Pirovano would be adversely affected in the sense that
Mrs. Pirovano would have a voting power twice as much as that of her
sisters. This caused Lourdes de la Rama to write to the secretary of the
corporation, Atty. Marcial Lichauco, asking him to cancel the waiver she
supposedly gave of her pre-emptive rights. Osmea elaborated on this
matter at the annual meeting of the stockholders held on December 12, 1946
but at said meeting it was decided to leave the matter in abeyance pending
further action on the part of the members of the De la Rama family.
Osmea, in the meantime, took up the matter with Don Esteban and, as
consequence, the latter, on December 30, 1946, addressed to Marcial
Lichauco a letter stating, among other things, that "in view of the total lack of
understanding by me and my daughters of the two Resolutions
abovementioned, namely, Directors' and Stockholders' dated July 10, 1946,
as finally resolved by the majority of the Stockholders and Directors present
yesterday, that you consider the abovementioned resolutions nullified."
(Exhibit CC).
On January 6, 1947, the Board of Directors of the De la Rama company, as a
consequence of the change of attitude of Don Esteban, adopted a resolution
changing the form of the donation to the Pirovano children from a donation of
4,000 shares of stock as originally planned into a renunciation in favor of the
children of all the company's "right, title, and interest as beneficiary in and to
the proceeds of the abovementioned life insurance policies", subject to the
express condition that said proceeds should be retained by the company as
a loan drawing interest at the rate of 5 per cent per annum and payable to
the Pirovano children after the company "shall have first settled in full the
balance of its present remaining bonded indebtedness in the sum of
approximately P5,000,000" (Exhibit C). This resolution was concurred in by
the representatives of the National Development Company. The pertinent
portion of the resolution reads as follows:
Be resolved, that out of gratitude to the late Enrico Pirovano this
Company renounce as it hereby renounces, all of his right, title, and
interest as beneficiary in and to the proceeds of the abovementioned
life insurance policies in favor of Esteban, Maria Carla, Enrico and
John Albert, all surnamed Pirovano, subject to the terms and
conditions herein after provided;
That the proceeds of said insurance policies shall be retained by the
Company in the nature of a loan drawing interest at the rate of 5 per
cent annum from the date of receipt of payment by the Company
from the various insurance companies above-mentioned until the
time the time the same amounts are paid to the minor heirs of Enrico
Pirovano previously mentioned;
That all amounts received from the above-mentioned policies shall
be divided equally among the minors heirs of said Enrico Pirovano;
That the company shall proceed to pay the proceeds of said
insurance policies plus interests that may have accrued to each of
the heirs of the said Enrico Pirovano or their duly appointed
representatives after the Company shall have first settled in full the
balance of its present remaining bonded indebtedness in the sum of
the approximately P5,000,000.
The above resolution was carried out by the company and Mrs. Estefania R.
Pirovano, the latter acting as guardian of her children, by executing a
Memorandum Agreement on January 10, 1947 and June 17, 1947,
respectively, stating therein that the De la Rama Steamship Co., Inc., shall
enter in its books as a loan the proceeds of the life insurance policies taken
on the life of Pirovano totalling S321,500, which loan would earn interest at
the rate of 5 per cent per annum. Mrs. Pirovano, in executing the agreement,
569
acted with the express authority granted to her by the court in an order dated
March 26, 1947.
On June 24, 1947, the Board of Directors approved a resolution providing
therein that instead of the interest on the loan being payable, together with
the principal, only after the company shall have first settled in full its bonded
indebtedness, said interest may be paid to the Pirovano children "whenever
the company is in a position to met said obligation" (Exhibit D), and on
February 26, 1948, Mrs. Pirovano executed a public document in which she
formally accepted the donation (Exhibit H). The Dela Rama company took
"official notice" of this formal acceptance at a meeting held by its Board of
Directors on February 26, 1948.
In connection with the above negotiations, the Board of Directors took up at
its meeting on July 25, 1949, the proposition of Mrs. Pirovano to buy the
house at New Rochelle, New York, owned by the Demwood Realty, a
subsidiary of the De la Rama company at its original costs of $75,000, which
would be paid from the funds held in trust belonging to her minor children.
After a brief discussion relative to the matter, the proposition was approved in
a resolution adopted on the same date.
The formal transfer was made in an agreement signed on September 5, 1949
by Mrs. Pirovano, as guardian of her children, and by the De la Rama
company, represented by its new General Manager, Sergio Osmea, Jr. The
transfer of this property was approved by the court in its order of September
20, 1949.lawphil.net
On September 13, 1949, or two years and 3 months after the donation had
been approved in the various resolutions herein above mentioned, the
stockholders of the De la Rama company formally ratified the donation
(Exhibit E), with certain clarifying modifications, including the resolution
approving the transfer of the Demwood property to the Pirovano children.
The clarifying modifications are quoted hereunder:
1. That the payment of the above-mentioned donation shall not be
affected until such time as the Company shall have first duly
liquidated its present bonded indebtedness in the amount of
P3,260,855.77 with The National Development Company, or fully
redeemed the preferred shares of stock in the amount which shall be
issued to the National Development Company in lieu thereof;
2. That any and all taxes, legal fees, and expenses in any way
connected with the above transaction shall be chargeable and
deducted from the proceeds of the life insurance policies mentioned
in the resolutions of the Board of Directors. (Exhibit E)
Sometime in March 1950, the President of the corporation, Sergio Osmea,
Jr., addressed an inquiry to the Securities and Exchange Commission asking
for opinion regarding the validity of the donation of the proceeds of the
insurance policies to the Pirovano children. On June 20, 1950 that office
rendered its opinion that the donation was void because the corporation
could not dispose of its assets by gift and therefore the corporation acted
beyond the scope of its corporate powers. This opinion was submitted to the
Board of Directors at its meting on July 12, 1950, on which occasion the
president recommend that other legal ways be studied whereby the donation
could be carried out. On September 14, 1950, another meeting was held to
discuss the propriety of the donation. At this meeting the president expressed
the view that, since the corporation was not authorized by its charter to make
the donation to the Pirovano children and the majority of the stockholders
was in favor of making provision for said children, the manner he believed
this could be done would be to declare a cash dividend in favor of the
stockholders in the exact amount of the insurance proceeds and thereafter
have the stockholders make the donation to the children in their individual
capacity. Notwithstanding this proposal of the president, the board took no
action on the matter, and on March 8, 1951, at a stockholders' meeting
convened on that date the majority of the stockholders' voted to revoke the
resolution approving the donation to the Pirovano children. The pertinent
portion of the resolution reads as follows:
Be it resolved, as it is hereby resolved, that in view of the failure of
compliance with the above conditions to which the above donation
was made subject, and in view of the opinion of the Securities and
Exchange Commissioner, the stockholders revoke, rescind and
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 annul, as they do thereby revoke, rescind and annul, its ratification
and approval on September 13, 1949 of the aforementioned
resolution of the Board of Directors of January 6, 1947, as amended
on June 24, 1947. (Exhibit T)
In view of the resolution declaring that the corporation failed to comply with
the condition set for the effectivity of the donation and revoking at the same
time the approval given to it by the corporation, and considering that the
corporation can no longer set aside said donation because it had no longer
set aside said donation because it had long been perfected and
consummated, the minor children of the late Enrico Pirovano, represented by
their mother and guardian, Estefania R. de Pirovano, demanded the payment
of the credit due them as of December 31, 1951, amounting to P564,980.89,
and this payment having been refused, they instituted the present action in
the Court of First Instance of Rizal wherein they prayed that the be granted
an alternative relief of the following tenor: (1) sentencing defendant to pay to
the plaintiff the sum of P564,980.89 as of December 31, 1951, with the
corresponding interest thereon; (2) as an alternative relief, sentencing
defendant to pay to the plaintiffs the interests on said sum of P564,980.89 at
the rate of 5 per cent per annum, and the sum of P564,980.89 after the
redemption of the preferred shares of the corporation held by the National
Development Company; and (3) in any event, sentencing defendant to pay
the plaintiffs damages in the amount of not less than 20 per cent of the sum
that may be adjudged to the plaintiffs, and the costs of action.
The only issues which in the opinion of the court need to be determined in
order to reach a decision in this appeal are: (1) Is the grant of the proceeds
of the insurance policies taken on the life of the late Enrico Pirovano as
embodied in the resolution of the Board of Directors of defendant corporation
adopted on January 6, 1947 and June 24, 1947 a remunerative donation as
found by the lower court?; (2) IN the affirmative case, has that donation been
perfected before its rescission or nullification by the stockholders of the
corporation on March 8, 1951?; (3) Can defendant corporation give by way of
donation the proceeds of said insurance policies to the minor children of the
late Enrico Pirovano under the law or its articles of corporation, or is that
donation an ultra vires act?; and (4) has the defendant corporation, by the
acts it performed subsequent to the granting of the donation, deliberately
prevented the fulfillment of the condition precedent to the payment of said
donation such that it can be said it has forfeited its right to demand its
fulfillment and has made the donation entirely due and demandable?
We will discuss these issues separately.
1. To determine the nature of the grant made by the defendant corporation to
the minor children of the late Enrico Pirovano, we do not need to go far nor
dig into the voluminous record that lies at the bottom of this case. We do not
even need to inquire into the interest which has allegedly been shown by
President Roxas in the welfare of the children of his good friend Enrico
Pirovano. Whether President Roxas has taken the initiative in the move to
give something to said children which later culminated in the donation now in
dispute, is of no moment for the fact is that, from the mass of evidence on
hand, such a donation has been given the full indorsement and encouraging
support by Don Esteban de la Rama who was practically the owner of the
corporation. We only need to fall back to accomplish this purpose on the
several resolutions of the Board of Directors of the corporations containing
said grant for they clearly state the reasons and purposes why the donation
has been given.
Before we proceed further, it is convenient to state here in passing that,
before the Board of Directors had approved its resolution of January 6, 1947,
as later amended by another resolution adopted on June 24, 1947, the
corporation had already decided to give to the minor children of the late
Enrico Pirovano the sum of P400,000 out of the proceeds of the insurance
policies taken on his life in the form of shares, and that when this form was
considered objectionable because its result and effect would be to give to
said children a much greater amount considering the value then of the stock
of the corporation, the Board of Directors decided to amend the donation in
the form and under the terms stated in the aforesaid resolutions. Thus, in the
original resolution approved by the Board of Directors on July 10, 1946,
wherein the reasons for granting the donation to the minor children of the late
Enrico Pirovano were clearly, we find out the following revealing statements:
571
 Whereas, the late Enrico Pirovano President and General Manager
of the De la Rama Steamship Company, died in Manila sometime in
November, 1944;
Whereas, the said Enrico Pirovano was largely responsible for the
rapid and very successful development of the activities of this
company;
Whereas, early in 1941 this company insured the life of said Enrico
Pirovano in various Philippine and American Life Insurance
companies for the total sum of P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow,
Estefania Pirovano and 4 minor children, to wit: Esteban, Maria
Carla, Enrico and John Albert, all surnamed Pirovano;
Whereas, the said Enrico Pirovano left practically nothing to his heirs
and it is but fit and proper that this company which owes so much to
the deceased should make some provisions for his children;
Whereas, this company paid premiums on Mr. Pirovano's life
insurance policies for a period of only 4 years so that it will receive
from the insurance companies sums of money greatly in excess of
the premiums paid by the company,
Again, in the resolution approved by the Board of Directors on January 6,
1947, we also find the following expressive statements which are but a
reiteration of those already expressed in the original resolution:
Whereas, the late Enrico Pirovano, President and General Manager
of the De la Rama Steamship Co., Inc., died in Manila sometime
during the latter part of the year 1944;
Whereas, the said Enrico Pirovano was to a large extent responsible
for the rapid and very successful development and expansion of the
activities of this company;
Whereas, early in 1941, the life of the said Enrico Pirovano was
insured in various life companies, to wit:
Whereas, the said Enrico Pirovano is survived by 4 minor children, to
wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed
Pirovano; and
Whereas, the said Enrico Pirovano left practically nothing to his heirs
and it is but fit and proper that this Company which owes so much to
the deceased should make some provision for his children;
Be it resolved, that out of gratitude to the late Enrico Pirovano this
Company renounce as it hereby renounces, . . . .
From the above it clearly appears that the corporation thought of giving the
donation to the children of the late Enrico Pirovano because he "was to a
large extent responsible for the rapid and very successful development and
expansion of the activities of this company"; and also because he "left
practically nothing to his heirs and it is but fit and proper that this company
which owes so much to the deceased should make some provision to his
children", and so, the donation was given "out of gratitude to the late Enrico
Pirovano." We do not need to stretch our imagination to see that a grant or
donation given under these circumstances is remunerative in nature in
contemplation of law.
That which is made to a person in consideration of his merits or for
services rendered to the donor, provided they do not constitute
recoverable debts, or that in which a burden less than the value of
the thing given is imposed upon the donee, is also a donation." (Art.
619, old Civil Code.)
In donations made to a person for services rendered to the donor,
the donor's will is moved by acts which directly benefit him. The
motivating cause is gratitude, acknowledgment of a favor, a desire to
compensate. A donation made to one who saved the donor's life, or a
lawyer who renounced his fees for services rendered to the donor,
572
 would fall under this class of donations. These donations are
called remunerative donations . (Sinco and Capistrano, The Civil
Code, Vol. 1, p. 676; Manresa, 5th ed., pp. 72-73.)
2. The next question to be determined is whether the donation has been
perfected such that the corporation can no longer rescind it even if it wanted
to. The answer to this question cannot but be in the affirmative considering
that the same has not only been granted in several resolutions duly adopted
by the Board of Directors of the defendant corporation, and in all these
corporate acts the concurrence of the representatives of the National
Development Company, the only creditor whose interest may be affected by
the donation, has been expressly given. The corporation has even gone
further. It actually transferred the ownership of the credit subject of donation
to the Pirovano children with the express understanding that the money
would be retained by the corporation subject to the condition that the latter
would pay interest thereon at the rate of 5 per cent per annum payable
whenever said corporation may be in a financial position to do so. Thus, the
following acts of the corporation as reflected from the evidence bear this out:
(a) The donation was embodied in a resolution duly approved by the Board of
Directors on January 6, 19437. In this resolution, the representatives of the
National Development Company, have given their concurrence. This is the
only creditor which can be considered as being adversely affected by the
donation. The resolution of June 24, 1947 did not modify the substance of
the former resolution for it merely provided that instead of the interest on the
loan being payable, together with the principal, only after the corporation had
first settled in full its bonded indebtedness, said interest would be paid
"whenever the company is in a position to meet said obligation."
(b) The resolution of January 6, 1947 was actually carried out when the
company and Mrs. Estefania R. Pirovano, executed a memorandum
agreement stating therein hat the proceeds of the insurance policies would
be entered in the books of the corporation as a loan which would bear an
interest at the rate of 5 per cent per annum, and said agreement was signed
by Mrs. Pirovano as judicial guardian of her children after she had been
expressly authorized by the court to accept the donation in behalf of her
children.
(c) While the donation can be considered as duly executed by the execution
of the document stated in the preceding paragraph, and by the entry in the
books of the corporation of the donation as a loan, a further record of said
execution was made when Mrs. Pirovano executed a public document on
February 26, 1948 making similar acceptance of the donation. And this
acceptance was officially recorded by the corporation when on the same date
its Board of Directors approved a resolution taking "official notice" of said
acceptance.
(d) On July 25, 1949, the Board of Directors approved the proposal of Mrs.
Pirovano to buy the house at New Rochelle, New York, owned by a
subsidiary of the corporation at the costs of S75,000 which would be paid
from the sum held in trust belonging to her minor children. And this
agreement was actually carried out in a document signed by the general
manager of the corporation and by Mrs. Pirovano, who acted on the matter
with the express authority of the court.
(e) And on September 30, 1949, or two years and 3 months after the
donation had been executed, the stockholders of the defendant corporation
formally ratified and gave approval to the donation as embodied in the
resolutions above referred to, subject to certain modifications which did not
materially affect the nature of the donation.
There can be no doubt from the foregoing relation of facts the donation was a
corporate act carried out by the corporation not only with the sanction of its
Board of Directors but also of its stockholders. It is evident that the donation
has reached the stage of perfection which is valid and binding upon the
corporation and as such cannot be rescinded unless there is exists legal
grounds for doing so. In this case, we see none. The two reasons given for
the rescission of said donation in the resolution of the corporation adopted on
March 8, 1951, to wit: that the corporation failed to comply with the conditions
to which the above donation was made subject, and that in the opinion of the
Securities and Exchange Commission said donation is ultra vires, are not, in
our opinion, valid and legal as to justify the rescission of a perfected
donation. These reasons, as we will discuss in the latter part of this decision,
cannot be invoked by the corporation to rescind or set at naught the
donation, and the only way by which this can be done is to show that the
573
donee has been in default, or that the donation has not been validly
executed, or is illegal or ultra vires, and such is not the case as we will see
hereafter. We therefore declare that the resolution approved by the
stockholders of the defendant corporation on March 8, 1951 did not and
cannot have the effect of nullifying the donation in question.
3. The third question to be determined is: Can defendant corporation give by
way of donation the proceeds of said insurance policies to the minor children
of the late Enrico Pirovano under the law or its articles of corporation, or is
that donation an ultra vires act? To answer this question it is important for us
to examine the articles of incorporation of the De la Rama company to see
this question it is important for us to examine the articles of incorporation of
the De la Rama company to see if the act or donation is outside of their
scope. Paragraph second of said articles provides:
Second. The purposes for which said corporation is formed are:
(a) To purchase, charter, hire, build, or otherwise acquire steam or
other ships or vessels, together with equipments and furniture
therefor, and to employ the same in conveyance and carriage of
goods, wares and merchandise of every description, and of
passengers upon the high seas.
(b) To sell, let, charter, or otherwise dispose of the said vessels or
other property of the company.
(c) To carry on the business of carriers by water.
(d) To carry on the business of shipowners in all of its branches.
(e) To purchase or take on lease, lands, wharves, stores, lighters,
barges and other things which the company may deem necessary or
advisable to be purchased or leased for the necessary and proper
purposes of the business of the company, and from time to time to
sell the dispose of the same.
(f) To promote any company or companies for the purposes of
acquiring all or any of the property or liabilities of this company, or
both, or for any other purpose which may seem directly or indirectly
calculated to benefit the company.
(g) To invest and deal with the moneys of the company and
immediately required, in such manner as from time to time may be
determined.
(h) To borrow, or raise, or secure the payment of money in such
manner as the company shall think fit.
(i) Generally, to do all such other thing and to transact all business as
may be directly or indirectly incidental or conducive to the attainment
of the above object, or any of them respectively.
(j) Without in any particular limiting or restricting any of the objects
and powers of the corporation, it is hereby expressly declared and
provided that the corporation shall have power to issue bonds and
provided that the corporation shall have power to issue bonds and
other obligations, to mortgage or pledge any stocks, bonds or other
obligations or any property which may be required by said
corporations; to secure any bonds, guarantees or other obligations
by it issued or incurred; to lend money or credit to and to aid in any
other manner any person, association, or corporation of which any
obligation or in which any interest is held by this corporation or in the
affairs or prosperity of which this corporation or in the affairs or
prosperity of which this corporation has a lawful interest, and to do
such acts and things as may be necessary to protect, preserve,
improve, or enhance the value of any such obligation or interest;
and, in general, to do such other acts in connection with the
purposes for which this corporation has been formed which is
calculated to promote the interest of the corporation or to enhance
the value of its property and to exercise all the rights, powers and
privileges which are now or may hereafter be conferred by the laws
of the Philippines upon corporations formed under the Philippine
574
 Corporation Act; to execute from time to time general or special
powers of attorney to persons, firms, associations or corporations
either in the Philippines, in the United States, or in any other country
and to revoke the same as and when the Directors may determine
and to do any and or all of the things hereinafter set forth and to the
same extent as natural persons might or could do.
After a careful perusal of the provisions above quoted we find that the
corporation was given broad and almost unlimited powers to carry out the
purposes for which it was organized among them, (1) "To invest and deal
with the moneys of the company not immediately required, in such manner
as from time to time may be determined" and, (2) "to aid in any other manner
any person, association, or corporation of which any obligation or in which
any interest is held by this corporation or in the affairs or prosperity of which
this corporation has a lawful interest." The world deal is broad enough to
include any manner of disposition, and refers to moneys not immediately
required by the corporation, and such disposition may be made in such
manner as from time to time may be determined by the corporations. The
donation in question undoubtedly comes within the scope of this broad power
for it is a fact appearing in the evidence that the insurance proceeds were not
immediately required when they were given away. In fact, the evidence
shows that the corporation declared a 100 per cent cash dividend, or
P2,000,000, and later on another 30 per cent cash dividend. This is clear
proof of the solvency of the corporation. It may be that, as insinuated, Don
Esteban wanted to make use of the insurance money to rehabilitate the
central owned by a sister corporation, known as Hijos de I. de la Rama and
Co., Inc., situated in Bago, Negros Occidental, but this, far from reflecting
against the solvency of the De la Rama company, only shows that the funds
were not needed by the corporation.
Under the second broad power we have the above stated, that is, to aid in
any other manner any person in the affairs and prosperity of whom the
corporation has a lawful interest, the record of this case is replete with
instances which clearly show that the corporation knew well its scope and
meaning so much so that, with the exception of the instant case, no one has
lifted a finger to dispute their validity. Thus, under this broad grant of power,
this corporation paid to the heirs of one Florentino Nonato, an engineer of
one of the ships of the company who died in Japan, a gratuity of P7,000,
equivalent to one month salary for each year of service. It also gave to
Ramon Pons, a captain of one of its ships , a retirement gratuity equivalent to
one month salary for every year of service, the same to be based upon his
highest salary. And it contributed P2,000 to the fund raised by the Associated
Steamship Lines for the widow of the late Francis Gispert, secretary of said
Association, of which the De la Rama Steamship Co., Inc., was a member
along with about 30 other steamship companies. In this instance, Gispert
was not even an employee of the corporation. And invoking this vast power,
the corporation even went to the extent of contributing P100,000 to the
Liberal Party campaign funds, apparently in the hope that by conserving its
cordial relations with that party it might continue to retain the patronage of the
administration. All these acts executed before and after the donation in
question have never been questioned and were willingly and actually carried
out.
We don't see much distinction between these acts of generosity or
benevolence extended to some employees of the corporation, and even to
some in whom the corporation was merely interested because of certain
moral or political considerations, and the donation which the corporation has
seen fit to give to the children of the late Enrico Pirovano from the point of
view of the power of the corporation as expressed in its articles of
incorporation. And if the former had been sanctioned and had been
considered valid and intra vires, we see no plausible reasons why the latter
should now be deemed ultra vires. It may perhaps be argued that the
donation given to the children of the late Enrico Pirovano is so large and
disproportionate that it can hardly be considered a pension of gratuity that
can be placed on a par with the instances above mentioned, but this
argument overlooks one consideration: the gratuity here given was not
merely motivated by pure liberality or act of generosity, but by a deep sense
of recognition of the valuable services rendered by the late Enrico Pirovano
which had immensely contributed to the growth of the corporation to the
extent that from its humble capitalization it blossomed into a multi-million
corporation that it is today. In other words of the very resolutions granting the
donation or gratuity, said donation was given not only because the company
was so indebted to him that it saw fit and proper to make provisions for his
children, but it did so out of a sense of gratitude. Another factor that we
575
should bear in mind is that Enrico Pirovano was not only a high official of the
company but was at the same time a member of the De la Rama family, and
the recipient of the donation are the grandchildren of Don Esteban de la
Rama. This we, may say, is the motivating root cause behind the grant of this
bounty.
It may be contended that a donation is different from a gratuity. While
technically this may be so in substance they are the same. They are even
similar to a pension. Thus, it was granted for services previously rendered,
and which at the time they were rendered gave rise to no legal obligation. "
(Words and Phrases, Permanent Edition, p. 675; O'Dea vs. Cook,, 169 Pac.,
306, 176 Cal., 659.) Or stated in another way, a "Gratuity is mere bounty
given by the Government in consideration or recognition or meritorious
services and springs from the appreciation an d graciousness of the
Government", (Ilagan vs. Ilaya, G.R. No. 33507, Dec. 20 1930) or "A gratuity
is something given freely, or without recompense, a gift, something
voluntarily given in return for a favor or services; a bounty; a tip." Wood
Mercantile Co. vs. Cole, 209 S.W. 2d. 290; Mendoza vs. Dizon, 77 Phil., 533,
43 Off. Gaz. p. 4633. We do not see much difference between this definition
of gratuity and a remunerative donation contemplated in the Civil Code. In
essence they are the same. Such being the case, it may be said that this
donation is gratuity in a large sense for it was given for valuable services
rendered an ultra vires act in the light of the following authorities:
Indeed, some cases seem to hold that the giving of a pure gratuity to
directors is ultra vires of corporation, so that it could not be legalized
even if the approval of the shareholders; but this position has no
sound reason to support it, and is opposed to the weight of
authority (Suffaker vs. Kierger's Assignee, 53 S.W. Rep. 288; !07 Ky.
200; 46 L.R.A. 384).
But although business corporations cannot contribute to charity or
benevolence, yet they are not required always to insist on the full
extent of their legal rights. They are not forbidden for the recognizing
moral obligation of which strict law takes no cognizance. They are
not prohibited from establishing a reputation for board, liberal,
equitable dealing which may stand them in good stead in competition
with less fair rivals. Thus, an incorporated fire insurance company
which policies except losses from explosions may nevertheless pay
a loss from that cause when other companies are accustomed to do
so, such liberal dealing being deemed conducive to the prosperity of
the corporation." (Modern Law of Corporations, Machen, Vol. 1, p.
81).
So, a bank may grant a five years pension to the family at one of its
officers. In all cases in this sorts, the amount of the gratuity rests
entirely within the discretion of the company, unless indeed it be all
together out of the reason and fitness. But where the company has
ceased to be going concerned, this power to make gifts or present it
at the end. (Modern Law of Corporations, Machen, Vol. 1, p. 82.).
Payment of Gratitude out of Capital. There seems on principle no
reason to doubt that gifts or gratuities wherever they are lawful may
be paid out of capital as well as out of profits. (Modern Law of
corporations, Machen, Vol. 1 p. 83.).
Whether desirable to supplement implied powers of this kind by
express provisions. Enough has been said to show that the implied
powers of a corporation to give gratuities to its servants and officers,
as well as to strangers, are ample, so that there is therefore no need
to supplement them by express provisions." (modern Law of
Corporations, Machen, Vol. 1, p. 83.) 1
Granting arguendo that the donation given by Pirovano children is outside
the scope of the powers of the defendant corporation, or the scope of the
powers that it may exercise under the law, or it is an ultra vires act, still it may
said that the same can not be invalidated, or declared legally ineffective for
the reason alone, it appearing that the donation represents not only the act of
the Board of Directors but of the stockholders themselves as shown by the
fact that the same has been expressly ratified in a resolution duly approved
by the latter. By this ratification, the infirmity of the corporate act, it may has
been obliterated thereby making the cat perfectly valid and enforceable. This
is specially so if the donation is not merely executory but executed and
576
consummated and no creditors are prejudice, or if there are creditors Corporate transactions which are illegal because prohibited by
affected, the latter has expressly given their confirmity. statute or against public policy are ordinarily void and unenforceable
regardless of the part performance, ratification, or estoppel; but
In making this pronouncement, advertence should made of the nature of general prohibitions against exceeding corporate powers and
the ultra vires act that is in question. A little digression needs be made on this prohibitions intended to protect a particular class or specifying the
matter to show the different legal effect that may result consequent upon the consequences of violation may not preclude enforcement of the
performance of a particular ultra vires act on the part of the corporation. may transaction and an action may be had for the part unaffected by the
authorities may be cited interpreting or defining, extent, and scope of an ultra illegality or for equitable restitution. (19 C.J.S. 421.)
vires act, but all of them are uniform and unanimous that the same may be
either an act performed merely outside the scope of the powers granted to it Generally, a transaction within corporate powers but executed in an
by it articles of incorporation, or one which is contrary to law or violative of irregular or unauthorized manner is voidable only, and may become
any principle which will void any contract whether done individually or enforceable by reason of ratification or express or implied assent by
collectively. In other words, a distinction should be made between corporate the stockholders or by reason of estoppel of the corporation or the
acts or contracts which are illegal and those which are merely ultra vires. The other party to the transaction to raise the objection, particularly
former contemplates the doing of an act which is contrary to law, morals, or where the benefits are retained
public policy or public duty, and are, like similar transactions between the
individuals void. They cannot serve as basis of a court action, nor require As appears in paragraphs 960-964 supra, the general rule is that a
validity ultra vires acts on the other hand, or those which are not illegal and corporation must act in the manner and with the formalities, if any,
void ab initio, but are merely within are not illegal and void ab initio, but are prescribed by its character or by the general law. However, a
not merely within the scope of the articles of incorporation, are merely corporation transaction or contract which is within the corporation
voidable and may become binding and enforceable when ratified by the powers, which is neither wrong in itself nor against public policy, but
stockholders. which is defective from a failure to observe in its execution a
requirement of law enacted for the benefit or protection of a certain
Strictly speaking, an ultra vires act is one outside the scope of the class, is voidable and is valid until avoided, not void until validated;
power conferred by the legislature, and although the term has been the parties for whose benefit the requirement was enacted may ratify
used indiscriminately, it is properly distinguishable from acts which it or be estoppel to assert its invalidity, and third persons acting in
are illegal, in excess or abuse of power, or executed in an good faith are not usually affected by an irregularity on the part of the
unauthorized manner, or acts within corporate powers but outside corporation in the exercise of its granted powers. (19 C.J.S., 423-24.)
the authority of particular officers or agents (19 C. J. S. 419).
It is true that there are authorities which told that ultra vires acts, or those
performed beyond the powers conferred upon the corporation either by law
or by its articles of incorporation, are not only voidable, but wholly void and of
no legal effect, and that such acts cannot be validated by ratification or be
the basis of any action in court; but such ruling does not constitute the weight
of authority, the reason being that they fail to make the important distinction
we have above adverted to. Because rule has been rejected by most of the
state courts and even by the modern treaties or corporations (7 Flethcer,

577
Cyc. Corps., 563-564). And now it can be said that the majority of the cases
hold that acts which are merely ultra vires, or acts which are not illegal, may
be ratified by the stockholders of a corporation (Brooklyn Heights R. Co. vs.
Brooklyn City R. Co., 135 N.Y. Supp. 1001).
Strictly speaking, an act of a corporation outside of its character
powers is just as such ultra vires where all the stockholders consent
thereto as in a case where none of the stockholders expressly or
cannot be ratified so as to make it valid, even though all the
stockholders consent thereto; but inasmuch as the stockholders in
reality constitute the corporation, it should , it would seem, be
estopped to allege ultra vires, and it is generally so held where there
are no creditors, or the creditors are not injured thereby, and where
the rights of the state or the public are not involved, unless the act is
not only ultra vires but in addition illegal and void. of course, such
consent of all the stockholders cannot adversely affect creditors of
the corporation nor preclude a proper attack by the state because of
such ultra vires act. (7 Fletcher Corp., Sec. 3432, p. 585)
Since it is not contended that the donation under consideration is illegal, or
contrary to any of the express provision of the articles of incorporation, nor
prejudicial to the creditors of the defendant corporation, we cannot but
logically conclude, on the strength of the authorities we have quoted above,
that said donation, even if ultravires in the supposition we have adverted to,
is not void, and if voidable its infirmity has been cured by ratification and
subsequent acts of the defendant corporation. The defendant corporation,
therefore, is now prevented or estopped from contesting the validity of the
donation. This is specially so in this case when the very directors who
conceived the idea of granting said donation are practically the stockholders
themselves, with few nominal exception. This applies to the new stockholder
Jose Cojuangco who acquired his interest after the donation has been made
because of the rule that a "purchaser of shares of stock cannot avoid ultra
vires acts of the corporation authorized by its vendor, except those done after
the purchase" (7 Fletcher, Cyc. Corps. section 3456, p. 603; Pascual vs. Del
Saz Orozco, 19 Phil., 82.) Indeed, how can the stockholders now pretend to
revoke the donation which has been partly consummated? How can the
corporation now set at naught the transfer made to Mrs. Pirovano of the
property in New York, U.S.A., the price of which was paid by her but of the
proceeds of the insurance policies given as donation. To allow the
corporation to undo what it has done would only be most unfair but would
contravene the well-settled doctrine that the defense of ultra vires cannot be
set up or availed of in completed transactions (7 Fletcher, Cyc. Corps.
Section 3497, p. 652; 19 C.J.S., 431).
4. We now come to the fourth and last question that the defendant
corporation, by the acts it has performed subsequent to the granting of the
donation, deliberately prevented the fulfillment of the condition precedent to
the payment of said donation such that it can be said it has forfeited entirely
due and demandable.
It should be recalled that the original resolution of the Board of Directors
adopted on July 10, 1946 which provided for the donation of P400,000 out of
the proceeds which the De la Rama company would collect on the insurance
policies taken on the life of the late Enrico Pirovano was, as already stated
above, amended on January 6, 1947 to include, among the conditions
therein provided, that the corporation shall proceed to pay said amount, as
well as the interest due thereon, after it shall have settled in full balance of its
bonded indebtedness in the sum of P5,000,000. It should be recalled that on
September 13, 1949, or more than 2 years after the last amendment referred
too above, the stockholders adopted another resolution whereby they
formally ratified said donation but subject to the following clarifications: (1)
that the amount of the donation shall not be effected until such time as the
company shall have first duly liquidated its present bonded indebtedness in
the amount of P3,260,855.77 to the National Development Company, or shall
have first fully redeemed the preferred shares of stock in the amount to be
issued to said company in lieu thereof, and (2) that any and all taxes, legal
fees, and expenses connected with the transaction shall be chargeable from
the proceeds of said insurance policies.
The trial court, in considering these conditions in the light of the acts
subsequently performed by the corporation in connection with the proceeds
of the insurance policies, considered said conditions null and void, or at most
not written because in its pinion their non-fulfillment was due to a deliberate
desistance of the corporation and not to lack of funds to redeem the
578
preferred shares of the National Development Company. The conclusions
arrived at by the trial court on this point are as follows:
Fourth. that the condition mentioned in the donation is null and
void because it depends on the exclusive will of the donor, in
accordance with the provisions of Article 1115 of the Old Civil Code.
Fifth. That if the condition is valid, its non-fulfillment is due to the
desistance of the defendant company from obeying and doing the
wishes and mandate of the majority of the stockholders.
Sixth. That the non-payment of the debt in favor of the National
Development Company is due to the lack of funds, nor to lack of
authority, but to the desire of the President of the corporation to
preserve and continue the Government participation in the company.
To this views of the trial court, we fail to agree. There are many factors we
can consider why the failure to immediately redeem the preferred shares
issued to the National Development Company as desired by the minor
children of the late Enrico Pirovano cannot or should not be attributed to a
mere desire on the part of the corporation to delay the redemption, or to
prejudice the interest of the minors, but rather to protect the interest of the
corporation itself. One of them is the text of the very resolution approved by
the National Development Company on February 18, 1949 which prescribed
the terms and conditions under which it expressed its conformity to the
conversion of the bonded indebtedness into preferred shares of stock. The
text of the resolution above mentioned reads:
Resolved: That the outstanding bonded indebtedness of the Dela
Rama Steamship Co., Inc., in the approximate amount of
P3,260,855.77 be converted into non-voting preferred shares of
stock of said company, said shares to bear a fixed dividend of 6
percent per annum which shall be cumulative and redeemable within
15 years. Said shares shall be preferred as to assets in the event of
liquidation or dissolution of said company but shall be non-
participating.
It is plain from the text of the above resolution that the defendant corporation
had 15 years from February 18, 1949, or until 1964, within which to effect the
redemption of the preferred shares issued to the National Development
Company. This condition cannot but be binding and obligatory upon the
donees, if they desire to maintain the validity of the donation, for it is not only
the basis upon which the stockholders of the defendant corporation
expressed their willingness to ratify the donation, but it is also by way which
its creditor, the National Development Company, would want it to be. If the
defendant corporation is given 15 years within which to redeem the preferred
shares, and that period would expire in 1964, one cannot blame the
corporation for availing itself of this period if in its opinion it would redound to
its best interest. It cannot therefore be said that the fulfillment of the condition
for the payment of the donation is one that wholly depends on the exclusive
will of the donor, as the lower court has concluded, simply because it failed to
meet the redemption of said shares in her manner desired by the donees.
While it may be admitted that because of the disposition of the assets of the
corporation upon the suggestion of its general manager more than enough
funds had been raised to effect the immediate redemption of the above
shares, it is not correct to say that the management has completely failed in
its duty to pay its obligations for, according to the evidence, a substantial
portion of the indebtedness has been paid and only a balance of about
P1,805,169.98 was outstanding when the stockholders of the corporation
decided to revoke or cancel the donation. (Exhibit P.)
But there are other good reasons why all the available funds have not been
actually applied to the redemption of the preferred shares, one of them being
the "desire of the president of the corporation to preserve and continue the
government participation in the company" which even the lower court found it
to be meritorious, which is one way by which it could continue receiving the
patronage and protection of the government. Another reason is that the
redemption of the shares does not depend on the will of the corporation
alone but to a great extent on the will of a third party, the National
Development Company. In fact, as the evidence shows, this Company had
pledged these shares to the Philippine National Bank and the Rehabilitation
Finance Corporation as a security to obtain certain loans to finance the
purchase of certain ships to be built for the use of the company under
management contract entered into between the corporation and the National
579
Development Company, and this was what prevented the corporation from
carrying out its offer to pay the sum P1,956,513.07 on April 5, 1951. Had this
offer been accepted, or favorably acted upon by the National Development
Company, the indebtedness would have been practically liquidated, leaving
outstanding only one certificate worth P217,390.45. Of course, the
corporation could have insisted in redeeming the shares if it wanted to even
to the extent of taking a court action if necessary to force its creditor to
relinquish the shares that may be necessary to accomplish the redemption,
but such would be a drastic step which would have not been advisable
considering the policy right along maintained by the corporation to preserve
its cordial and smooth relation with the government. At any rate, whether
such attitude be considered as a mere excuse to justify the delay in effecting
the redemption of the shares, or a mere desire on the part of the corporation
to retain in its possession more funds available to attend to other pressing
need as demanded by the interest of the corporation, we fail to see in such
an attitude an improper motive to circumvent the early realization of the
desire of the minors to obtain the immediate payment of the donation which
was made dependent upon the redemption of said shares there being no
clear evidence that may justify such design. Anyway, a great portion of the
funds went to the stockholders themselves by way of dividends to offset, so it
appears, the huge advances that the corporation had made to them which
were entered in the books of the corporation as loans and, therefore, they
were invested for their own benefit. As General Manager Osmea said, "we
were first confronted with the problem of the withdrawals of the family which
had to be repaid back to the National Development Company and one of the
most practical solutions to that was to declare dividends and reduce the
amounts of their withdrawals", which then totalled about P3,000,000.
All things considered, we are of the opinion that the finding of the lower court
that the failure of the defendant corporation to comply with the condition of
the donation is merely due to its desistance from obeying the mandate of the
majority of the stockholders and not to lack of funds, or to lack of authority,
has no foundation in law or in fact, and, therefore, its conclusion that
because of such desistance that condition should be deemed as fulfilled and
the payment of the donation due and demandable, is not justified. In this
respect, the decision of the lower court should be reversed.
Having reached the foregoing conclusion, we deem it unnecessary to discuss
the other issues raised by the parties in their briefs.
The lower court adjudicated to plaintiff an additional amount equivalent to 20
per cent of the amount claimed as damages by way of attorney's fees, and in
our opinion, this award can be justified under Article 2208, paragraph 2, of
the new Civil Code, which provides: "When the defendant's act or omission
has compelled the plaintiff to litigate with third persons or to incur expenses
to protect his interest", attorney's fees nay be awarded as damages.
However, the majority believes that this award should be reduced to 10 per
cent.
Wherefore, the decision appealed from should be modified as follows: (a)
that the donation made in favor of the children of the late Enrico Pirovano of
the proceeds of the insurance policies taken on his life is valid and binding on
the defendant corporation, (b) that said donation, which amounts to a total of
P583,813.59, including interest, as it appears in the books of the corporation
as of August 31, 1951, plus interest thereon at the rate of 5 per cent per
annum from the filing of the complaint, should be paid to the plaintiffs after
the defendant corporation shall have fully redeemed the preferred shares
issued to the National Development Company under the terms and
conditions stated in the resolutions of the Board of Directors of January 6,
1947 and June 24, 1947, as amended by the resolution of the stockholders
adopted on September 13,1949; and (c) defendant shall pay to plaintiffs an
additional amount equivalent to 10 per cent of said amount of P583,813.59
as damages by way of attorney's fees, and to pay the costs of action.
Paras, C. J., Pablo Bengzon, Padilla, Montemayor, Jugo, Concepcion, and
Reyes, J. B. L., concur.
Reyes, A., concurs in the result.
580

G.R. No. L-17716 July 31, 1962
LUNETA MOTOR COMPANY, petitioner,
vs.
A.D. SANTOS, INC., ET AL., respondents.
Jose Agbulos for petitioner.
Graciano C. Regala and Angel A. Sison for respondents.
DIZON, J.:
Appeal from the decision of the Public Service Commission in case No.
123401 dismissing petitioner's application for the approval of the sale in its
favor, made by the Sheriff of the City of Manila, of the certificate of public
convenience granted before the war to Nicolas Concepcion (Commission
Cases Nos. 60604 and 60605, reconstituted after the war in Commission
Case No. 1470) to operate a taxicab service of 27 units in the City of Manila
and therefrom to any point in Luzon.
It appears that on December 31, 1941, to secure payment of a loan
evidenced by a promissory note executed by Nicolas Concepcion and
guaranteed by one Placido Esteban in favor of petitioner, Concepcion
executed a chattel mortgage covering the above mentioned certificate in
favor of petitioner.
To secure payment of a subsequent loan obtained by Concepcion from the
Rehabilitation Finance Corporation (now Development Bank of the
Philippines) he constituted a second mortgage on the same certificate. This
second mortgage was approved by the respondent Commission, subject to
the mortgage lien in favor of petitioner.
The certificate was later sold to Francisco Benitez, Jr., who resold it to Rodi
Taxicab Company. Both sales were made with assumption of the mortgage in
favor of the RFC, and were also approved provisionally by the Commission,
subject to petitioner's lien.
On October 10, 1953 petitioner filed an action to foreclose the chattel
mortgage executed in its favor by Concepcion (Civil Case No. 20853 of the
Court of First Instance of Manila) in view of the failure of the latter and his
guarantor, Placido Esteban, to pay their overdue account.
While the above case was pending, the RFC also instituted foreclosure
proceedings on its second chattel mortgage, and as a result of the decision
in its favor therein rendered, the certificate of public convenience was sold at
public auction in favor of Amador D. Santos for P24,010.00 on August 31,
1956. Santos immediately applied with the Commission for the approval of
the sale, and the same was approved on January 26, 1957, subject to the
mortgage lien in favor of petitioner.
On June 9, 1958 the Court of First Instance of Manila rendered judgment in
Civil Case No. 20853, amended on August 1, 1958, adjudging Concepcion
indebted to petitioner in the sum of P15,197.84, with 12% interest thereon
from December 2, 1941 until full payment, plus other assessments, and
ordered that the certificate of public convenience subject matter of the chattel
mortgage be sold at public auction in accordance with law. Accordingly, on
March 3, 1959 said certificate was sold at public auction to petitioner, and six
days thereafter the Sheriff of the City of Manila issued in its favor the
corresponding certificate of sale. Thereupon petitioner filed the application
mentioned heretofore for the approval of the sale. In the meantime and
before his death, Amador D. Santos sold and transferred (Commission Case
No. 1272231) all his rights and interests in the certificate of public
convenience in question in favor of the now respondent A.D. Santos, Inc.,
who opposed petitioner's application.
The record discloses that in the course of the hearing on said application and
after petitioner had rested its case, the respondent A. D. Santos, Inc., with
leave of court, filed a motion to dismiss based on the following grounds:
581
 a) under the petitioner's Articles of Incorporation, it was not
authorized to engage in the taxicab business or operate as a
common carrier;
b) the decision in Civil Case No. 20853 of the Court of First Instance
of Manila did not affect the oppositor nor its predecessor Amador D.
Santos inasmuch as neither of them had been impleaded into the
case;
c) that what was sold to the petitioner were only the "rights, interests
and participation" of Nicolas Concepcion in the certificate that had
been granted to him which were no longer existing at the time of the
sale.
On October 18, 1960, the respondent Commission, after considering the
memoranda submitted by the parties, rendered the appealed decision
sustaining the first ground relied upon in support thereof, namely, that under
petitioner's articles of incorporation it had no authority to engage in the
taxicab business or operate as a common carrier, and that, is a result, it
could not acquire by purchase the certificate of public convenience referred
to above. Hence, the present appeal interposed by petitioner who claims
that, in accordance with the Corporation Law and its articles of incorporation,
it can acquire by purchase the certificate of public convenience in question,
maintaining inferentially that, after acquiring said certificate, it could make
use of it by operating a taxicab business or operate is a common carrier by
land.
There is no question that a certificate of public convenience granted to the
public operator is liable to execution (Raymundo vs. Luneta Motor Co., 58
Phil. 889) and may be acquired by purchase. The question involved in the
present appeal, however, is not only whether, under the Corporation Law and
petitioner's articles of incorporation, it may acquire by purchase a certificate
of public convenience, such as the one in question, but also whether, after its
acquisition, petitioner may hold the certificate and thereunder operate as a
common carrier by land.
It is not denied that under Section 13 (5) of the Corporation Law, a
corporation created thereunder may purchase, hold, etc., and otherwise deal
in such real and personal property is the purpose for which the corporation
was formed may permit, and the transaction of its lawful business may
reasonably and necessarily require. The issue here is precisely whether the
purpose for which petitioner was organized and the transaction of its lawful
business reasonably and necessarily require the purchase and holding by it
of a certificate of public convenience like the one in question and thus give it
additional authority to operate thereunder as a common carrier by land.
Petitioner claims in this regard that its corporate purposes are to carry on a
general mercantile and commercial business, etc., and that it is authorized in
its articles of incorporation to operate and otherwise deal in and concerning
automobiles and automobile accessories' business in all its multifarious
ramification (petitioner's brief p. 7) and to operate, etc., and otherwise
dispose of vessels and boats, etc., and to own and operate steamship and
sailing ships and other floating craft and deal in the same and engage in the
Philippine Islands and elsewhere in the transportation of persons,
merchandise and chattels by water; all this incidental to the transportation of
automobiles (id. pp. 7-8 and Exhibit B).
We find nothing in the legal provision and the provisions of petitioner's
articles of incorporation relied upon that could justify petitioner's contention in
this case. To the contrary, they are precisely the best evidence that it has no
authority at all to engage in the business of land transportation and operate a
taxicab service. That it may operate and otherwise deal in automobiles and
automobile accessories; that it may engage in the transportation of
persons by water does not mean that it may engage in the business of land
transportation an entirely different line of business. If it could not thus
engage in the line of business, it follows that it may not acquire an certificate
of public convenience to operate a taxicab service, such as the one in
question, because such acquisition would be without purpose and would
have no necessary connection with petitioner's legitimate business.
In view of the conclusion we have arrived at on the decisive issue involved in
this appeal, we deem it unnecessary to resolve the other incidental questions
raised by petitioner.
582
WHEREFORE, the appealed decision is affirmed, with costs.
Bengzon, C.J., Padilla, Concepcion, Barrera, Paredes and Makalintal, JJ.,
concur.
Regala, J., took no part.
On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of
Posts requesting the opening of a post, telegraph and money order offices at
its mining camp at Sta. Cruz, Zambales, to service its employees and their
families that were living in said camp. Acting on the request, the Director of
Posts wrote in reply stating that if aside from free quarters the company
would provide for all essential equipment and assign a responsible employee
to perform the duties of a postmaster without compensation from his office
until such time as funds therefor may be available he would agree to put up
the offices requested. The company in turn replied signifying its willingness to
comply with all the requirements outlined in the letter of the Director of Posts
requesting at the same time that it be furnished with the necessary forms for
the early establishment of a post office branch.

On April 11, 1949, the Director of Posts again wrote a letter to the company
stating among other things that "In cases where a post office will be opened
G.R. No. L-18062 February 28, 1963 under circumstances similar to the present, it is the policy of this office to
have the company assume direct responsibility for whatever pecuniary loss
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, may be suffered by the Bureau of Posts by reason of any act of dishonesty,
vs. carelessness or negligence on the part of the employee of the company who
ACOJE MINING COMPANY, INC., defendant-appellant. is assigned to take charge of the post office," thereby suggesting that a
resolution be adopted by the board of directors of the company expressing
Office of the Solicitor General for plaintiff-appellee. conformity to the above condition relative to the responsibility to be assumed
Jalandoni & Jamir for defendant-appellant. buy it in the event a post office branch is opened as requested. On
September 2, 1949, the company informed the Director of Posts of the
BAUTISTA ANGELO, J.: passage by its board of directors of a resolution of the following tenor: "That
the requirement of the Bureau of Posts that the Company should accept full
responsibility for all cash received by the Postmaster be complied with, and
that a copy of this resolution be forwarded to the Bureau of Posts." The letter
further states that the company feels that that resolution fulfills the last
condition imposed by the Director of Posts and that, therefore, it would
request that an inspector be sent to the camp for the purpose of acquainting
the postmaster with the details of the operation of the branch office.

The post office branch was opened at the camp on October 13, 1949 with
one Hilario M. Sanchez as postmaster. He is an employee of the company.
On May 11, 1954, the postmaster went on a three-day leave but never
returned. The company immediately informed the officials of the Manila Post

583
Office and the provincial auditor of Zambales of Sanchez' disappearance with
the result that the accounts of the postmaster were checked and a shortage
was found in the amount of P13,867.24.
The several demands made upon the company for the payment of the
shortage in line with the liability it has assumed having failed, the government
commenced the present action on September 10, 1954 before the Court of
First Instance of Manila seeking to recover the amount of Pl3,867.24. The
company in its answer denied liability for said amount contending that the
resolution of the board of directors wherein it assumed responsibility for the
act of the postmaster is ultra vires, and in any event its liability under said
resolution is only that of a guarantor who answers only after the exhaustion
of the properties of the principal, aside from the fact that the loss claimed by
the plaintiff is not supported by the office record.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts
be admitted and approved by this Honorable Court, without prejudice to the
parties adducing other evidence to prove their case not covered by this
stipulation of facts. 1wph1.t On the basis of the foregoing facts, it is evident that the company cannot now
After trial, the court a quo found that, of the amount claimed by plaintiff
totalling P13,867.24, only the sum of P9,515.25 was supported by the
evidence, and so it rendered judgment for the plaintiff only for the amount
last mentioned. The court rejected the contention that the resolution adopted
by the company is ultra vires and that the obligation it has assumed is merely
that of a guarantor.
Defendant took the present appeal.
The contention that the resolution adopted by the company dated August 31,
1949 is ultra vires in the sense that it has no authority to act on a matter
which may render the company liable as a guarantor has no factual or legal
basis. In the first place, it should be noted that the opening of a post office
branch at the mining camp of appellant corporation was undertaken because
of a request submitted by it to promote the convenience and benefit of its
employees. The idea did not come from the government, and the Director of
Posts was prevailed upon to agree to the request only after studying the
necessity for its establishment and after imposing upon the company certain
requirements intended to safeguard and protect the interest of the
government. Thus, after the company had signified its willingness to comply
with the requirement of the government that it furnish free quarters and all
the essential equipment that may be necessary for the operation of the office
including the assignment of an employee who will perform the duties of a
postmaster, the Director of Posts agreed to the opening of the post office
stating that "In cases where a post office will be opened under circumstances
similar to the present, it is the policy of this office to have the company
assume direct responsibility for whatever pecuniary loss may be suffered by
the Bureau of Posts by reason of any act of dishonesty, carelessness or
negligence on the part of the employee of the company who is assigned to
take charge of the post office," and accepting this condition, the company,
thru its board of directors, adopted forthwith a resolution of the following
tenor: "That the requirement of the Bureau of Posts that the company should
accept full responsibility for all cash received by the Postmaster, be complied
with, and that a copy of this resolution be forwarded to the Bureau of Posts."
be heard to complain that it is not liable for the irregularity committed by its
employee upon the technical plea that the resolution approved by its board of
directors is ultra vires. The least that can be said is that it cannot now go
back on its plighted word on the ground of estoppel.
The claim that the resolution adopted by the board of directors of appellant
company is an ultra vires act cannot also be entertained it appearing that the
same covers a subject which concerns the benefit, convenience and welfare
of its employees and their families. While as a rule an ultra vires act is one
committed outside the object for which a corporation is created as defined by
the law of its organization and therefore beyond the powers conferred upon it
by law (19 C.J.S., Section 965, p. 419), there are however certain corporate
acts that may be performed outside of the scope of the powers expressly
conferred if they are necessary to promote the interest or welfare of the
corporation. Thus, it has been held that "although not expressly authorized to
do so a corporation may become a surety where the particular transaction is
reasonably necessary or proper to the conduct of its business," 1 and here it is
undisputed that the establishment of the local post office is a reasonable and
584
proper adjunct to the conduct of the business of appellant company. Indeed,
such post office is a vital improvement in the living condition of its employees
and laborers who came to settle in its mining camp which is far removed from
the postal facilities or means of communication accorded to people living in a
city or municipality..
Even assuming arguendo that the resolution in question constitutes an ultra
vires act, the same however is not void for it was approved not in
contravention of law, customs, public order or public policy. The term ultra
viresshould be distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or estoppel,
while the latter is void and cannot be validated. 2 It being merely voidable, an
ultra vires act can be enforced or validated if there are equitable grounds for
taking such action. Here it is fair that the resolution be upheld at least on the
ground of estoppel. On this point, the authorities are overwhelming:
The weight of authority in the state courts is to the effect that a
transaction which is merely ultra vires and not malum in se or malum
prohibitum, is, if performed by one party, not void as between the
parties to all intents and purposes, and that an action may be
brought directly on the transaction and relief had according to its
terms. (19 C.J.S., Section 976, p. 432, citing Nettles v. Rhett,
C.C.A.S.C., 94 F. 2d, reversing, D.C., 20 F. Supp. 48)
This rule is based on the consideration that as between private
corporations, one party cannot receive the benefits which are
embraced in total performance of a contract made with it by another
party and then set up the invalidity of the transaction as a defense."
(London & Lancashire Indemnity Co. of America v. Fairbanks Steam
Shovel Co., 147 N.E. 329, 332, 112 Ohio St. 136.)
The defense of ultra vires rests on violation of trust or duty toward
stockholders, and should not be entertained where its allowance will
do greater wrong to innocent parties dealing with corporation..
The acceptance of benefits arising from the performance by the
other party may give rise to an estoppel precluding repudiation of the
transaction. (19 C.J.S., Section 976, p. 433.)
The current of modern authorities favors the rule that where the ultra
vires transaction has been executed by the other party and the
corporation has received the benefit of it, the law interposes an
estoppel, and will not permit the validity of the transaction or contract
to be questioned, and this is especially true where there is nothing in
the circumstances to put the other party to the transaction on notice
that the corporation has exceeded its powers in entering into it and
has in so doing overstepped the line of corporate privileges. (19
C.J.S., Section 977, pp. 435-437, citing Williams v. Peoples Building
& Loan Ass'n, 97 S.W. 2d 930, 193 Ark. 118; Hays v. Galion Gas
Light Co., 29 Ohio St. 330)
Neither can we entertain the claim of appellant that its liability is only that of a
guarantor. On this point, we agree with the following comment of the court a
quo: "A mere reading of the resolution of the Board of Directors dated August
31, 1949, upon which the plaintiff based its claim would show that the
responsibility of the defendant company is not just that of a guarantor. Notice
that the phraseology and the terms employed are so clear and sweeping and
that the defendant assumed 'full responsibility for all cash received by the
Postmaster.' Here the responsibility of the defendant is not just that of a
guarantor. It is clearly that of a principal."
WHEREFORE, the decision appealed from is affirmed. No costs.
Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera,
Paredes, Dizon, Regala and Makalintal, JJ. concur.
585
G.R. No. 80599 September 15, 1989

ERNESTINA CRISOLOGO-JOSE, petitioner,

vs.
COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf
and as Vice-President for Sales of Mover Enterprises, Inc., respondents.

Melquiades P. de Leon for petitioner.

Rogelio A. Ajes for private respondent.

REGALADO, J.:

Petitioner seeks the annulment of the decision 1 of respondent Court of

Appeals, promulgated on September 8, 1987, which reversed the decision of
the trial Court 2 dismissing the complaint for consignation filed by therein
plaintiff Ricardo S. Santos, Jr.

The parties are substantially agreed on the following facts as found by both
lower courts:

In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-

president of Mover Enterprises, Inc. in-charge of marketing
and sales; and the president of the said corporation was Atty.
Oscar Z. Benares. On April 30, 1980, Atty. Benares, in
accommodation of his clients, the spouses Jaime and Clarita
Ong, issued Check No. 093553 drawn against Traders Royal
Bank, dated June 14, 1980, in the amount of P45,000.00
(Exh- 'I') payable to defendant Ernestina Crisologo-Jose.
Since the check was under the account of Mover
Enterprises, Inc., the same was to be signed by its president,
Atty. Oscar Z. Benares, and the treasurer of the said
corporation. However, since at that time, the treasurer of
Mover Enterprises was not available, Atty. Benares prevailed

586
upon the plaintiff, Ricardo S. Santos, Jr., to sign the
aforesaid chEck as an alternate story. Plaintiff Ricardo S.
Santos, Jr. did sign the check.
It appears that the check (Exh. '1') was issued to defendant
Ernestina Crisologo-Jose in consideration of the waiver or
quitclaim by said defendant over a certain property which the
Government Service Insurance System (GSIS) agreed to
sell to the clients of Atty. Oscar Benares, the spouses Jaime
and Clarita Ong, with the understanding that upon approval
by the GSIS of the compromise agreement with the spouses
Ong, the check will be encashed accordingly. However, since
the compromise agreement was not approved within the
expected period of time, the aforesaid check for P45,000.00
(Exh. '1') was replaced by Atty. Benares with another Traders
Royal Bank cheek bearing No. 379299 dated August 10,
1980, in the same amount of P45,000.00 (Exhs. 'A' and '2'),
also payable to the defendant Jose. This replacement check
was also signed by Atty. Oscar Z. Benares and by the
plaintiff Ricardo S. Santos, Jr. When defendant deposited
this replacement check (Exhs. 'A' and '2') with her account at
Family Savings Bank, Mayon Branch, it was dishonored for
insufficiency of funds. A subsequent redepositing of the said
check was likewise dishonored by the bank for the same
reason. Hence, defendant through counsel was constrained
to file a criminal complaint for violation of Batas Pambansa
Blg. 22 with the Quezon City Fiscal's Office against Atty.
Oscar Z. Benares and plaintiff Ricardo S. Santos, Jr. The
investigating Assistant City Fiscal, Alfonso Llamas,
accordingly filed an amended information with the court
charging both Oscar Benares and Ricardo S. Santos, Jr., for
violation of Batas Pambansa Blg. 22 docketed as Criminal
Case No. Q-14867 of then Court of First Instance of Rizal,
Quezon City.
Meanwhile, during the preliminary investigation of the
criminal charge against Benares and the plaintiff herein,
before Assistant City Fiscal Alfonso T. Llamas, plaintiff
Ricardo S. Santos, Jr. tendered cashier's check No. CC
160152 for P45,000.00 dated April 10, 1981 to the defendant
Ernestina Crisologo-Jose, the complainant in that criminal
case. The defendant refused to receive the cashier's check
in payment of the dishonored check in the amount of
P45,000.00. Hence, plaintiff encashed the aforesaid
cashier's check and subsequently deposited said amount of
P45,000.00 with the Clerk of Court on August 14, 1981
(Exhs. 'D' and 'E'). Incidentally, the cashier's check adverted
to above was purchased by Atty. Oscar Z. Benares and
given to the plaintiff herein to be applied in payment of the
dishonored check. 3
After trial, the court a quo, holding that it was "not persuaded to believe that
consignation referred to in Article 1256 of the Civil Code is applicable to this
case," rendered judgment dismissing plaintiff s complaint and defendant's
counterclaim. 4
As earlier stated, respondent court reversed and set aside said judgment of
dismissal and revived the complaint for consignation, directing the trial court
to give due course thereto.
Hence, the instant petition, the assignment of errors wherein are prefatorily
stated and discussed seriatim.
1. Petitioner contends that respondent Court of Appeals
erred in holding that private respondent, one of the
signatories of the check issued under the account of Mover
Enterprises, Inc., is an accommodation party under the
Negotiable Instruments Law and a debtor of petitioner to the
extent of the amount of said check.
Petitioner avers that the accommodation party in this case is Mover
Enterprises, Inc. and not private respondent who merely signed the check in
question in a representative capacity, that is, as vice-president of said
587
corporation, hence he is not liable thereon under the Negotiable Instruments
Law.
The pertinent provision of said law referred to provides:
Sec. 29. Liability of accommodation party an accommodation
party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some
other person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder, at the time of
taking the instrument, knew him to be only an
accommodation party.
Consequently, to be considered an accommodation party, a person must (1)
be a party to the instrument, signing as maker, drawer, acceptor, or indorser,
(2) not receive value therefor, and (3) sign for the purpose of lending his
name for the credit of some other person.
Based on the foregoing requisites, it is not a valid defense that the
accommodation party did not receive any valuable consideration when he
executed the instrument. From the standpoint of contract law, he differs from
the ordinary concept of a debtor therein in the sense that he has not received
any valuable consideration for the instrument he signs. Nevertheless, he is
liable to a holder for value as if the contract was not for accommodation 5in
whatever capacity such accommodation party signed the instrument, whether
primarily or secondarily. Thus, it has been held that in lending his name to the
accommodated party, the accommodation party is in effect a surety for the
latter. 6
Assuming arguendo that Mover Enterprises, Inc. is the accommodation party
in this case, as petitioner suggests, the inevitable question is whether or not
it may be held liable on the accommodation instrument, that is, the check
issued in favor of herein petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments Law which holds an
accommodation party liable on the instrument to a holder for value, although
such holder at the time of taking the instrument knew him to be only an
accommodation party, does not include nor apply to corporations which are
accommodation parties. 7 This is because the issue or indorsement of
negotiable paper by a corporation without consideration and for the
accommodation of another is ultra vires. 8 Hence, one who has taken the
instrument with knowledge of the accommodation nature thereof cannot
recover against a corporation where it is only an accommodation party. If the
form of the instrument, or the nature of the transaction, is such as to charge
the indorsee with knowledge that the issue or indorsement of the instrument
by the corporation is for the accommodation of another, he cannot recover
against the corporation thereon. 9
By way of exception, an officer or agent of a corporation shall have the power
to execute or indorse a negotiable paper in the name of the corporation for
the accommodation of a third person only if specifically authorized to do
so. 10 Corollarily, corporate officers, such as the president and vice-president,
have no power to execute for mere accommodation a negotiable instrument
of the corporation for their individual debts or transactions arising from or in
relation to matters in which the corporation has no legitimate concern. Since
such accommodation paper cannot thus be enforced against the corporation,
especially since it is not involved in any aspect of the corporate business or
operations, the inescapable conclusion in law and in logic is that the
signatories thereof shall be personally liable therefor, as well as the
consequences arising from their acts in connection therewith.
The instant case falls squarely within the purview of the aforesaid decisional
rules. If we indulge petitioner in her aforesaid postulation, then she is
effectively barred from recovering from Mover Enterprises, Inc. the value of
the check. Be that as it may, petitioner is not without recourse.
The fact that for lack of capacity the corporation is not bound by an
accommodation paper does not thereby absolve, but should render
personally liable, the signatories of said instrument where the facts show that
the accommodation involved was for their personal account, undertaking or
purpose and the creditor was aware thereof.
588
Petitioner, as hereinbefore explained, was evidently charged with the
knowledge that the cheek was issued at the instance and for the personal
account of Atty. Benares who merely prevailed upon respondent Santos to
act as co-signatory in accordance with the arrangement of the corporation
with its depository bank. That it was a personal undertaking of said corporate
officers was apparent to petitioner by reason of her personal involvement in
the financial arrangement and the fact that, while it was the corporation's
check which was issued to her for the amount involved, she actually had no
transaction directly with said corporation.
There should be no legal obstacle, therefore, to petitioner's claims being
directed personally against Atty. Oscar Z. Benares and respondent Ricardo
S. Santos, Jr., president and vice-president, respectively, of Mover
Enterprises, Inc.
2. On her second assignment of error, petitioner argues that
the Court of Appeals erred in holding that the consignation of
the sum of P45,000.00, made by private respondent after his
tender of payment was refused by petitioner, was proper
under Article 1256 of the Civil Code.
Petitioner's submission is that no creditor-debtor relationship exists between
the parties, hence consignation is not proper. Concomitantly, this argument
was premised on the assumption that private respondent Santos is not an
accommodation party.
As previously discussed, however, respondent Santos is an accommodation
party and is, therefore, liable for the value of the check. The fact that he was
only a co-signatory does not detract from his personal liability. A co-maker or
co-drawer under the circumstances in this case is as much an
accommodation party as the other co-signatory or, for that matter, as a lone
signatory in an accommodation instrument. Under the doctrine in Philippine
Bank of Commerce vs. Aruego, supra, he is in effect a co-surety for the
accommodated party with whom he and his co-signatory, as the other co-
surety, assume solidary liability ex lege for the debt involved. With the
dishonor of the check, there was created a debtor-creditor relationship, as
between Atty. Benares and respondent Santos, on the one hand, and
petitioner, on the other. This circumstance enables respondent Santos to
resort to an action of consignation where his tender of payment had been
refused by petitioner.
We interpose the caveat, however, that by holding that the remedy of
consignation is proper under the given circumstances, we do not thereby rule
that all the operative facts for consignation which would produce the effect of
payment are present in this case. Those are factual issues that are not clear
in the records before us and which are for the Regional Trial Court of Quezon
City to ascertain in Civil Case No. Q-33160, for which reason it has advisedly
been directed by respondent court to give due course to the complaint for
consignation, and which would be subject to such issues or claims as may be
raised by defendant and the counterclaim filed therein which is hereby
ordered similarly revived.
3. That respondent court virtually prejudged Criminal Case
No. Q-14687 of the Regional Trial Court of Quezon City filed
against private respondent for violation of Batas Pambansa
Blg. 22, by holding that no criminal liability had yet attached
to private respondent when he deposited with the court the
amount of P45,000.00 is the final plaint of petitioner.
We sustain petitioner on this score.
Indeed, respondent court went beyond the ratiocination called for in the
appeal to it in CA-G.R. CV. No. 05464. In its own decision therein, it declared
that "(t)he lone issue dwells in the question of whether an accommodation
party can validly consign the amount of the debt due with the court after his
tender of payment was refused by the creditor." Yet, from the commercial and
civil law aspects determinative of said issue, it digressed into the merits of
the aforesaid Criminal Case No. Q-14867, thus:
Section 2 of B.P. 22 establishes the prima facie evidence of
knowledge of such insufficiency of funds or credit. Thus, the
making, drawing and issuance of a check, payment of which
589
 is refused by the drawee because of insufficient funds in or
credit with such bank is prima facie evidence of knowledge
of insufficiency of funds or credit, when the check is
presented within 90 days from the date of the check.
It will be noted that the last part of Section 2 of B.P. 22
provides that the element of knowledge of insufficiency of
funds or credit is not present and, therefore, the crime does
not exist, when the drawer pays the holder the amount due
or makes arrangements for payment in full by the drawee of
such check within five (5) banking days after receiving notice
that such check has not been paid by the drawee.
Based on the foregoing consideration, this Court finds that
the plaintiff-appellant acted within Ms legal rights when he
consigned the amount of P45,000.00 on August 14, 1981,
between August 7, 1981, the date when plaintiff-appellant
receive (sic) the notice of non-payment, and August 14,
1981, the date when the debt due was deposited with the
Clerk of Court (a Saturday and a Sunday which are not
banking days) intervened. The fifth banking day fell on
August 14, 1981. Hence, no criminal liability has yet
attached to plaintiff-appellant when he deposited the amount
of P45,000.00 with the Court a quo on August 14, 1981. 11
That said observations made in the civil case at bar and the intrusion into the
merits of the criminal case pending in another court are improper do not have
to be belabored. In the latter case, the criminal trial court has to grapple with
such factual issues as, for instance, whether or not the period of five banking
days had expired, in the process determining whether notice of dishonor
should be reckoned from any prior notice if any has been given or from
receipt by private respondents of the subpoena therein with supporting
affidavits, if any, or from the first day of actual preliminary investigation; and
whether there was a justification for not making the requisite arrangements
for payment in full of such check by the drawee bank within the said period.
These are matters alien to the present controversy on tender and
consignation of payment, where no such period and its legal effects are
involved.
These are aside from the considerations that the disputed period involved in
the criminal case is only a presumptive rule, juris tantum at that, to determine
whether or not there was knowledge of insufficiency of funds in or credit with
the drawee bank; that payment of civil liability is not a mode for
extinguishment of criminal liability; and that the requisite quantum of
evidence in the two types of cases are not the same.
To repeat, the foregoing matters are properly addressed to the trial court in
Criminal Case No. Q-14867, the resolution of which should not be interfered
with by respondent Court of Appeals at the present posture of said case,
much less preempted by the inappropriate and unnecessary holdings in the
aforequoted portion of the decision of said respondent court. Consequently,
we modify the decision of respondent court in CA-G.R. CV No. 05464 by
setting aside and declaring without force and effect its pronouncements and
findings insofar as the merits of Criminal Case No. Q-14867 and the liability
of the accused therein are concerned.
WHEREFORE, subject to the aforesaid modifications, the judgment of
respondent Court of Appeals is AFFIRMED.
SO ORDERED.
Paras, Padilla and Sarmiento, JJ., concur
G.R. No. L-37331 March 18, 1933
FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own
behalf and in that all other stockholders of the Balatoc Mining
Company, etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING
COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and A. W.
BEAM, defendants-appellees.
590
Gibbs and McDonough and Roman Ozaeta for appellants.
DeWitt, Perkins and Brady for appellees.
Ross, Lawrence and Selph for appellee Balatoc Mining Company.
STREET, J.:
This action was originally instituted in the Court of First Instance of the City of
Manila by F. M. Harden, acting in his own behalf and that of all other
stockholders of the Balatoc Mining Co. who might join in the action and
contribute to the expense of the suit. With the plaintiff Harden two others, J.
D. Highsmith and John C. Hart, subsequently associated themselves. The
defendants are the Benguet Consolidated Mining Co., the Balatoc Mining
Co., H. E. Renz, John W. Haussermann, and A. W. Beam. The principal
purpose of the original action was to annul a certificate covering 600,000
shares of the stock of the Balatoc Mining Co., which have been issued to the
Benguet Consolidated Mining Co., and to secure to the Balatoc Mining Co.,
the restoration of a large sum of money alleged to have been unlawfully
collected by the Benguet Consolidated Mining Co., with legal interest, after
deduction therefrom of the amount expended by the latter company under a
contract between the two companies, bearing date of March 9, 1927. The
complaint was afterwards amended so as to include a prayer for the
annulment of this contract. Shortly prior to the institution of this lawsuit, the
Benguet Consolidated Mining Co., transferred to H. E. Renz, as trustee, the
certificate for 600,000 shares of the Balatoc Mining Co. which constitute the
principal subject matter of the action. This was done apparently to facilitate
the splitting up to the shares in the course of the sale or distribution. To
prevent this the plaintiffs, upon filing their original complaint, procured a
preliminary injunction restraining the defendants, their agents and servants,
from selling, assigning or transferring the 600,000 shares of the Balatoc
Mining Co., or any part thereof, and from removing said shares from the
Philippine Islands. This explains the connection of Renz with the case. The
other individual defendants are made merely as officials of the Benguet
Consolidated Mining Co. Upon hearing the cause the trial court dismissed
the complaint and dissolved the preliminary injunction, with costs against the
plaintiffs. From this judgment the plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the financial
interests involve are immense. Briefly told these facts are as follows: The
Benguet Consolidated Mining Co. was organized in June, 1903, as
a sociedad anonima in conformity with the provisions of Spanish law; while
the Balatoc Mining Co. was organized in December 1925, as a corporation,
in conformity with the provisions of the Corporation Law (Act No. 1459). Both
entities were organized for the purpose of engaging in the mining of gold in
the Philippine Islands, and their respective properties are located only a few
miles apart in the subprovince of Benguet. The capital stock of the Balatoc
Mining Co. consists of one million shares of the par value of one peso (P1)
each.
When the Balatoc Mining Co. was first organized the properties acquired by it
were largely undeveloped; and the original stockholders were unable to
supply the means needed for profitable operation. For this reason, the board
of directors of the corporation ordered a suspension of all work, effective July
31, 1926. In November of the same year a general meeting of the company's
stockholders appointed a committee for the purpose of interesting outside
capital in the mine. Under the authority of this resolution the committee
approached A. W. Beam, then president and general manager of the
Benguet Company, to secure the capital necessary to the development of the
Balatoc property. As a result of the negotiations thus begun, a contract,
formally authorized by the management of both companies, was executed on
March 9, 1927, the principal features of which were that the Benguet
Company was to proceed with the development and construct a milling plant
for the Balatoc mine, of a capacity of 100 tons of ore per day, and with an
extraction of at least 85 per cent of the gold content. The Benguet Company
also agreed to erect an appropriate power plant, with the aerial tramlines and
such other surface buildings as might be needed to operate the mine. In
return for this it was agreed that the Benguet Company should receive from
the treasurer of the Balatoc Company shares of a par value of P600,000, in
payment for the first P600,000 be thus advanced to it by the Benguet
Company.
The performance of this contract was speedily begun, and by May 31, 1929,
the Benguet Company had spent upon the development the sum of
P1,417,952.15. In compensation for this work a certificate for six hundred
591
thousand shares of the stock of the Balatoc Company has been delivered to
the Benguet Company, and the excess value of the work in the amount of
P817,952.15 has been returned to the Benguet Company in cash. Meanwhile
dividends of the Balatoc Company have been enriching its stockholders, and
at the time of the filing of the complaint the value of its shares had increased
in the market from a nominal valuation to more than eleven pesos per share.
While the Benguet Company was pouring its million and a half into the
Balatoc property, the arrangements made between the two companies
appear to have been viewed by the plaintiff Harden with complacency, he
being the owner of many thousands of the shares of the Balatoc Company.
But as soon as the success of the development had become apparent, he
began this litigation in which he has been joined by two others of the eighty
shareholders of the Balatoc Company.
Briefly, the legal point upon which the action is planted is that it is unlawful for
the Benguet Company to hold any interest in a mining corporation and that
the contract by which the interest here in question was acquired must be
annulled, with the consequent obliteration of the certificate issued to the
Benguet Company and the corresponding enrichment of the shareholders of
the Balatoc Company.
When the Philippine Islands passed to the sovereignty of the United States,
in the attention of the Philippine Commission was early drawn to the fact that
there is no entity in Spanish law exactly corresponding to the notion of the
corporation in English and American law; and in the Philippine Bill, approved
July 1, 1902, the Congress of the United States inserted certain provisions,
under the head of Franchises, which were intended to control the lawmaking
power in the Philippine Islands in the matter of granting of franchises,
privileges and concessions. These provisions are found in section 74 and 75
of the Act. The provisions of section 74 have been superseded by section 28
of the Act of Congress of August 29, 1916, but in section 75 there is a
provision referring to mining corporations, which still remains the law, as
amended. This provisions, in its original form, reads as follows: "... it shall be
unlawful for any member of a corporation engaged in agriculture or mining
and for any corporation organized for any purpose except irrigation to be in
any wise interested in any other corporation engaged in agriculture or in
mining."
Under the guidance of this and certain other provisions thus enacted by
Congress, the Philippine Commission entered upon the enactment of a
general law authorizing the creation of corporations in the Philippine Islands.
This rather elaborate piece of legislation is embodied in what is called our
Corporation Law (Act No. 1459 of the Philippine Commission). The evident
purpose of the commission was to introduce the American corporation into
the Philippine Islands as the standard commercial entity and to hasten the
day when the sociedad anonima of the Spanish law would be obsolete. That
statute is a sort of codification of American corporate law.
For the purposes general description only, it may be stated that the sociedad
anonima is something very much like the English joint stock company, with
features resembling those of both the partnership is shown in the fact that
sociedad, the generic component of its name in Spanish, is the same word
that is used in that language to designate other forms of partnership, and in
its organization it is constructed along the same general lines as the ordinary
partnership. It is therefore not surprising that for purposes of loose translation
the expression sociedad anonima has not infrequently the other hand, the
affinity of this entity to the American corporation has not escaped notice, and
the expression sociedad anonima is now generally translated by the word
corporation. But when the word corporation is used in the sense of sociedad
anonima and close discrimination is necessary, it should be associated with
the Spanish expression sociedad anonima either in a parenthesis or
connected by the word "or". This latter device was adopted in sections 75
and 191 of the Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted bodily, in
subsection (5) of section 13 of that Act (No. 1459) the words which we have
already quoted from section 75 of the Act of Congress of July 1, 1902
(Philippine Bill); and it is of course obvious that whatever meaning originally
attached to this provision in the Act of Congress, the same significance
should be attached to it in section 13 of our Corporation Law.
As it was the intention of our lawmakers to stimulate the introduction of the
American Corporation into Philippine law in the place of the sociedad
anonima, it was necessary to make certain adjustments resulting from the
continued co-existence, for a time, of the two forms of commercial entities.
592
Accordingly, in section 75 of the Corporation Law, a provision is found
making the sociedad anonima subject to the provisions of the Corporation
Law "so far as such provisions may be applicable", and giving to
the sociedades anonimas previously created in the Islands the option to
continue business as such or to reform and organize under the provisions of
the Corporation Law. Again, in section 191 of the Corporation Law, the Code
of Commerce is repealed in so far as it relates to sociedades anonimas. The
purpose of the commission in repealing this part of the Code of Commerce
was to compel commercial entities thereafter organized to incorporate under
the Corporation Law, unless they should prefer to adopt some form or other
of the partnership. To this provision was added another to the effect that
existing sociedades anonimas, which elected to continue their business as
such, instead of reforming and reorganizing under the Corporation Law,
should continue to be governed by the laws that were in force prior to the
passage of this Act "in relation to their organization and method of
transacting business and to the rights of members thereof as between
themselves, but their relations to the public and public officials shall be
governed by the provisions of this Act."
As already observed, the provision above quoted from section 75 of the Act
Congress of July 1, 1902 (Philippine Bill), generally prohibiting corporations
engaged in mining and members of such from being interested in any other
corporation engaged in mining, was amended by section 7 of Act No. 3518 of
the Philippine Legislature, approved by Congress March 1, 1929. The
change in the law effected by this amendment was in the direction of
liberalization. Thus, the inhibition contained in the original provision against
members of a corporation engaged in agriculture or mining from being
interested in other corporations engaged in agriculture or in mining was so
modified as merely to prohibit any such member from holding more than
fifteen per centum of the outstanding capital stock of another such
corporation. Moreover, the explicit prohibition against the holding
by any corporation (except for irrigation) of an interest in any other
corporation engaged in agriculture or in mining was so modified as to limit
the restriction to corporations organized for the purpose of engaging in
agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain any
appropriate clause directly penalizing the act of a corporation, a member of a
corporation , in acquiring an interest contrary to paragraph (5) of section 13
of the Act. The Philippine Legislature undertook to remedy this situation in
section 3 of Act No. 2792 of the Philippine Legislature, approved on February
18, 1919, but this provision was declared invalid by this court in Government
of the Philippine Islands vs. El Hogar Filipino (50 Phil., 399), for lack of an
adequate title to the Act. Subsequently the Legislature reenacted
substantially the same penal provision in section 21 of Act No. 3518, under a
title sufficiently broad to comprehend the subject matter. This part of Act No.
3518 became effective upon approval by the Governor-General, on
December 3, 1928, and it was therefore in full force when the contract now in
question was made.
This provision was inserted as a new section in the Corporation Law, forming
section 1990 (A) of said Act as it now stands. Omitting the proviso, which
seems not to be pertinent to the present controversy, said provision reads as
follows:
SEC. 190 (A). Penalties. The violation of any of the provisions of
this Act and its amendments not otherwise penalized therein, shall
be punished by a fine of not more than five thousand pesos and by
imprisonment for not more than five years, in the discretion of the
court. If the violation is committed by a corporation, the same shall,
upon such violation being proved, be dissolved by quo
warranto proceedings instituted by the Attorney-General or by any
provincial fiscal by order of said Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that there are two
fundamental questions involved in this controversy. The first is whether the
plaintiffs can maintain an action based upon the violation of law supposedly
committed by the Benguet Company in this case. The second is whether,
assuming the first question to be answered in the affirmative, the Benguet
Company, which was organized as a sociedad anonima, is a corporation
within the meaning of the language used by the Congress of the United
States, and later by the Philippine Legislature, prohibiting a mining
corporation from becoming interested in another mining corporation. It is
593
obvious that, if the first question be answered in the negative, it will be
unnecessary to consider the second question in this lawsuit.
Upon the first point it is at once obvious that the provision referred to was
adopted by the lawmakers with a sole view to the public policy that should
control in the granting of mining rights. Furthermore, the penalties imposed in
what is now section 190 (A) of the Corporation Law for the violation of the
prohibition in question are of such nature that they can be enforced only by a
criminal prosecution or by an action of quo warranto. But these proceedings
can be maintained only by the Attorney-General in representation of the
Government.
What room then is left for the private action which the plaintiffs seek to assert
in this case? The defendant Benguet Company has committed no civil wrong
against the plaintiffs, and if a public wrong has been committed, the directors
of the Balatoc Company, and the plaintiff Harden himself, were the active
inducers of the commission of that wrong. The contract, supposing it to have
been unlawful in fact, has been performed on both sides, by the building of
the Balatoc plant by the Benguet Company and the delivery to the latter of
the certificate of 600,000 shares of the Balatoc Company. There is no
possibility of really undoing what has been done. Nobody would suggest the
demolition of the mill. The Balatoc Company is secure in the possession of
that improvement, and talk about putting the parties in status quo ante by
restoring the consideration with interest, while the Balatoc Company remains
in possession of what it obtained by the use of that money, does not quite
meet the case. Also, to mulct the Benguet Company in many millions of
dollars in favor of individuals who have not the slightest equitable right to that
money in a proposition to which no court can give a ready assent.
The most plausible presentation of the case of the plaintiffs proceeds on the
assumption that only one of the contracting parties has been guilty of a
misdemeanor, namely, the Benguet Company, and that the other party, the
Balatoc Company, is wholly innocent to participation in that wrong. The
plaintiffs would then have us apply the second paragraph of article 1305 of
the Civil Code which declares that an innocent party to an illegal contract
may recover anything he may have given, while he is not bound to fulfill any
promise he may have made. But, supposing that the first hurdle can be
safely vaulted, the general remedy supplied in article 1305 of the Civil Code
cannot be invoked where an adequate special remedy is supplied in a
special law. It has been so held by this court in Go Chioco vs. Martinez (45
Phil., 256, 280), where we refused to apply that article to a case of nullity
arising upon a usurious loan. The reason given for the decision on this point
was that the Usury Act, as amended, contains all the provisions necessary
for the effectuation of its purposes, with the result that the remedy given in
article 1305 of the Civil Code is unnecessary. Much more is that idea
applicable to the situation now before us, where the special provisions give
ample remedies for the enforcement of the law by action in the name of the
Government, and where no civil wrong has been done to the party here
seeking redress.
The view of the case presented above rest upon considerations arising upon
our own statutes; and it would seem to be unnecessary to ransack the
American decisions for analogies pertinent to the case. We may observe,
however, that the situation involved is not unlike that which has frequently
arisen in the United States under provisions of the National Bank Act
prohibiting banks organized under that law from holding real property. It has
been uniformly held that a trust deed or mortgaged conveying property of this
kind to a bank, by way of security, is valid until the transaction is assailed in a
direct proceeding instituted by the Government against the bank, and the
illegality of such tenure supplies no basis for an action by the former private
owner, or his creditor, to annul the conveyance. (National Bank vs. Matthews,
98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other
analogies point in the same direction. (South & Ala. R. Ginniss vs. B. & M.
Consol. etc. Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs.
Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R.
Co., 77 Hun., 332.)
594
Most suggestive perhaps of all the cases in Compaia Azucarera de
Carolina vs. Registrar (19 Porto Rico, 143), for the reason that this case
arose under a provision of the Foraker Act, a law analogous to our Philippine
Bill. It appears that the registrar had refused to register two deeds in favor of
the Compaia Azucarera on the ground that the land thereby conveyed was
in excess of the area permitted by law to the company. The Porto Rican court
reversed the ruling of the registrar and ordered the registration of the deeds,
saying:

Thus it may be seen that a corporation limited by the law or by its

charter has until the State acts every power and capacity that any
other individual capable of acquiring lands, possesses. The
corporation may exercise every act of ownership over such lands; it
may sue in ejectment or unlawful detainer and it may demand
specific performance. It has an absolute title against all the world
except the State after a proper proceeding is begun in a court of
law. ... The Attorney General is the exclusive officer in whom is
confided the right to initiate proceedings for escheat or attack the
right of a corporation to hold land.

Having shown that the plaintiffs in this case have no right of action against
the Benguet Company for the infraction of law supposed to have been
committed, we forego cny discussion of the further question whether
a sociedad anonima created under Spanish law, such as the Benguet
Company, is a corporation within the meaning of the prohibitory provision
already so many times mentioned. That important question should, in our
opinion, be left until it is raised in an action brought by the Government.

The judgment which is the subject of his appeal will therefore be affirmed,
and it is so ordered, with costs against the appellants.

Avancea, C.J., Villamor, Ostrand, Villa-Real, Abad Santos, Hull, Vickers,

Imperial and Butte, JJ., concur.

595
 thereon, issued by the Mindoro Sugar Company and placed in trust with the
Philippine Trust Company which, in turn, guaranteed them for value received.
Said plaintiff appealed from the judgment rendered by the Court of First
Instance of Manila absolving the defendants from the complaint, excepting
the Mindoro Sugar Company, which was sentenced to pay the value of the
four bonds with interest at 8 per cent per annum, plus costs.

The Mindoro Sugar Company is a corporation constituted in accordance with

the laws of the country and registered on July 30, 1917. According to its
articles of incorporation, Exhibit 5, one of its principal purposes was to
acquire and exercise the franchise granted by Act No. 2720 to George H.
Fairchild, to substitute the organized corporation, the Mindoro Company, and
to acquire all the rights and obligations of the latter and of Horace
Havemeyer and Charles J. Welch in the so-called San Jose Estate in the
Province of Mindoro.

The Philippine Trust Company is another domestic corporation, registered on

October 21, 1917. In its articles of incorporation, Exhibit A, some of its
purposes are expressed thus: "To acquire by purchase, subscription, or
otherwise, and to invest in, hold, sell, or otherwise dispose of stocks, bonds,
mortgages, and other securities, or any interest in either, or any obligations
G.R. No. L-36207 October 26, 1932 or evidences of indebtedness, of any other corporation or corporations,
domestic or foreign. . . . Without in any particular limiting any of the powers of
the corporation, it is hereby expressly declared that the corporation shall
IRINEO G. CARLOS, plaintiff-appellant,
have power to make any guaranty respecting the dividends, interest, stock,
vs.
bonds, mortgages, notes, contracts or other obligations of any corporation,
MINDORO SUGAR CO., ET AL., defendants-appellees.
so far as the same may be permitted by the laws of the Philippine Islands
now or hereafter in force." Its principal purpose, then, as its name indicates,
Jose Ayala for appellant. is to engage in the trust business.
Ross, Lawrence & Selph for appellees.
On November 17, 1917, the board of directors of the Philippine Trust
Company, composed of Phil, C. Whitaker, chairman, and James Ross, Otto
Vorster, Charles D. Ayton, and William J. O'Donovan, members, adopted a
IMPERIAL, J.: resolution authorizing its president, among other things, to purchase at par
and in the name and for the use of the trust corporation all or such part as he
The plaintiff brought this action to recover from the defendants the value of may deem expedient, of the bonds in the value of P3,000,000 that the
four bonds, Nos. 1219, 1220, 1221, and 1222, with due and unpaid interest Mindoro Sugar Company was about to issue, and to resell them, with or

596
without the guarantee of said trust corporation, at a price not less than par,
and to guarantee to the Philippine National Bank the payment of the
indebtedness to said bank by the Mindoro Sugar Company or Charles J.
Welch and Horace Havemeyer, up to P2,000,000. The relevant part of the
resolution, Exhibit 3, reads as follows:
Resolved that Mr. Phil. C. Whitaker, president of this company, be
and he hereby is authorized to purchase at par in the name and for
the use of this company all, or such part as he may deem expedient,
of the said P3,000,000 of 20-year 8 per cent coupon bonds of the
said Mindoro Sugar Company, and to resell or otherwise dispose of
the said bonds, with or without this company's guaranty, at a price
not less than par; and it was further
Resolved that Mr. Phil. C. Whitaker, president of the company be and
he hereby is authorized in the name of this company alone or in
connection with others, by joint and several obligations, to guarantee
to the Philippine National Bank the due and punctual payment of any
and all indebtedness owing to the said Bank by either the Mindoro
Sugar Company, the Mindoro Company, or Charles J. Welch and
Horace Havemeyer, up to P2,000,000; and it was further
Resolved that the said president, Mr. Phil. C. Whitaker, be and he
hereby is authorized to execute in the name of this company any and
all notes, mortgages, bonds, guaranties, or instruments in writing
whatever necessary for the carrying into effect of the authority
hereby granted.
In pursuance of this resolution, on December 21, 1917, the Mindoro Sugar
Company executed in favor of the Philippine Trust Company the deed of
trust, Exhibit 6, transferring all of its property to it in consideration of the
bonds it had issued to the value of P3,000,000, the value of each bond being
$1,000, which par value, with interest at 8 per cent per annum, the Philippine
Trust Company had guaranteed to the holders, and in consideration,
furthermore, of said trust corporation having guaranteed to the Philippine
National Bank all the obligations contracted by the Mindoro Sugar Company,
Charles J. Welch and Horace Havemeyer up to the aforesaid amount of
P2,000,000. The aforementioned deed was approved by his Excellency, the
Governor-General, upon recommendation of the Secretary of Agriculture and
Natural Resources, and in accordance with the provisions of Act No. 2720 of
the Philippine Legislature. Following are the clauses of said Exhibit 6 material
to this decision:
Whereas, for the purposes aforesaid, and in further pursuance of
said resolutions of its board of directors and of its stockholders, the
company, in order to secure the payment of said First Mortgage,
Twenty Year, Eight Per Cent, Gold Bonds, has determined to execute
and deliver to said Philippine Trust Company, as trustee, a deed of
trust of its properties hereinafter described, and the board of
directors of the Company has approved the form of this indenture
and directed that the same be executed and delivered to said
trustee; and
Whereas, all things necessary to make said bonds, when certified by
said trustee as in this indenture provided, valid, binding, legal and
negotiable obligations of the company and this indenture a valid
deed of trust to secure the payment of said bonds, have been done
and performed, and the creation and issue of said bonds, and the
execution, acknowledgment and delivery of this deed of trust have
been duly authorized;
Now, therefore, in order to secure the payment of the principal and
interest of all such bonds at any time issued and outstanding under
this indenture, according to their tenor, purport and effect, and to
secure the performance and observance of all the covenants and
conditions herein contained and to declare the terms and conditions
upon which said bonds are issued, received and held, and for and in
consideration of the premises, and of the purchase or acceptance of
such bonds by the holders thereof, and of the sum of one dollar,
United States currency, to it duly paid at or before the ensealing and
delivery of these presents, the receipt whereof is hereby
acknowledged, the Mindoro Sugar Company, party of the first part,
has sold and conveyed, and by these presents does sell and convey
597
 to the Philippine Trust Company, party of the second part, its The appellant now contends that the judgment appealed from is untenable,
successors and assigns forever; assigning the following errors:

(Description of the property.) FIRST ERROR

In consequence of this transaction, the bonds, with their coupons were The lower court erred in sustaining the demurrer against the
placed on the market and sold by the Philippine Trust Company, all endorsed amended complaint, filed by defendant J. S. Reis (Reese) and
as follows: consequently in dismissing the same with regard to this defendant.

This is to certify that the within bond is one of the series described in SECOND ERROR
the trust deed therein mentioned.
The lower court, without a proof to support it or an averment in
PHILIPPINE TRUST COMPANY defense by the defendant Philippine Trust Company, erred in finding
by: (Sgd.) PHIL. C. WHITAKER hypothetically that if the guarantee made by this company be held
President valid, the trust funds and deposits in its hands would probably be
endangered.
For values received, the Philippine Trust Company hereby
guarantees the payment of principal and interest of the within bond. THIRD ERROR

Manila, Jan.2, 1918 The lower court erred in holding that the Philippine Trust Company
has no power to guarantee the obligation of another juridical
PHILIPPINE TRUST COMPANY personality, for value received.
by: (Sgd.) PHIL. C. WHITAKER
President FOURTH ERROR

The Philippine Trust Company sold thirteen bonds, Nos. 1219 to 1231, to The lower court erred in not recognizing the validity and effect of the
Ramon Diaz for P27,300, at a net profit of P100 per bond. The four bonds guarantee subscribed by the Philippine Trust Company for the
Nos. 1219, 1220, 1221, and 1222, here in litigation, are included in the payment of the four bonds claimed in the complaint, endorsed upon
thirteen sold to Diaz. them, and in absolving said institution from the complaint.

The Philippine Trust Company paid the appellant, upon presentation of the
coupons, the stipulated interest from the date of their maturity until the 1st of
July, 1928, when it stopped payments; and thenceforth it alleged that it did
not deem itself bound to pay such interest or to redeem the obligation
because the guarantee given for the bonds was illegal and void.
FIFTH ERROR
The lower court erred in absolving the ex-directors of the Philippine
Trust Company, Phil. C. Whitaker, O. Vorster, and Charles D. Ayton,
from the complaint.

598
We shall not follow the order of the appellant's argument, deeming it
unnecessary, but shall decide only the third and fourth assignments of error
upon which the merits of the case depend. For the clear understanding of
this decision and to avoid erroneous interpretations, however, we wish to
state that in this decision we shall decide only the rights of the parties with
regard to the four bonds in question and whatever we say in no wise affects
or applies to the rest of the bonds.
We shall begin by saying that the majority of the justices of this court who
took part in the case are of opinion that the only point of law to be decided is
whether the Philippine Trust Company acquired the four bonds in question,
and whether as such it bound itself legally and acted within its corporate
powers in guaranteeing them. This question was answered in the
affirmative.1awphil.net
In adopting this conclusion we have relied principally upon the following facts
and circumstances: Firstly, that the Philippine Trust Company, although
secondarily engaged in banking, was primarily organized as a trust
corporation with full power to acquire personal property such as the bonds in
question according to both section 13 (par. 5) of the Corporation Law and its
duly registered by-laws and articles of incorporation; secondly, that being
thus authorized to acquire the bonds, it was given implied power to
guarantee them in order to place them upon the market under better, more
advantageous conditions, and thereby secure the profit derived from their
sale:
It is not, however, ultra vires for a corporation to enter into contracts
of guaranty or suretyship where it does so in the legitimate
furtherance of its purposes and business. And it is well settled that
where a corporation acquires commercial paper or bonds in the
legitimate transaction of its business it may sell them, and in
furtherance of such a sale it may, in order to make them the more
readily marketable, indorse or guarantee their payment. (7 R. C. L.,
p. 604 and cases cited.)
"Whenever a corporation has the power to take and dispose of the securities
of another corporation, of whatsoever kind, it may, for the purpose of giving
them a marketable quality, guarantee their payment, even though the amount
involved in the guaranty may subject the corporation to liabilities in excess of
the limit of indebtedness which it is authorized to incur. A corporation which
has power by its charter to issue its own bonds has power to guarantee the
bonds of another corporation, which has been taken in payment of a debt
due to it, and which it sells or transfers in payment of its own debt, the
guaranty being given to enable it to dispose of the bond to better advantage.
And so guaranties of payment of bonds taken by a loan and trust company in
the ordinary course of its business, made in connection with their sale, are
not ultra vires, and are binding." (14-A C. J., pp. 742-743 and cases cited);
thirdly, that although it does not clearly appear in the deed of trust (Exhibit 6)
that the Mindoro Sugar Company transferred the bonds therein referred to, to
the Philippine Trust Company, nevertheless, in the resolution of the board of
directors (Exhibit 3), the president of the Philippine Trust Company was
expressly authorized to purchase all or some of the bonds and to guarantee
them; whence it may be inferred that subsequent purchasers of the bonds in
the market relied upon the belief that they were acquiring securities of the
Philippine Trust Company, guaranteed by this corporation; fourthly, that as
soon as P3,000,000 worth of bonds was issued, and by the deed of trust the
Mindoro, Sugar Company transferred all its real property to the Philippine
Trust Company, the cause or consideration of the transfer being, (1) the
guarantee given by the purchaser to the bonds, and (2) its having likewise
guaranteed its obligations and those of Welch and Havemeyer in favor of the
Philippine National Bank up to the amount of P2,000,000; fifthly, that in
transferring its real property as aforesaid the Mindoro Sugar Company was
reduced to a real state of bankruptcy, as the parties specifically agreed
during the hearing of the case, to the point of having become a nominal
corporation without any assets whatsoever; sixthly, that such operation or
transaction cannot mean anything other than that the real intention of the
parties was that the Philippine Trust Company acquired the bonds issued
and at the same time guaranteed the payment of their par value with interest,
because otherwise the transaction would be fraudulent, inasmuch as nobody
would be answerable to the bond-holders for their value and interest;
seventhly, that the Philippine Trust Company had been paying the appellant
the interest accrued upon the four bonds from the date of their issuance until
599
July 1, 1928, such payment of interest being another proof that said
corporation had really become the owner of the aforesaid bonds; and, eightly,
that the Philippine Trust Company has not adduced any evidence to show
any other conclusions.
There are other considerations leading to the same result even in the
supposition that the Philippine Trust Company did not acquire the bonds in
question, but only guaranteed them. In such a case the guarantee of these
bonds would at any rate, be valid and the said corporation would be bound to
pay the appellant their value with the accrued interest in view of the fact that
they become due on account of the lapse of sixty (60) days, without the
accrued interest due having been paid; and the reason is that it is estopped
from denying the validity of its guarantee.
. . . On the other hand, according to the view taken by other courts,
which it must be acknowledged are in the majority, a recovery
directly upon the contract is permitted, on the ground that the
corporation, having received money or property by virtue of a
contract not immoral or illegal of itself, is estopped to deny liability;
and that the only remedy is one on behalf of the state to punish the
corporation for violating the law. (7 R. C. L., pp. 680-681 and cases
cited.)
. . . The doctrine of ultra vires has been declared to be entirely the
creation of the courts and is of comparatively modern origin. The
defense is by some courts regarded as an ungracious and odious
one, to be sustained only where the most persuasive considerations
of public policy are involved, and there are numerous decisions and
dicta to the effect that the plea should not as a general rule prevail
whether interposed for or against the corporation, where it will not
advance justice but on the contrary will accomplish a legal wrong.
(14-A C. J., pp. 314-315.)
The doctrine of the Supreme Court of the United States together with
the English courts and some of the state courts is that no
performance upon either side can validate an ultra vires transaction
or authorize an action to be maintained directly upon it. However, the
great weight of authority in the state courts is to the effect that a
transaction which is merely ultra vires and not malum in se or malum
prohibitum although it may be made by the state a basis for the
forfeiture of the corporate charter or the dissolution of the
corporation, is, if performed by one party, not void as between the
parties to all intents and purposes, and that an action may be
brought directly upon the transaction and relief had according to its
terms. ( 14-A C. J., pp. 319-320.)
When a contract is not on its face necessarily beyond the scope of
the power of the corporation by which it was made, it will, in the
absence of proof to the contrary, be presumed to be valid.
Corporations are presumed to contract within their powers. The
doctrine of ultra vires, when invoked for or against a corporation,
should not be allowed to prevail where it would defeat the ends of
justice or work a legal wrong. (Coleman vs. Hotel de France Co., 29
Phil., 323.)
Guaranties of payment of bonds taken by a loan and trust company
in the ordinary course of its business, made in connection with their
sale, are not ultra vires, and are binding. (Broadway Nat. Bank vs.
Baker, 57 N. E., p. 603.)
It has been intimated according to section 121 of the Corporation Law, the
Philippine Trust Company, as a banking institution, could not guarantee the
bonds to the value of P3,000,000 because this amount far exceeds its capital
of P1,000,000 of which only one-half has been subscribed and paid. Section
121 reads as follows:
SEC. 212. No such bank shall at any time be indebted or in any way
liable to an amount exceeding the amount of its capital stock at such
time actually paid in and remaining undiminished by losses or
otherwise, except on account of demands of the following nature:
(1) Moneys deposited with or collected by the bank;
600
 (2) Bills of exchange or drafts drawn against money actually
on deposit to the credit of the bank or due thereto;

(3) Liabilities to the stockholders of the bank for dividends

and reserve profits.

This difficulty is easily obviated by bearing in mind that, as we stated above,

the banking operations are not the primary aim of said corporation, which is
engaged essentially in the trust business, and that the prohibition of the law
is not applicable to the Philippine Trust Company, for the evidence shows
that Mindoro Sugar Company transferred all its real property, with the
improvements, to it, and the value of both, which surely could not be less
than the value of the obligation guaranteed, became a part of its capital and
assets; in other words, with the value of the real property transferred to it, the G.R. No. L-27155 May 18, 1978
Philippine Trust Company had enough capital and assets to meet the amount
of the bonds guaranteed with interest thereon. PHILIPPINE NATIONAL BANK, petitioner,
vs.
Wherefore, the decision appealed from is reversed and the Philippine Trust THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and
Company is sentenced to pay to the appellant the sum of four thousand THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY,
dollars ($4,000) with interest at eight per cent (8%) per annum from July 1, INC., respondents.
1928 until fully paid, and the costs of both instances. So ordered.
Medina, Locsin, Corua, & Sumbillo for petitioner.
Avancea, C.J., Ostrand, Villa-Real, Abad Santos and Butte, JJ., concur.
Malcolm and Hull, JJ., concur in the result. Manuel Lim & Associates for private respondents.

ANTONIO, J.:

Certiorari to review the decision of the Court of Appeals which affirmed the
judgment of the Court of First Instance of Manila in Civil Case No. 34185,
ordering petitioner, as third-party defendant, to pay respondent Rita Gueco
Tapnio, as third-party plaintiff, the sum of P2,379.71, plus 12% interest per
annum from September 19, 1957 until the same is fully paid, P200.00
attorney's fees and costs, the same amounts which Rita Gueco Tapnio was
ordered to pay the Philippine American General Insurance Co., Inc., to be

601
paid directly to the Philippine American General Insurance Co., Inc. in full
satisfaction of the judgment rendered against Rita Gueco Tapnio in favor of
the former; plus P500.00 attorney's fees for Rita Gueco Tapnio and costs.
The basic action is the complaint filed by Philamgen (Philippine American
General Insurance Co., Inc.) as surety against Rita Gueco Tapnio and Cecilio
Gueco, for the recovery of the sum of P2,379.71 paid by Philamgen to the
Philippine National Bank on behalf of respondents Tapnio and Gueco,
pursuant to an indemnity agreement. Petitioner Bank was made third-party
defendant by Tapnio and Gueco on the theory that their failure to pay the
debt was due to the fault or negligence of petitioner.
The facts as found by the respondent Court of Appeals, in affirming the
decision of the Court of First Instance of Manila, are quoted hereunder:
Plaintiff executed its Bond, Exh. A, with defendant Rita
Gueco Tapnio as principal, in favor of the Philippine National
Bank Branch at San Fernando, Pampanga, to guarantee the
payment of defendant Rita Gueco Tapnio's account with said
Bank. In turn, to guarantee the payment of whatever amount
the bonding company would pay to the Philippine National
Bank, both defendants executed the indemnity agreement,
Exh. B. Under the terms and conditions of this indemnity
agreement, whatever amount the plaintiff would pay would
earn interest at the rate of 12% per annum, plus attorney's
fees in the amount of 15 % of the whole amount due in case
of court litigation.
The original amount of the bond was for P4,000.00; but the
amount was later reduced to P2,000.00.
It is not disputed that defendant Rita Gueco Tapnio was
indebted to the bank in the sum of P2,000.00, plus
accumulated interests unpaid, which she failed to pay
despite demands. The Bank wrote a letter of demand to
plaintiff, as per Exh. C; whereupon, plaintiff paid the bank on
September 18, 1957, the full amount due and owing in the
sum of P2,379.91, for and on account of defendant Rita
Gueco's obligation (Exhs. D and D-1).
Plaintiff, in turn, made several demands, both verbal and
written, upon defendants (Exhs. E and F), but to no avail.
Defendant Rita Gueco Tapnio admitted all the foregoing
facts. She claims, however, when demand was made upon
her by plaintiff for her to pay her debt to the Bank, that she
told the Plaintiff that she did not consider herself to be
indebted to the Bank at all because she had an agreement
with one Jacobo-Nazon whereby she had leased to the latter
her unused export sugar quota for the 1956-1957 agricultural
year, consisting of 1,000 piculs at the rate of P2.80 per picul,
or for a total of P2,800.00, which was already in excess of
her obligation guaranteed by plaintiff's bond, Exh. A. This
lease agreement, according to her, was with the knowledge
of the bank. But the Bank has placed obstacles to the
consummation of the lease, and the delay caused by said
obstacles forced 'Nazon to rescind the lease contract. Thus,
Rita Gueco Tapnio filed her third-party complaint against the
Bank to recover from the latter any and all sums of money
which may be adjudged against her and in favor of the plaitiff
plus moral damages, attorney's fees and costs.
Insofar as the contentions of the parties herein are
concerned, we quote with approval the following findings of
the lower court based on the evidence presented at the trial
of the case:
602
It has been established during the trial that
Mrs. Tapnio had an export sugar quota of
1,000 piculs for the agricultural year 1956-
1957 which she did not need. She agreed to
allow Mr. Jacobo C. Tuazon to use said
quota for the consideration of P2,500.00
(Exh. "4"-Gueco). This agreement was
called a contract of lease of sugar allotment.
At the time of the agreement, Mrs. Tapnio
was indebted to the Philippine National Bank
at San Fernando, Pampanga. Her
indebtedness was known as a crop loan and
was secured by a mortgage on her standing
crop including her sugar quota allocation for
the agricultural year corresponding to said
standing crop. This arrangement was
necessary in order that when Mrs. Tapnio
harvests, the P.N.B., having a lien on the
crop, may effectively enforce collection
against her. Her sugar cannot be exported
without sugar quota allotment Sometimes,
however, a planter harvest less sugar than
her quota, so her excess quota is utilized by
another who pays her for its use. This is the
arrangement entered into between Mrs.
Tapnio and Mr. Tuazon regarding the
former's excess quota for 1956-1957 (Exh.
"4"-Gueco).
Since the quota was mortgaged to the
P.N.B., the contract of lease had to be
approved by said Bank, The same was
submitted to the branch manager at San
Fernando, Pampanga. The latter required
the parties to raise the consideration of
P2.80 per picul or a total of P2,800.00 (Exh.
"2-Gueco") informing them that "the
minimum lease rental acceptable to the
Bank, is P2.80 per picul." In a letter
addressed to the branch manager on August
10, 1956, Mr. Tuazon informed the manager
that he was agreeable to raising the
consideration to P2.80 per picul. He further
informed the manager that he was ready to
pay said amount as the funds were in his
folder which was kept in the bank.
Explaining the meaning of Tuazon's
statement as to the funds, it was stated by
him that he had an approved loan from the
bank but he had not yet utilized it as he was
intending to use it to pay for the quota.
Hence, when he said the amount needed to
pay Mrs. Tapnio was in his folder which was
in the bank, he meant and the manager
understood and knew he had an approved
loan available to be used in payment of the
quota. In said Exh. "6-Gueco", Tuazon also
informed the manager that he would want
for a notice from the manager as to the time
when the bank needed the money so that
Tuazon could sign the corresponding
promissory note.
Further Consideration of the evidence discloses that when
the branch manager of the Philippine National Bank at San
Fernando recommended the approval of the contract of
lease at the price of P2.80 per picul (Exh. 1 1-Bank), whose
recommendation was concurred in by the Vice-president of
said Bank, J. V. Buenaventura, the board of directors
required that the amount be raised to 13.00 per picul. This
act of the board of directors was communicated to Tuazon,
who in turn asked for a reconsideration thereof. On
603
November 19, 1956, the branch manager submitted
Tuazon's request for reconsideration to the board of directors
with another recommendation for the approval of the lease at
P2.80 per picul, but the board returned the recommendation
unacted upon, considering that the current price prevailing at
the time was P3.00 per picul (Exh. 9-Bank).
The parties were notified of the refusal on the part of the
board of directors of the Bank to grant the motion for
reconsideration. The matter stood as it was until February
22, 1957, when Tuazon wrote a letter (Exh. 10-Bank
informing the Bank that he was no longer interested to
continue the deal, referring to the lease of sugar quota
allotment in favor of defendant Rita Gueco Tapnio. The result
is that the latter lost the sum of P2,800.00 which she should
have received from Tuazon and which she could have paid
the Bank to cancel off her indebtedness,
The court below held, and in this holding we concur that
failure of the negotiation for the lease of the sugar quota
allocation of Rita Gueco Tapnio to Tuazon was due to the
fault of the directors of the Philippine National Bank, The
refusal on the part of the bank to approve the lease at the
rate of P2.80 per picul which, as stated above, would have
enabled Rita Gueco Tapnio to realize the amount of
P2,800.00 which was more than sufficient to pay off her
indebtedness to the Bank, and its insistence on the rental
price of P3.00 per picul thus unnecessarily increasing the
value by only a difference of P200.00. inevitably brought
about the rescission of the lease contract to the damage and
prejudice of Rita Gueco Tapnio in the aforesaid sum of
P2,800.00. The unreasonableness of the position adopted by
the board of directors of the Philippine National Bank in
refusing to approve the lease at the rate of P2.80 per picul
and insisting on the rate of P3.00 per picul, if only to
increase the retail value by only P200.00 is shown by the
fact that all the accounts of Rita Gueco Tapnio with the Bank
were secured by chattel mortgage on standing crops,
assignment of leasehold rights and interests on her
properties, and surety bonds, aside from the fact that from
Exh. 8-Bank, it appears that she was offering to execute a
real estate mortgage in favor of the Bank to replace the
surety bond This statement is further bolstered by the fact
that Rita Gueco Tapnio apparently had the means to pay her
obligation fact that she has been granted several value of
almost P80,000.00 for the agricultural years from 1952 to
56. 1
Its motion for the reconsideration of the decision of the Court of Appeals
having been denied, petitioner filed the present petition.
The petitioner contends that the Court of Appeals erred:
(1) In finding that the rescission of the lease contract of the 1,000 piculs of
sugar quota allocation of respondent Rita Gueco Tapnio by Jacobo C.
Tuazon was due to the unjustified refusal of petitioner to approve said lease
contract, and its unreasonable insistence on the rental price of P3.00 instead
of P2.80 per picul; and
(2) In not holding that based on the statistics of sugar price and prices of
sugar quota in the possession of the petitioner, the latter's Board of Directors
correctly fixed the rental of price per picul of 1,000 piculs of sugar quota
leased by respondent Rita Gueco Tapnio to Jacobo C. Tuazon at P3.00 per
picul.
Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the
right, both under its own Charter and under the Corporation Law, to
safeguard and protect its rights and interests under the deed of assignment,
which include the right to approve or disapprove the said lease of sugar
quota and in the exercise of that authority, its
Board of Directors necessarily had authority to determine and fix the rental
price per picul of the sugar quota subject of the lease between private
604
respondents and Jacobo C. Tuazon. It argued further that both under its
Charter and the Corporation Law, petitioner, acting thru its Board of
Directors, has the perfect right to adopt a policy with respect to fixing of rental
prices of export sugar quota allocations, and in fixing the rentals at P3.00 per
picul, it did not act arbitrarily since the said Board was guided by statistics of
sugar price and prices of sugar quotas prevailing at the time. Since the fixing
of the rental of the sugar quota is a function lodged with petitioner's Board of
Directors and is a matter of policy, the respondent Court of Appeals could not
substitute its own judgment for that of said Board of Directors, which acted in
good faith, making as its basis therefore the prevailing market price as shown
by statistics which were then in their possession.
Finally, petitioner emphasized that under the appealed judgment, it shall
suffer a great injustice because as a creditor, it shall be deprived of a just
claim against its debtor (respondent Rita Gueco Tapnio) as it would be
required to return to respondent Philamgen the sum of P2,379.71, plus
interest, which amount had been previously paid to petitioner by said
insurance company in behalf of the principal debtor, herein respondent Rita
Gueco Tapnio, and without recourse against respondent Rita Gueco Tapnio.
We must advert to the rule that this Court's appellate jurisdiction in
proceedings of this nature is limited to reviewing only errors of law, accepting
as conclusive the factual fin dings of the Court of Appeals upon its own
assessment of the evidence. 2
The contract of lease of sugar quota allotment at P2.50 per picul between
Rita Gueco Tapnio and Jacobo C. Tuazon was executed on April 17, 1956.
This contract was submitted to the Branch Manager of the Philippine National
Bank at San Fernando, Pampanga. This arrangement was necessary
because Tapnio's indebtedness to petitioner was secured by a mortgage on
her standing crop including her sugar quota allocation for the agricultural
year corresponding to said standing crop. The latter required the parties to
raise the consideration to P2.80 per picul, the minimum lease rental
acceptable to the Bank, or a total of P2,800.00. Tuazon informed the Branch
Manager, thru a letter dated August 10, 1956, that he was agreeable to
raising the consideration to P2.80 per picul. He further informed the manager
that he was ready to pay the said sum of P2,800.00 as the funds were in his
folder which was kept in the said Bank. This referred to the approved loan of
Tuazon from the Bank which he intended to use in paying for the use of the
sugar quota. The Branch Manager submitted the contract of lease of sugar
quota allocation to the Head Office on September 7, 1956, with a
recommendation for approval, which recommendation was concurred in by
the Vice-President of the Bank, Mr. J. V. Buenaventura. This notwithstanding,
the Board of Directors of petitioner required that the consideration be raised
to P3.00 per picul.
Tuazon, after being informed of the action of the Board of Directors, asked
for a reconsideration thereof. On November 19, 1956, the Branch Manager
submitted the request for reconsideration and again recommended the
approval of the lease at P2.80 per picul, but the Board returned the
recommendation unacted, stating that the current price prevailing at that time
was P3.00 per picul.
On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was
no longer interested in continuing the lease of sugar quota allotment. The
crop year 1956-1957 ended and Mrs. Tapnio failed to utilize her sugar quota,
resulting in her loss in the sum of P2,800.00 which she should have received
had the lease in favor of Tuazon been implemented.
It has been clearly shown that when the Branch Manager of petitioner
required the parties to raise the consideration of the lease from P2.50 to
P2.80 per picul, or a total of P2,800-00, they readily agreed. Hence, in his
letter to the Branch Manager of the Bank on August 10, 1956, Tuazon
informed him that the minimum lease rental of P2.80 per picul was
acceptable to him and that he even offered to use the loan secured by him
from petitioner to pay in full the sum of P2,800.00 which was the total
consideration of the lease. This arrangement was not only satisfactory to the
Branch Manager but it was also approves by Vice-President J. V.
Buenaventura of the PNB. Under that arrangement, Rita Gueco Tapnio could
have realized the amount of P2,800.00, which was more than enough to pay
the balance of her indebtedness to the Bank which was secured by the bond
of Philamgen.
605
There is no question that Tapnio's failure to utilize her sugar quota for the
crop year 1956-1957 was due to the disapproval of the lease by the Board of
Directors of petitioner. The issue, therefore, is whether or not petitioner is
liable for the damage caused.
As observed by the trial court, time is of the essence in the approval of the
lease of sugar quota allotments, since the same must be utilized during the
milling season, because any allotment which is not filled during such milling
season may be reallocated by the Sugar Quota Administration to other
holders of allotments. 3 There was no proof that there was any other person
at that time willing to lease the sugar quota allotment of private respondents
for a price higher than P2.80 per picul. "The fact that there were isolated
transactions wherein the consideration for the lease was P3.00 a picul",
according to the trial court, "does not necessarily mean that there are always
ready takers of said price. " The unreasonableness of the position adopted
by the petitioner's Board of Directors is shown by the fact that the difference
between the amount of P2.80 per picul offered by Tuazon and the P3.00 per
picul demanded by the Board amounted only to a total sum of P200.00.
Considering that all the accounts of Rita Gueco Tapnio with the Bank were
secured by chattel mortgage on standing crops, assignment of leasehold
rights and interests on her properties, and surety bonds and that she had
apparently "the means to pay her obligation to the Bank, as shown by the
fact that she has been granted several sugar crop loans of the total value of
almost P80,000.00 for the agricultural years from 1952 to 1956", there was
no reasonable basis for the Board of Directors of petitioner to have rejected
the lease agreement because of a measly sum of P200.00.
While petitioner had the ultimate authority of approving or disapproving the
proposed lease since the quota was mortgaged to the Bank, the latter
certainly cannot escape its responsibility of observing, for the protection of
the interest of private respondents, that degree of care, precaution and
vigilance which the circumstances justly demand in approving or
disapproving the lease of said sugar quota. The law makes it imperative that
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, 4 This petitioner failed to do. Certainly, it knew that the agricultural
year was about to expire, that by its disapproval of the lease private
respondents would be unable to utilize the sugar quota in question. In failing
to observe the reasonable degree of care and vigilance which the
surrounding circumstances reasonably impose, petitioner is consequently
liable for the damages caused on private respondents. Under Article 21 of
the New Civil Code, "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." The afore-cited provisions on human
relations were intended to expand the concept of torts in this jurisdiction by
granting adequate legal remedy for the untold number of moral wrongs which
is impossible for human foresight to specifically provide in the statutes. 5
A corporation is civilly liable in the same manner as natural persons for torts,
because "generally speaking, the rules governing the liability of a principal or
master for a tort committed by an agent or servant are the same whether the
principal or master be a natural person or a corporation, and whether the
servant or agent be a natural or artificial person. All of the authorities agree
that a principal or master is liable for every tort which he expressly directs or
authorizes, and this is just as true of a corporation as of a natural person, A
corporation is liable, therefore, whenever a tortious act is committed by an
officer or agent under express direction or authority from the stockholders or
members acting as a body, or, generally, from the directors as the governing
body." 6
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals
is hereby AFFIRMED.
Fernando, Aquino, Concepcion, Jr., and Santos, JJ., concur.
606
 That on and during the four quarters of the year 1924, in the
municipality of Iloilo, Province of Iloilo, Philippine Islands, the said
accused, as corporation organized under the laws of the Philippine
Islands and engaged in the purchase and the sale of sugar, "bayon,"
coprax, and other native products and as such object to the payment
of internal-revenue taxes upon its sales, did then and there
voluntarily, illegally, and criminally declare in 1924 for the purpose of
taxation only the sum of P2,352,761.94, when in truth and in fact,
and the accused well knew that the total gross sales of said
corporation during that year amounted to P2543,303.44, thereby
failing to declare for the purpose of taxation the amount of
P190,541.50, and voluntarily and illegally not paying the Government
as internal-revenue percentage taxes the sum of P2,960.12,
corresponding to 1 per cent of said undeclared sales.

The question to be decided is whether the information sets forth facts

rendering the defendant, as manager of the corporation liable criminally
under section 2723 of Act No. 2711 for violation of section 1458 of the same
act for the benefit of said corporation. Section 1458 and 2723 read as
G.R. No. L-35262 March 15, 1930 follows:

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellant, SEC. 1458. Payment of percentage taxes Quarterly reports of
vs. earnings. The percentage taxes on business shall be payable at
TAN BOON KONG, defendant-appellee. the end of each calendar quarter in the amount lawfully due on the
business transacted during each quarter; and it shall be on the duty
of every person conducting a business subject to such tax, within the
Attorney-General Jaranilla for appellant.
same period as is allowed for the payment of the quarterly
Alejandro de Aboitiz Pinaga for appellee.
installments of the fixed taxes without penalty, to make a true and
complete return of the amount of the receipts or earnings of his
OSTRAND, J.: business during the preceeding quarter and pay the tax due thereon.
. . . (Act No. 2711.)
This is an appeal from an order of the Judge of the Twenty-third Judicial
District sustaining to demurrer to an information charging the defendant Tan SEC. 2723. Failure to make true return of receipts and sales. Any
Boon Kong with the violation of section 1458 of Act No. 2711 as amended. person who, being required by law to make a return of the amount of
The information reads as follows: his receipts, sales, or business, shall fail or neglect to make such
return within the time required, shall be punished by a fine not

607
 exceeding two thousand pesos or by imprisonment for a term not
exceeding one year, or both.

And any such person who shall make a false or fraudulent return
shall be punished by a fine not exceeding ten thousand pesos or by
imprisonment for a term not exceeding two years, or both. (Act No.
2711.)

Apparently, the court below based the appealed ruling on the ground that the
offense charged must be regarded as committed by the corporation and not
by its officials or agents. This view is in direct conflict with the great weight of
authority. a corporation can act only through its officers and agent s, and
where the business itself involves a violation of the law, the correct rule is
that all who participate in it are liable (Grall and Ostrand's Case, 103 Va.,
855, and authorities there cited.)

In case of State vs. Burnam (17 Wash., 199), the court went so far as to hold
that the manager of a diary corporation was criminally liable for the violation
of a statute by the corporation through he was not present when the offense
was committed.

In the present case the information or complaint alleges that he defendant

was the manager of a corporation which was engaged in business as a
merchant, and as such manager, he made a false return, for purposes of
taxation, of the total amount of sale made by said false return constitutes a
violation of law, the defendant, as the author of the illegal act, must
necessarily answer for its consequences, provided that the allegation are
proven.

The ruling of the court below sustaining the demurrer to the complaint is
therefore reversed, and the case will be returned to said court for further
proceedings not inconsistent with our view as hereinafter stated. Without
costs. So ordered.

Johnson, Malcolm, Villamor, Johns, Romualdez and Villa-Real, JJ., concur.

608
 DE CASTRO, J.:

Petition for review of the decision of the Court of Appeals affirming the
decision of the Court of First Instance of Manila convicting the appellant of
estafa, under an information which reads:

That in, about or during the period comprised' between July

24, 1963 and December 31, 1963, both dates inclusive, in
the City of Manila, Philippines, the said accused did then and
there willfully, unlawfully and feloniously defraud the
Continental Bank, a banking institution duly organized and
doing business in the City of Manila, in the following manner,
to wit: the said accused, in his capacity as president and
general manager of the Metal Manufacturing of the
Philippines, Inc. (MEMAP) and on behalf of said company,
obtained delivery of 150 M/T Cold Rolled Steel Sheets
valued at P 71,023.60 under a trust receipt agreement under
L/C No. 63/109, which cold rolled steel sheets were
consigned to the Continental Bank, under the express
obligation on the part of said accused of holding the said
steel sheets in trust and selling them and turning over the
proceeds of the sale to the Continental Bank; but the said
accused, once in possession of the said goods, far from
complying with his aforesaid obligation and despite demands
made upon him to do so, with intent to defraud, failed and
refused to return the said cold rolled sheets or account for
the proceeds thereof, if sold, which the said accused willfully,
unlawfully and feloniously misappropriated, misapplied and
G.R. No. L-30896 April 28, 1983 converted to his own personal use and benefit, to the
damage and prejudice of the said Continental Bank in the
JOSE O. SIA, petitioner, total amount of P146,818.68, that is the balance including
vs. the interest after deducting the sum of P28,736.47 deposited
THE PEOPLE OF THE PHILIPPINES, respondent. by the said accused with the bank as marginal deposit and
forfeited by the said from the value of the said goods, in the
said sum of P71,023.60. (Original Records, p. 1).

609
In reviewing the evidence, the Court of Appeals came up with the following
findings of facts which the Solicitor General alleges should be conclusive
upon this Court:
There is no debate on certain antecedents: Accused Jose 0.
Sia sometime prior to 24 May, 1963, was General Manager
of the Metal Manufacturing Company of the Philippines, Inc.
engaged in the manufacture of steel office equipment; on 31
May, 1963, because his company was in need of raw
materials to be imported from abroad, he applied for a letter
of credit to import steel sheets from Mitsui Bussan Kaisha,
Ltd. of Tokyo, Japan, the application being directed to the
Continental Bank, herein complainant, Exhibit B and his
application having been approved, the letter of credit was
opened on 5 June, 1963 in the amount of $18,300, Exhibit D;
and the goods arrived sometime in July, 1963 according to
accused himself, tsn. II:7; now from here on there is some
debate on the evidence; according to Complainant Bank,
there was permitted delivery of the steel sheets only upon
execution of a trust receipt, Exhibit A; while according to the
accused, the goods were delivered to him sometime before
he executed that trust receipt in fact they had already been
converted into steel office equipment by the time he signed
said trust receipt, tsn. II:8; but there is no question - and this
is not debated - that the bill of exchange issued for the
purpose of collecting the unpaid account thereon having
fallen due (see Exh. B) neither accused nor his company
having made payment thereon notwithstanding demands,
Exh. C and C-1, dated 17 and 27 December, 1963, and the
accounts having reached the sum in pesos of P46,818.68
after deducting his deposit valued at P28,736.47; that was
the reason why upon complaint by Continental Bank, the
Fiscal filed the information after preliminary investigation as
has been said on 22 October, 1964. (Rollo [CA], pp. 103-
104).
The first issue raised, which in effect combines the first three errors
assigned, is whether petitioner Jose O. Sia, having only acted for and in
behalf of the Metal Manufacturing Company of the Philippines (Metal
Company, for short) as President thereof in dealing with the complainant, the
Continental Bank, (Bank for short) he may be liable for the crime charged.
In discussing this question, petitioner proceeds, in the meantime, on the
assumption that the acts imputed to him would constitute the crime of estafa,
which he also disputes, but seeks to avoid liability on his theory that the Bank
knew all along that petitioner was dealing with him only as an officer of the
Metal Company which was the true and actual applicant for the letter of credit
(Exhibit B) and which, accordingly, assumed sole obligation under the trust
receipt (Exhibit A). In disputing the theory of petitioner, the Solicitor General
relies on the general principle that when a corporation commits an act which
would constitute a punishable offense under the law, it is the responsible
officers thereof, acting for the corporation, who would be punished for the
crime, The Court of Appeals has subscribed to this view when it quoted
approvingly from the decision of the trial court the following:
A corporation is an artificial person, an abstract being. If the
defense theory is followed unscrupulously legions would
form corporations to commit swindle right and left where
nobody could be convicted, for it would be futile and
ridiculous to convict an abstract being that can not be
pinched and confined in jail like a natural, living person,
hence the result of the defense theory would be hopeless
chose in business and finance. It is completely untenable.
(Rollo [CA], p. 108.)
The above-quoted observation of the trial court would seem to be merely
restating a general principle that for crimes committed by a corporation, the
responsible officers thereof would personally bear the criminal liability.
(People vs. Tan Boon Kong, 54 Phil. 607. See also Tolentino, Commercial
Laws of the Philippines, p. 625, citing cases.)
610
The case cited by the Court of Appeals in support of its stand-Tan Boon Kong
case, supra-may however not be squarely applicable to the instant case in
that the corporation was directly required by law to do an act in a given
manner, and the same law makes the person who fails to perform the act in
the prescribed manner expressly liable criminally. The performance of the act
is an obligation directly imposed by the law on the corporation. Since it is a
responsible officer or officers of the corporation who actually perform the act
for the corporation, they must of necessity be the ones to assume the
criminal liability; otherwise this liability as created by the law would be
illusory, and the deterrent effect of the law, negated.
In the present case, a distinction is to be found with the Tan Boon Kong case
in that the act alleged to be a crime is not in the performance of an act
directly ordained by law to be performed by the corporation. The act is
imposed by agreement of parties, as a practice observed in the usual pursuit
of a business or a commercial transaction. The offense may arise, if at all,
from the peculiar terms and condition agreed upon by the parties to the
transaction, not by direct provision of the law. The intention of the parties,
therefore, is a factor determinant of whether a crime was committed or
whether a civil obligation alone intended by the parties. With this explanation,
the distinction adverted to between the Tan Boon Kong case and the case at
bar should come out clear and meaningful. In the absence of an express
provision of law making the petitioner liable for the criminal offense
committed by the corporation of which he is a president as in fact there is no
such provisions in the Revised Penal Code under which petitioner is being
prosecuted, the existence of a criminal liability on his part may not be said to
be beyond any doubt. In all criminal prosecutions, the existence of criminal
liability for which the accused is made answerable must be clear and certain.
The maxim that all doubts must be resolved in favor of the accused is always
of compelling force in the prosecution of offenses. This Court has thus far not
ruled on the criminal liability of an officer of a corporation signing in behalf of
said corporation a trust receipt of the same nature as that involved herein. In
the case of Samo vs. People, L-17603-04, May 31, 1962, the accused was
not clearly shown to be acting other than in his own behalf, not in behalf of a
corporation.
The next question is whether the violation of a trust receipt constitutes estafa
under Art. 315 (1-[2]) of the Revised Penal Code, as also raised by the
petitioner. We now entertain grave doubts, in the light of the promulgation of
P.D. 115 providing for the regulation of trust receipts transaction, which is a
very comprehensive piece of legislation, and includes an express provision
that if the violation or offense is committed by a corporation, partnership,
association or other juridical entities the penalty provided for in this Decree
shall be imposed upon the directors, officers, employees or other officials or
persons therein responsible for the offense, without prejudice to civil liabilities
arising from the criminal offense. The question that suggests itself is,
therefore, whether the provisions of the Revised Penal Code, Article 315, par.
1 (b) are not adequate to justify the punishment of the act made punishable
by P.D. 115, that the necessity was felt for the promulgation of the decree. To
answer this question, it is imperative to make an indepth analysis of the
conditions usually embodied in a trust receipt to best their legal sufficiency to
constitute the basis for holding the violation of said conditions as estafa
under Article 315 of the Revised Penal Code which P.D. 115 now seeks to
punish expressly.
As executed, the trust receipt in question reads:
I/WE HEREBY AGREE TO HOLD SAID GOODS IN TRUST
FOR THE SAID BANK as its property with liberty to sell the
same for its account but without authority to make any other
disposition whatsoever of the said goods or any part thereof
(or the proceeds thereof) either way of conditional sale,
pledge or otherwise;
In case of sale I/we further agree to hand the proceeds as
soon as received to the BANK to apply against the relative
acceptance (as described above) and for the payment of any
other indebtedness of mine/ours to CONTINENTAL BANK.
(Original Records, p. 108)
One view is to consider the transaction as merely that of a security of a loan,
and that the trust element is but and inherent feature of the security aspect of
611
the arrangement where the goods are placed in the possession of the
"entrustee," to use the term used in P.D. 115, violation of the element of trust
not being intended to be in the same concept as how it is understood in the
criminal sense. The other view is that the bank as the owner and "entrustor"
delivers the goods to the "entrustee, " with the authority to sell the goods, but
with the obligation to give the proceeds to the "entrustor" or return the goods
themselves if not sold, a trust being thus created in the full sense as
contemplated by Art. 315, par. 1 (b).
We consider the view that the trust receipt arrangement gives rise only to
civil liability as the more feasible, before the promulgation of P.D. 115. The
transaction being contractual, the intent of the parties should govern. Since
the trust receipt has, by its nature, to be executed upon the arrival of the
goods imported, and acquires legal standing as such receipt only upon
acceptance by the "entrustee," the trust receipt transaction itself, the
antecedent acts consisting of the application of the L/C, the approval of the
L/C and the making of the marginal deposit and the effective importation of
the goods, all through the efforts of the importer who has to find his supplier,
arrange for the payment and shipment of the imported goods-all these
circumstances would negate any intent of subjecting the importer to criminal
prosecution, which could possibly give rise to a case of imprisonment for
non-payment of a debt. The parties, therefore, are deemed to have
consciously entered into a purely commercial transaction that could give rise
only to civil liability, never to subject the "entrustee" to criminal prosecution.
Unlike, for instance, when several pieces of jewelry are received by a person
from the owner for sale on commission, and the former misappropriates for
his personal use and benefit, either the jewelries or the proceeds of the sale,
instead of returning them to the owner as is his obligation, the bank is not in
the same concept as the jewelry owner with full power of disposition of the
goods, which the bank does not have, for the bank has previously extended
a loan which the L/C represents to the importer, and by that loan, the
importer should be the real owner of the goods. If under the trust receipt the
bank is made to appear as the owner, it was but an artificial expedient, more
of a legal fiction than fact, for if it were really so, it could dispose of the goods
in any manner it wants, which it cannot do, just to give consistency with the
purpose of the trust receipt of giving a stronger security for the loan obtained
by the importer. To consider the bank as the true owner from the inception of
the transaction would be to disregard the loan feature thereof, a feature
totally absent in the case of the transaction between the jewel-owner and his
agent.
Consequently, if only from the fact that the trust receipt transaction is
susceptible to two reasonable interpretation, one as giving rise only to civil
liability for the violation of the condition thereof, and the other, as generating
also criminal liability, the former should be adopted as more favorable to the
supposed offender. (Duran vs. CA, L-39758, May 7, 1976, 71 SCRA 68;
People vs. Parayno, L-24804, July 5, 1968, 24 SCRA 3; People vs. Abendan,
L-1481, January 28,1949,82 Phil. 711; People vs. Bautista, L-1502, May 24,
1948, 81 Phil. 78; People vs. Abana, L-39, February 1, 1946, 76 Phil. 1.)
There is, moreover, one circumstance appearing on record, the significance
of which should be properly evaluated. As stated in petitioner's brief (page 2),
not denied by the People, "before the Continental Bank approved the
application for a letter of credit (Exhibit 'D'), subsequently covered by the
trust receipt, the Continental Bank examined the financial capabilities of the
applicant, Metal Manufacturing Company of the Philippines because that was
the bank's standard procedure (Testimony of Mr. Ernesto Garlit, Asst.
Manager of the Foreign Department, Continental Bank, t.s.n., August 30,
1965). The Continental Bank did not examine the financial capabilities of
herein petitioner, Jose O. Sia, in connection with the same letter of credit.
(Ibid). " From this fact, it would appear as positively established that the
intention of the parties in entering into the "trust receipt" agreement is merely
to afford a stronger security for the loan evidenced by the letter of credit, may
be not as an ordinary pledge as observed in P.N.B. vs. Viuda e Hijos de
Angel Jose, et al., 63 Phil. 814, citing In re Dunlap C (206 Fed. 726) but
neither as a transaction falling under Article 315-1 (b) of the Revised Penal
Code giving rise to criminal liability, as previously explained and
demonstrated.
It is worthy of note that the civil liability imposed by the trust receipt is
exclusively on the Metal Company. Speaking of such liability alone, as one
arising from the contract, as distinguished from the civil liability arising out of
a crime, the petitioner was never intended to be equally liable as the
corporation. Without being made so liable personally as the corporation is,
612
there would then be no basis for holding him criminally liable, for any
violation of the trust receipt. This is made clearly so upon consideration of the
fact that in the violation of the trust agreement and in the absence of positive
evidence to the contrary, only the corporation benefited, not the petitioner
personally, yet, the allegation of the information is to effect that the
misappropriation or conversion was for the personal use and benefit of the
petitioner, with respect to which there is variance between the allegation and
the evidence.

It is also worthy of note that while the trust receipt speaks of authority to sell,
the fact is undisputed that the imported goods were to be manufactured into
finished products first before they could be sold, as the Bank had full
knowledge of. This fact is, however, not embodied in the trust agreement,
thus impressing on the trust receipt vagueness and ambiguity which should
not be the basis for criminal prosecution, in the event of a violation of the
terms of the trust receipt. Again, P.D. 115 has express provision relative to [G.R. No. 128690. January 21, 1999]
the "manufacture or process of the good with the purpose of ultimate sale,"
as a distinct condition from that of "to sell the goods or procure their sale" ABS-CBN BROADCASTING CORPORATION, petitioners,
(Section 4, (1). Note that what is embodied in the receipt in question is vs. HONORABLE COURT OF APPEALS, REPUBLIC
the sale of imported goods, the manufacture thereof not having been BROADCASTING CORP., VIVA PRODUCTIONS, INC., and
mentioned. The requirement in criminal prosecution, that there must be strict VICENTE DEL ROSARIO, respondents.
harmony, not variance, between the allegation and the evidence, may
therefore, not be said to have been satisfied in the instance case. DECISION

FOR ALL THE FOREGOING, We reverse the decision of the Court of
Appeals and hereby acquit the petitioner, with costs de oficio.
SO ORDERED.
Concepcion, Jr., Guerrero, Vasquez, Relova and Gutierrez, JJ., concur.
Fernando, CJ., Escolin, Plana, Abad Santos, JJ., concur in the result.
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:

613
In 1990, ABS-CBN and VIVA executed a Film Exhibition Agreement (Exh. A) big action stars. As a film producer, I am sure you understand what I am
whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva trying to say as Viva produces only big action pictures.
films. Sometime in December 1991, in accordance with paragraph 2.4 [sic] of
said agreement stating that- 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
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) amount that was paid for these movies because as you very well know that
Viva films for TV telecast under such terms as may be agreed upon by the non-primetime advertising rates are very low. These are the unaired titles in
parties hereto, provided, however, that such right shall be exercised by ABS- the first contract.
CBN from the actual offer in writing.
1. Kontra Persa [sic]
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-
president Charo Santos-Concio, a list of three (3) film packages (36 title) 2. Raider Platoon
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 3. Underground guerillas
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,
4. Tiger Command
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.
5. Boy de Sabog
For further enlightenment, this rejection letter dated January 06, 1992 (Exh 3
Viva) is hereby quoted: 6. lady Commando

6 January 1992 7. Batang Matadero

Dear Vic, 8. Rebelyon

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
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.

614
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 re-runs 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 of P36 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-
615
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 CA-G.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 CA-G.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-92-12309. Thereafter, on 28 April 1993, it rendered a
decision[20] in favor of RBS and VIVA and against ABS-CBN disposing as
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;
616
 (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
617
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 therefor. RBS spent for the premium on the counterbond of its own volition in
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
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
618
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:
619
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
620
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 in Stuart 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
621
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
worth P19,950,000.00. 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.
622
 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.
71-75). 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 quasi-
delicts, 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]
623
 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 quasi-delict. 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
624
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 quasi-delicts, 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 CA-G.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.
625
 SO ORDERED. FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO
MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN
Melo, Kapunan, Martinez, and Pardo, JJ., concur. 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 Center-
Bicol 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
[G.R. No. 141994. January 17, 2005]
complaint for damages[7] against FBNI, Rima and Alegre on 27 February
1990. Quoted are portions of the allegedly libelous broadcasts:

626
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.
627
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
628
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.
[15]
Hence, FBNI filed this petition.
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
629
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.
630
 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
631
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
632
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.
633
 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.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-
Santiago, and Azcuna, JJ., concur.
634
 entered into a Purchase Agreement under which the plaintiff
agreed to purchase from the said defendant preferred
shares of stock worth ONE MILLION PESOS
[P1,000,000.00] subject to the conditions set forth in such
agreement;...

2. That pursuant to the Purchase Agreement of September

4, 1961, the plaintiff, on January 31, 1962, paid the
defendant Lirag Textile Mills, Inc. the sum of FIVE
HUNDRED THOUSAND PESOS [P500,000.00] for which
the said defendant issued to plaintiff 5,000 preferred shares
with a par value of one hundred pesos [P10000] per share
as evidenced by stock Certificate No. 128, ...

3. That further in pursuance of the Purchase Agreement of

G.R. No. L-33205 August 31, 1987 September 4, 1961, the plaintiff paid to the Lirag Textile Mills,
Inc. the sum of FIVE UNDRED THOUSAND PESOS
LIRAG TEXTILE MILLS, INC., and BASILIO L. LIRAG, petitioners, [P500,000.00] for which the said defendant issued to plaintiff
vs. 5,000 preferred shares with a par value of one hundred
SOCIAL SECURITY SYSTEM, and HON. PACIFICO DE pesos [P100.00] per share as evidenced by Stock Certificate
CASTRO, respondents. No. 139, ...

4. That in accordance with paragraph 3 of the Purchase

FERNAN, J.:
This is an appeal by certiorari involving purely questions of law from the
decision rendered by respondent judge in Civil Case No. Q-12275 entitled
"Social Security System versus Lirag Textile Mills, Inc. and Basilio L. Lirag."
Agreement of September 4, 1961 which provides for the
repurchase by the Lirag Textile Mills, Inc. of the shares of
stock at regular intervals of one year beginning with the 4th
year following the date of issue, Stock Certificates Nos. 128
and 139 were to be repurchased by the Lirag Textile Mills,
Inc. thus:

The antecedent facts, as stipulated by the parties during the trial, are as CERT. No. AMOUNT DATE OF REDEMPTION
follows:
128 P100,000.00 February 14, 1965
1. That on September 4, 1961, the plaintiff [herein
respondent Social Security System] and the defendants 100,000.00 February 14, 1966
[herein petitioners] Lirag Textile Mills, Inc. and Basilio Lirag

635
 100,000.00 February 14, 1967 6. That defendant corporation failed to redeem certificates of
Stock Nos. 128 and 139 by payment of the amounts
100,000.00 February 14, 1968 mentioned in paragraph 4 above;

100,000.00 February 14, 1969 7. That the Lirag Textile Mills, lnc. has not paid dividends in
the amounts and within the period set forth in paragraph 10
139 P100,000.00 July 3, 1966 of the complaint;*

100,000.00 July 3,1967 8. That letters of demands have been sent by the plaintiff to
the defendant to redeem the foregoing stock certificates and
pay the dividends set forth in paragraph 10 of the complaint,
100,000.00 July 3,1968
but the Lirag Textile Mills, Inc. has not made such
redemption nor made such dividend payments;
100,000.00 July 3, 1969
9. That defendant Basilio L. Lirag likewise received letters of
100,000.00 July 3,1970 demand from the plaintiff requiring him to make good his
obligation as surety;
5. That to guarantee the redemption of the stocks purchased
by the plaintiff, the payment of dividends, as well as the other 10. That notwithstanding such letters of demand to the
obligations of the Lirag Textile Mills, Inc., defendants Basilio defendant Basilio L. Lirag, Stock Certificates Nos. 128 and
L. Lirag signed the Purchase Agreement of September 4, 139 issued to plaintiff are still unredeemed and no dividends
1961 not only as president of the defendant corporation, but have been paid on said stock certificates;
also as surety so that should the Lirag Textile Mills, Inc. fail
to perform any of its obligations in the said Purchase
11. That paragraph 5 of the Purchase Agreement provides
Agreement, the surety shall immediately pay to the vendee
that should the Lirag Textile Mills, Inc. fail to effect any of the
the amounts then outstanding pursuant to Condition No. 4,
redemptions stipulated therein, the entire obligation shall
to wit:
immediately become due and demandable and the Lirag
Textile Mills, Inc., shall, furthermore, be liable to the plaintiff
To guarantee the redemption of the stocks in an amount equivalent to twelve per cent [12%] of the
herein purchased, the payment of the amount then outstanding as liquidated damages;
dividends, as well as other obligations of the
VENDOR herein, the SURETY hereby binds
12. That the failure of the Lirag Textile Mills, Inc. to redeem
himself jointly and severally liable with the
the foregoing certificates of stock and pay dividends thereon
VENDOR so that should the VENDOR fail to
were due to financial reverses, to wit:
perform any of its obligations hereunder, the
SURETY shall immediately pay to the
VENDEE the amounts then outstanding. '

636
 [a] Unrestrained smuggling into the country
of textiles from the United States and other
countries;
[b] Unrestricted entry of supposed remmants
which competed with textiles of domestic
produce to the disadvantage and economic
prejudice of the latter;
[c] Scarcity of money and the unavailability
of financing facilities;
[d] Payment of interest on matured loans
extended to defendant corporation;
[e] Construction of the Montalban plant of
the defendant corporation financed largely
through reparation benefits;
[f] Labor problems occasioned by the fact
that the defendant company is financial (sic)
unable to improve, in a substantial way, the
economic plight of its workers as a result of
which two costly strikes had occurred, one in
1965 and another in 1968; and
[g] The occurrence of a fire which destroyed
more than 1 million worth of raw cotton,
paralyzed operations partially, increased
overhead costs and wiped out any expected
profits that year;
13. That it has been the policy of the plaintiff to be
represented in the board of directors of the corporation or
entity which has obtained financial assistance from the
System be it in terms of loans, mortgages or equity
investments. Thus, pursuant to paragraph 6 of the Purchase
Agreement of September 4, 1961 which provides as follows:
The VENDEE shall be allowed to have a
representative in the Board of Directors of
the VENDOR with the right to participate in
the discussions and to vote therein;
14. That Messrs. Rene Espina, Bernardino Abes and Heber
Catalan were each issued one common share of stock as a
qualifying share to their election to the Board of Directors of
the Lirag Textiles Mills, Inc.;
15. That Messrs. Rene Espina, Bernardino Abes and Heber
Catalan, during their respective tenure as member of the
Board of Directors of the Lirag Textile Mills, Inc. attended the
meetings of the said Board, received per diems for their
attendance therein in the same manner and in the same
amount as any other member of the Board of Directors,
participated in the deliberations therein and freely exercised
their right to vote in such meetings. However, the per diems
received by the SSS representative do not go to the coffers
of the System but personally to the representative in the said
board of directors. 1
For failure of Lirag Textile Mills, Inc. and Basilio L. Lirag to comply with the
terms of the Purchase Agreement, the SSS filed an action for specific
performance and damages before the then Court of First Instance of Rizal,
Quezon City, praying that therein defendants Lirag Textile Mills, Inc. and
Basilio L. Lirag be adjudged liable for [1] the entire obligation of P1M which
became due and demandable upon defendants' failure to repurchase the
stocks as scheduled; [21 dividends in the amount of P220,000.00; [31
liquidated damages in an amount equivalent to twelve percent (12%) of the
amount then outstanding; [4] exemplary damages in the amount of
P100,000.00 and [5] attorney's fees of P20,000.00.
637
Lirag Textile Mills, Inc. and Basilio L. Lirag moved for the dismissal of the
complaint, but were denied the relief sought. Thus, they filed their answer
with counterclaim, denying the existence of any obligation on their part to
redeem the preferred stocks, on the ground that the SSS became and still is
a preferred stockholder of the corporation so that redemption of the shares
purchased depended upon the financial ability of said corporation. Insofar as
defendant Basilio Lirag is concerned, it was alleged that his liability arises
only if the corporation is liable and does not perform its obligations under the
Purchase Agreement. They further contended that no liability on their part
has arisen because of the financial condition of the corporation upon which
such liability was made to depend, particularly the non-realization of any
profit or earned surplus. Thus, the other claims for dividends, liquidated
damages and exemplary damages are allegedly without basis.
After entering into the Stipulation of Facts above-quoted, the parties filed
their respective memoranda and submitted the case for decision.
The lower court, ruling that the purchase agreement was a debt instrument,
decided in favor of SSS and sentenced Lirag Textile Mills, Inc. and Basilio L.
Lirag to pay SSS jointly and severally P1,000,000.00 plus legal interest until
the said amount is fully paid; P220,000.00 representing the 8% per annum
dividends on the preferred shares plus legal interest up to the time of actual
payment; P146,400.00 as liquidated damages; and P10,000.00 as attorney's
fees. The counterclaim of Lirag Textile Mills, Inc. and Basilio L. Lirag was
dismissed.
Hence, this petition.
Petitioners assign the following errors:
1. The trial court erred in deciding that the Purchase
Agreement is a debt instrument;
2. Respondent judge erred in holding petitioner corporation
liable for the payment of the 8% preferred and cumulative
dividends on the preferred shares since the purchase
agreement provides that said dividends shall be paid from
the net profits and earned surplus of petitioner corporation
and respondent SSS has admitted that due to losses
sustained since -1964, no dividends had been and can be
declared by petitioner corporation;
3. Respondent judge erred in sentencing petitioners to pay
P146,400.00 in liquidated damages;
4. Respondent judge erred in sentencing petitioners to pay
P10,000.00 by way of attorney's fees;
5. Respondent judge erred in sentencing petitioners to pay
interest from the time of firing the complaint u to the time of
full payment both on the P1,000,000.00 invested by
respondent SSS in petitioner's corporation and on the
P220,000.00 which the SSS claims as dividends due on its
investments;
6. Respondent judge erred in holding that petitioner Lirag is
liable to redeem the P1,000,000.00 worth of preferred
shares purchased by respondent SSS from petitioner
corporation and the 8% cumulative dividend, it appearing
that Lirag was merely a surety and not an insurer of the
obligation;
7. Respondent judge erred in dismissing the counterclaim of
petitioners.
The fundamental issue in this case is whether or not the Purchase
Agreement entered into by petitioners and respondent SSS is a debt
instrument.
Petitioners claim that respondent SSS merely became and still is a preferred
stockholder of the petitioner corporation, the redemption of the shares
purchased by said respondent being dependent upon the financial ability of
638
petitioner corporation. Petitioner corporation, thus, has no obligation to
redeem the preferred stocks.
On the other hand, respondent SSS claims that the Purchase Agreement is a
debt instrument, imposing upon the petitioners the obligation to pay the
amount owed, and creating as between them the relation of creditor and
debtor, not that of a stockholder and a corporation.
We uphold the lower court's finding that the Purchase Agreement is, indeed,
a debt instrument. Its terms and conditions unmistakably show that the
parties intended the repurchase of the preferred shares on the respective
scheduled dates to be an absolute obligation which does not depend upon
the financial ability of petitioner corporation. This absolute obligation on the
part of petitioner corporation is made manifest by the fact that a surety was
required to see to it that the obligation is fulfilled in the event of the principal
debtor's inability to do so. The unconditional undertaking of petitioner
corporation to redeem the preferred shares at the specified dates constitutes
a debt which is defined "as an obligation to pay money at some fixed future
time, or at a time which becomes definite and fixed by acts of either party
and which they expressly or impliedly, agree to perform in the contract. 2
A stockholder sinks or swims with the corporation and there is no obligation
to return the value of his shares by means of repurchase if the corporation
incurs losses and financial reverses, much less guarantee such repurchase
through a surety.
As private respondent rightly contends, if the parties intended it [SSS] to be
merely a stockholder of petitioner corporation, it would have been sufficient
that Preferred Certificates Nos. 128 and 139 were issued in its name as the
preferred certificates contained all the rights of a stockholder as well as
certain obligations on the part of petitioner corporation. However, the parties
did in fact execute the Purchase Agreement, at the same time that the
petitioner corporation issued its preferred stock to the respondent SSS. The
Purchase Agreement serves to define the rights and obligations of the parties
and to establish firmly the liability of petitioners in case of breach of contract.
The Certificates of Preferred Stock serve as additional evidence of the
agreement between the parties, though the precise terms and conditions
thereof must be read together with, and regarded as qualified by the terms
and conditions of the Purchase Agreement.
The rights given by the Purchase Agreement to respondent SSS are rights
not enjoyed by ordinary stockholders. This fact could only lead to the
conclusion made by the trial court that:
The aforementioned rights specially stipulated for the benefit
of the plaintiff [respondent SSS] suggest eloquently an
intention on the part of the plaintiff [respondent SSS] to
facilitate a loan to the defendant corporation upon the latter's
request. In order to afford protection to the plaintiff which
otherwise is provided by means of collaterals, as the plaintiff
exacts in its grants of loans in its ordinary transactions of this
kind, as it is looked upon more as a lending institution rather
than as an investing agency, the purchase agreement
supplied these protective rights which would otherwise be
furnished by collaterals to the loan. Thus, the membership in
the board is to have a watchdog in the operation of the
business of the corporation, so as to insure against
mismanagement which may result in losses not entirely
unavoidable since payment for purposes of redemption as
well as the dividends is expressly stipulated to come from
profits and/or surplus. Such a right is never exacted by an
ordinary stockholder merely investing in the corporation. 3
Moreover, the Purchase Agreement provided that failure on the part of
petitioner to repurchase the preferred shares on the scheduled due dates
renders the entire obligation due and demandable, with petitioner in such
eventuality liable to pay 12% of the then outstanding obligation as liquidated
damages. These features of the Purchase Agreement, taken collectively,
clearly show the intent of the parties to be bound therein as debtor and
creditor, and not as corporation and stockholder.
639
Petitioners' contention that it is beyond the power and competence of
petitioner corporation to redeem the preferred shares or pay the accrued
dividends due to financial reverses can not serve as legal justification for
their failure to perform under the Purchase Agreement. The Purchase
Agreement constitutes the law between the parties and obligations arising ex
contractu must be fulfilled in accordance with the stipulations. 4 Besides, it
was precisely this eventuality that was sought to be avoided when
respondent SSS required a surety for the obligation.
Thus, it follows that petitioner Basilio L. Lirag cannot deny liability for
petitioner corporation's default. As surety, Basilio L. Lirag is bound
immediately to pay respondent SSS the amount then outstanding.
The obligation of a surety differs from that of a guarantor in
that the surety insures the debt, whereas the guarantor
merely insures solvency of the debtor; and the surety
undertakes to pay if the principal does not pay, whereas a
guarantor merely binds itself to pay if the principal is unable
to pay. 5
On the liability of petitioners to pay 8% cumulative dividend, We agree with
the observation of the lower court that the dividends stipulated by the parties
served evidently as interests. 6 The amount thereof was fixed at 8% per
annum and was not made to depend upon or to fluctuate with the amount of
profits or surplus realized, a clear indication that the parties intended to give
a sure and fixed earnings on the principal loan. The fact that the dividends
were supposed to be paid out of net profits and earned surplus, of which
there were none, does not excuse petitioners from the payment thereof,
again for the reason that the undertaking of petitioner Basilio L. Lirag as
surety, included the payment of dividends and other obligations then
outstanding.
The award of the sum of P146,400.00 in liquidated damages representing
12% of the amount then outstanding is correct, considering that petitioners in
the stipulation of facts admitted having failed to fulfill their obligations under
the Purchase Agreement. The grant of liquidated damages in the amount
stated is expressly provided for in the Purchase Agreement in case of
contractual breach.
The pronouncement of the lower court for the payment of interests on both
the unredeemed shares and unpaid dividends is also in order. Per stipulation
of facts, petitioners did not deny the fact of non-payment of dividends nor
their failure to purchase the preferred shares. Since these involve sums of
money which are overdue, they are bound to earn legal interest from the time
of demand, in this case, judicial, i.e., the time of filing the action.
Petitioner Basilio L. Lirag is precluded from denying his liability under the-
Purchase Agreement. After his firm representation to "pay immediately to the
VENDEE the amounts then outstanding" evidencing his commitment as
SURETY, he is estopped from denying the same. His signature in the
agreement carries with it the official imprimatur as petitioner corporation's
president, in his personal capacity as majority stockholder, as surety and as
solidary obligor. The essence of his obligation as surety is to pay immediately
without qualification whatsoever if petitioner corporation does not pay. To
have another interpretation of petitioner Lirag's liability as surety would
violate the integrity of the Purchase Agreement as well as the clear and
unmistakable intent of the parties to the same.
WHEREFORE, the decision in Civil Case No. Q-12275 entitled "Social
Security System vs. Lirag Textile Mills, Inc. and Basilio L. Lirag" is hereby
affirmed in toto. Costs against petitioners.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Cortes, JJ., concur.
640
G.R. No. L-39427 February 24, 1934

TIRSO GARCIA, in his capacity as receiver of the Mercantile Bank of

China, plaintiff-appellee,
vs.
LIM CHU SING, defendant-appellant.

Marcelino Lontok for appellant.

Nicolas Santiago for appellee.

VILLA-REAL, J.:

This is an appeal taken by the defendant Lim Chu Sing from the judgment
rendered by the Court of First Instance of Manila, the dispositive part of
which reads as follows:

Wherefore, judgment is rendered sentencing the defendant to pay

the sum of P9,105.17 with interest thereon at the rate of six per cent

641
 per annum from September 1, 1932, until fully paid, plus the sum of
P910.51, as attorney's fees, with the costs of this suit.
In conformity with the stipulation, this judgment shall be subject to
execution after ninety (90) days. So ordered.
In support of his appeal, the appellant assigns the following alleged errors as
committed by the court a quo in its decision, to wit:
1. In denying the motion dated December 27, 1932, praying for the
inclusion of Lim Cuan Sy, being the principal debtor, as party to this
suit.
2. In holding as improper the compensation of the defendant's debt
of P9,106.17, claimed in the complaint, with his credit amounting to
P10,000 with the Mercantile Bank of China.
3. In not ordering that after the compensation the plaintiff-appellee,
as receiver of the Mercantile Bank of China, should liquidate the
dividends of the defendant-appellant's shares.
4. In sentencing the defendant-appellant to pay to the plaintiff-
appellee the sum of P910.51 as attorney's fees, plus interest at 6 per
cent per annum on the sum of P9,105.17, with costs.
5. In denying the motion for a new trial.
When the case was called for hearing, the parties submitted the following
stipulation of facts for the consideration of the trial court, to wit:
Come now both parties and to this Honorable Court respectfully
submit the following stipulation:
1. The defendant admits the facts alleged in the complaint.
2. The plaintiff admits the allegations in the answer, particularly with
reference to the fact that the defendant is the owner of two hundred
shares at a par value of fifty pesos (P50) each, that is (Pl0,000).
3. The court may render judgment in accordance with this stipulation,
but the same shall be subject to execution after ninety (90) days.
Wherefore, they respectfully submit this stipulation and pray that
judgment be rendered in accordance therewith.
The facts alleged in the complaint and admitted by both parties under the
above quoted stipulation of facts are as follows:
On June 20, 1930, the defendant-appellant Lim Chu Sing executed and
delivered to the Mercantile Bank of China promissory note for the sum of
P19,605.17 with interest thereon at 6 per cent per annum, payable monthly
as follows: P1,000 on July 1, 1930; P500 on August 1, 1930; and P500 on
the first of every month thereafter until the amount of the promissory note
together with the interest thereon is fully paid (Exhibit A). One of the
conditions stipulated in said promissory note is that in case of defendant's
default in the payment of any of the monthly installments, as they become
due, the entire amount or the unpaid balance thereof together with interest
thereon at 6 per cent per annum, shall become due and payable on demand.
The defendant had been, making several partial payments thereon, leaving
an unpaid balance of P9,105.17. However, he defaulted in the payment of
several installments by reason of which the unpaid balance of P9,105.17 on
the promissory note has ipso factobecome due and demandable.
The facts alleged in the answer and admitted by both parties under the same
stipulation of facts are as follows:
The debt which is the subject matter of the complaint was not really an
indebtedness of the defendant but of Lim Cuan Sy, who had an account with
the plaintiff bank in the form of "trust receipts" guaranteed by the defendant
as surety and with chattel mortgage securities. The plaintiff bank, without the
knowledge and consent of the defendant, foreclosed the chattel mortgage
642
and privately sold the property covered thereby. Inasmuch as Lim Cuan Sy
failed to comply with his obligations, the plaintiff required the defendant, as
surety, to sign a promissory note for the sum of P19,105.17 payable in the
manner hereinbefore stated (Exhibit A). The defendant had been paying the
corresponding installments until the debt was reduced to the sum of
P9,105.17 claimed in the complaint. The defendant is the owner of shares of
stock of the plaintiff Mercantile Bank of China amounting to P10,000. The
plaintiff bank is now under liquidation.
On December 27, 1932, the defendant-appellant Lim Chu Sing filed a motion
praying for the inclusion of the principal debtor Lim Cuan Sy as party
defendant so that he could avail himself of the benefit of the exhaustion of
the property of said Lim Cuan Sy. Said motion was denied in open court by
the presiding judge without the defendant-appellant having excepted to such
order of denial.
The proceeds of the sale of the mortgaged chattels together with other
payments made were applied to the amount of the promissory note in
question, leaving the balance which the plaintiff now seeks to collect.
The first question to be decided in this appeal is whether or not the court a
quo erred in denying the motion for inclusion of a party a defendant, filed by
the defendant-appellant.
According to the provisions of section 141 of the Code of Civil Procedure,
". . . Rulings of the court upon minor matters, such as adjournments,
postponements of trials, the extension of time for filing pleadings or motions,
and other matters addressed to the discretion of the court in the performance
of its duty, shall not be subject to exception. But exception may be taken to
any other ruling, order, or judgment of the court made during the pendency of
the action in the Court of First Instance." "An `exception' has been defined as
an objection taken to the decision of the trial court upon a matter of law, and
is a notice that the party taking it preserves for the consideration of the
appellate court a ruling deemed erroneous. (8 Am. Enc. P. and P., 157.)" "
`Errors in a judgment or decree will not be noticed on appeal in the absence
of objections and exceptions taken below, and they should be sufficiently
specific to direct the attention of the court to the alleged defects.' (8 Enc. Pl
and Pr., 289.)" (Garcia de Lara vs. Gonzales de Lara, 2 Phil., 297.) Inasmuch
as an exception is an objection taken to the decision of the trial court upon a
matter of law and is a notice that the party taking it will submit for the
consideration of the appellate court the ruling deemed erroneous, failure to
interpose it deprived the appellant of the right to raise the question whether
or not the court a quo committed the alleged error attributed to it in its ruling
which had not been excepted to by the said appellant. The inclusion in, or
exclusion from an action of a certain party is a question of law. The herein
defendant-appellant, not having excepted to the order of the Court of First
Instance of Manila denying his motion for the inclusion of Lim Cuan Sy as
party defendant, is estopped from raising such question upon appeal (Roman
Catholic Bishop of Lipa vs. Municipality of San Jose, 27 Phil., 571;
Vergara vs. Laciapag, 28 Phil., 439; Andrews vs. Morente Rosario, 9 Phil.,
634).
The second question to be decided is whether or not it is proper to
compensate the defendant-appellant's indebtedness of P9,105.17, which is
claimed in the complaint, with the sum of P10,000 representing the value of
his shares of stock with the plaintiff entity, the Mercantile Bank of China.
According to the weight of authority, a share of stock or the certificate thereof
is not an indebtedness to the owner nor evidence of indebtedness and,
therefore, it is not a credit (14 Corpus Juris, p. 388, see. 511). Stockholders,
as such, are not creditors of the corporation (14 Corpus Juris, p. 848, Sec.
1289). It is the prevailing doctrine of the American courts, repeatedly
asserted in the broadest terms, that the capital stock of a corporation is a
trust fund to be used more particularly for the security of creditors of the
corporation, who presumably deal with it on the credit of its capital stock (14
Corpus Juris, p. 383, sec. 505). Therefore, the defendant-appellant Lim Chu
Sing not being a creditor of the Mercantile Bank of China, although the latter
is a creditor of the former, there is no sufficient ground to justify a
compensation (art. 1195, Civil Code; Acua Co Chongco vs. Dievas, 12 Phil.,
250).
The third question to be decided in this appeal is whether or not the court a
quo erred in sentencing the said defendant-appellant to pay the sum of
643
P910.51 as attorney's fees in addition to interest at 6 per cent per annum on Wherefore, with the sole modification that the costs be eliminated from the
the amount sought in the complaint. appealed judgment, the same is hereby affirmed, without special
pronouncement as to costs of this instance. So ordered.
The pertinent clause of the promissory note Exhibit A reads as follows: "In
case of default of any of the above installments, the total amount of the Malcolm, Hull, Imperial, and Goddard, JJ., concur.
balance still unpaid of this note will become due and payable on demand
plus interest thereon at the rate of 6 per cent per annum from date of this
note until payment is made. And I further agree to pay an additional sum
equivalent to 10 per cent of the said note to cover cost and attorney's fees for
collection."

The stipulation relative to the payment of interest at the rate of 6 per cent per
annum on the unpaid balance of the promissory note Exhibit A refers to the
capital and the 10 per cent stipulated for costs and attorney's fees cannot be
considered as interest but an indemnity for damages occasioned by the
collection of the indebtedness through judicial process. Therefore the two
rates in question cannot be combined and considered usurious interest.

With reference to the costs, the 10 per cent stipulated in the promissory note
is for costs and attorney's fees which may be incurred in the collection of the
indebtedness through judicial process. Therefore, the defendant-appellant
should not again be made to pay for them (Bank of the Philippine Islands vs.
Yulo, 31 Phil., 476).

In view of the foregoing, this court is of the opinion and so holds: (1) That
failure to file an exception to a ruling rendered in open court denying a
motion for the inclusion of a party as defendant deprives the petitioner, upon
appeal of the right to raise the question whether such denial proper or
improper; (2) that the shares of a banking corporation do not constitute an
indebtedness of the corporation to the stockholder and, therefore, the latter is
G.R. No. L-27872 February 25, 1928
not a creditor of the former for such shares; (3) that the indebtedness of a
shareholder to a banking corporation cannot be compensated with the
amount of his shares therein, there being no relation of creditor and debtor THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,
with respect to such shares; and (4) that the percentage stipulated in a vs.
contract, for costs and attorney's fees for the collection of an indebtedness, I. B. DEXTER, defendant-appellant.
includes judicial costs.

644
Ross, Lawrence & Selph and Antonio T. Carrascoso, Jr., for appellant.
Lucio Javillonar for appellee.
STREET, J.:
This action was instituted in the Court of First Instance of Manila by the
National Exchange Co., Inc., as assignee (through the Philippine National
Bank) of C. S. Salmon & Co., for the purpose of recovering from I. B. Dexter
a balance of P15,000, the par value of one hundred fifty shares of the capital
stock of C. S. Salmon & co., with interest and costs. Upon hearing the cause
the trial judge gave judgment for the plaintiff to recover the amount claimed,
with lawful interest from January 1, 1920, and with costs. From this judgment
the defendant appealed.
It appears that on August 10, 1919, the defendant, I. B. Dexter, signed a
written subscription to the corporate stock of C. S. Salmon & Co. in the
following form:
I hereby subscribe for three hundred (300) shares of the capital stock
of C. S. Salmon and Company, payable from the first dividends
declared on any and all shares of said company owned by me at the
time dividends are declared, until the full amount of this subscription
has been paid.
Upon this subscription the sum of P15,000 was paid in January, 1920, from a
dividend declared at about that time by the company, supplemented by
money supplied personally by the subscriber. Beyond this nothing has been
paid on the shares and no further dividend has been declared by the
corporation. There is therefore a balance of P15,000 still paid upon the
subscription.
As the case reaches this court the sole question here presented for
consideration is one of law, namely, whether the stipulation contained in the
subscription to the effect that the subscription is payable from the first
dividends declared on the shares has the effect of relieving the subscriber
from personal liability in an action to recover the value of the shares. The trial
court held, in effect, that the stipulation mentioned is invalid.
In discussing this problem we accept as sound law the proposition
propounded by the appellant's attorneys and taken from Fletcher's
Cyclopedia as follows:
In the absence of restrictions in its character, a corporation, under its
general power to contract, has the power to accept subscriptions
upon any special terms not prohibited by positive law or contrary to
public policy, provided they are not such as to require the
performance of acts which are beyond the powers conferred upon
the corporation by its character, and provided they do not constitute
a fraud upon other subscribers or stockholders, or upon persons who
are or may become creditors of the corporation. (Fletcher, Cyc.
Corp., sec. 602, p. 1314.)
Under the American regime corporate franchises in the Philippine Islands are
granted subject to the provisions of section 74 of the Organic Act of July 1,
1902, which, in the part here material, is substantially reproduced in section
28 of the Autonomy Act of August 29, 1916. In the Organic Act it is among
other things, declared: "That all franchises, privileges, or concessions
granted under this Act shall forbid the issue of stock or bonds except in
exchange for actual cash or for property at a fair valuation equal to the par
value of the stock or bonds so issued; . . . ." (Act of Congress of July 1, 1902,
sec. 74.)
Pursuant to this provision we find that the Philippine Commission inserted in
the Corporation Law, enacted March 1, 1906, the following provision: ". . . no
corporation shall issue stock or bonds except in exchange for actual cash
paid to the corporation or for property actually received by it at a fair
645
valuation equal to the par value of the stock or bonds so issued." (Act No.
1459, sec. 16 as amended by Act No. 2792, sec. 2.)
The prohibition against the issuance of shares by corporations except for
actual cash to the par value of the stock to its full equivalent in property is
thus enshrined in both the organic and statutory law of the Philippine;
Islands; and it would seem that our lawmakers could scarely have chosen
language more directly suited to secure absolute equality stockholders with
respect to their liability upon stock subscriptions. Now, if it is unlawful to issue
stock otherwise than as stated it is self-evident that a stipulation such as that
now under consideration, in a stock subcription, is illegal, for this stipulation
obligates the subcriber to pay nothing for the shares except as dividends
may accrue upon the stock. In the contingency that dividends are not paid,
there is no liability at all. This is a discrimination in favor of the particular
subcriber, and hence the stipulation is unlawful.
The general doctrine of corporation law is in conformity with this conclusion,
as may be seen from the following proposition taken from the standard
encyclopedia treatise, Corpus Juris:
Nor has a corporation the power to receive a subscription upon such
terms as will operate as a fraud upon the other subscribers or
stockholders by subjecting the particular subcriber to lighter burdens,
or by giving him greater rights and privileges, or as a fraud upon
creditors of the corporation by withdrawing or decreasing the capital.
It is well settled therefore, as a general rule, that an agreement
between a corporation and a particular subscriber, by which the
subscription is not to be payable, or is to be payable in part only,
whether it is for the purpose of pretending that the stock is really
greater than it is, or for the purpose of preventing the predominance
of certain stockholders, or for any other purpose, is illegal and void
as in fraud of other stockholders or creditors, or both, and cannot be
either enforced by the subcriber or interposed as a defense in an
action on the subcription. (14 C. J., p. 570.)
The rule thus stated is supported by a long line of decisions from numerous
courts, with little or no diversity of opinion. As stated in the headnote to the
opinion of the Supreme Court of United States in the case of Putnan vs.New
Albany, etc. Railroad Co. as reported in 21 Law. ed., 361, the rule is that
"Conditions attached to subcriptions, which, if valid, lessen the capital of the
company, are a fraud upon the grantor of the franchise, and upon those who
may become creditors of the corporation, and upon unconditional
stockholders."
In the appellant's brief attention is called to the third headnote to
Bank vs. Cook (125 Iowa, 111), where it is stated that a collateral agreement
with a subcriber to stock that his subcription shall not be collectible except
from dividends on the stock, is valid as between the parties and a complete
defense to a suit on notes given for the amount of the subscription. A careful
persual of the decision will show that the rule thus broadly stated in the
headnote is not justified by anything in the reported decision; for what the
court really held was that the making of such promise by the agent of the
corporation who sold the stock is admissible in evidence in support of the
defense of fraud and failure of consideration. Moreover, even if the decision
had been to the effect supposed, the relu announced in the headnote could
have no weight in a jurisdiction like this were there is a statutory provision
prohibiting such agreements.
We may add that the law in force in this jurisdiction makes no distinction, in
respect to the liability of the subcriber, between shares subscribed before
incorporation is effected and shares subscribed thereafter. All like are bound
to pay full value in cash or its equivalent, and any attempt to discriminate in
favor of one subscriber by relieving him of this liability wholly or in part is
forbidden. In what is here said we have reference of course primarily to
subcriptions to shares that have not been previously issued. It is conceivable
that the power of the corporation to make terms with the purchaser would be
greater where the shares which are the subject of the transaction have been
acquired by the corporation in course of commerce, after they have already
been once issued. But the shares with which are here concerned are not of
this sort.
646
The judgment appealed from must be affirmed, and it is so ordered, with directly to this court under G.R. No. L-4824. Defendant Irineo Baltazar
costs against the appellant. appealed to the Court of Appeals. By a resolution of that appellate tribunal,
the appeal was certified to this court pursuant to section 17, (5) and (6) of the
Malcolm, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur. Judiciary Act of 1948, and is now listed here under G.R. No. L-6344.

The main facts of the case are not disputed, and we are reproducing and
making our own the relation of facts contained in the decision appealed from.

The plaintiff, Lingayen Gulf Electric Power Company is a domestic

corporation with an authorized capital stock of P300,000 divided into 3,000
shares with a par value of P100 per share. The defendant, Irineo Baltazar
appears to have subscribed for 600 shares on account of which he had paid
upon the organization of the corporation the sum of P15,000. (See Exhibit A,
page 2). After incorporation, the defendant made further payments on
G.R. No. L-4824 June 30, 1953 account of his subscription, leaving a balance of P18,500 unpaid for, which
amount, the plaintiff now claims in this action.
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellant,
vs. On July 23, 1946, a majority of the stockholders of the corporation, among
IRINEO BALTAZAR, defendant-appellee. them the herein defendant, held a meeting and adopted stockholders'
resolution No. 17. By said resolution, it was agreed upon by the stockholders
x---------------------------------------------------------x present to call the balance of all unpaid subscribed capital stock as of July
23, 1946, the first 50 per cent payable within 60 days beginnning August 1,
G.R. No. L-6244 June 30, 1953 1946, and the remaining 50 per cent payable within 60 days beginning
October 1, 1946. The resolution also provided, that all unpaid subscription
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellee, after the due dates of both calls would be subject to 12 per cent interest per
vs. annum. Lastly, the resolution provided, that after the expiration of 60 days'
IRINEO BALTAZAR, defendant and appellant. grace which would be on December 1, 1946, for the first call, and on
February 1, 1947, for the second call, all subscribed stocks remaining unpaid
Manuel L. Fernandez for appellant. would revert to the corporation. (See Exhibit F and Exhibit I).
Sofronio C. Quimson and daniel C. Macaraeg for appellee.
On September 22, 1946, the plaintiff corporation wrote a letter to the
MONTEMAYOR, J.: defendant reminding him that the first 50 per cent of his unpaid subscription
would be due on October 1, 1946. The plaintiff requested the defendant to
"kindly advise the company thru the undersigned your decision regarding this
These two cases here on appeal stem from the same case, that of civil case
matter." (See Exhibit 4). The defendant answered on September 25, 1946,
No. 10944 of the Court of First Instance of Pangasinan. From the trial court's
asking the corporation that he be allowed to pay his unpaid subscription by
decision, plaintiff Lingayen Gulf Electric Power Company, Inc. appealed

647
February 1, 1947. In his answer, the defendant also agreed that if he could
not pay the balance of his subscription by February 1, 1947, his unpaid
subscription would be reverted to the corporation. (See Exhibit 5).
On December 19, 1947, the defendant wrote another letter to the members
of the Board of Directors of the plaintiff corporation, offering to withdraw
completely from the corporation by selling out to the corporation all his
shares of stock in the total amount of P23,000. (See Exhibit 8). Apparently
this offer of the defendant was left unacted upon by the plaintiff.
On April 17, 1948, the Board of Directors of the plaintiff corporation held a
meeting, and in the course of the said meeting they adopted Resolution No.
17. This resolution in effect set aside the stockholders resolution approved on
June 23, 1946 (Exhibit D), on the ground that said stockholders' resolution
was null and void, and because the plaintiff corporation was not in a financial
position to absorb the unpaid balance of the subscribed capital stock. At the
said meeting the directors also decided to call 50 per cent of the unpaid
subscription within 30 days from April 17, 1948, the call payable within 60
days from receipt of notice from the Secretary-Treasurer. This resolution also
authorized legal counsel of the company to take all the necessary legal steps
for the collection of the payment of the call. (See Exhibit E-2).
On June 10, 1949, the stockholders of the corporation held another meeting
in which the stockholders were all present, either in person or by proxy. At
such meeting, the stockholders adopted resolution No. 4, whereby it was
agreed to revalue the stocks and assets of the company so as to attract
outside investors to put in money for the rehabilitation of the company. The
president was authorized to make all arrangement for such appraisal and the
Secretary to call a meeting upon completion of the reassessment. (See
Exhibit 2).
It was admitted by the defendant that he received notice from the Secretary-
Treasurer of the company, demanding payment of the unpaid balance of his
subscription. It was agreed by the parties that the call of the Board of
Directors was not published in a newspaper of general circulation as required
by section 40 of the Corporation Law.
On September 28, 1949, the legal counsel of the plaintiff corporation wrote a
letter to the defendant, demanding the payment of the unpaid balance of his
subscription amounting to P18,500. Copy of this letter was sent by registered
mail to the defendant on September 29,1 949. (See Exhibit G). The
defendant ignored the said demand. Hence this action.
The defendant, in his answer, disclaims liability tot he plaintiff corporation on
the following grounds:
1. That the plaintiffs' action is premature because there was no valid call; and
2. That granting that there was a valid call, he was released from the
obligation of the balance of his subscription by stockholders' resolution No.
17 and No. 4.
By way of counterclaim, the defendant also claims from the plaintiff a
reasonable compensation at the rate of P700 per month as president of the
company, for the period from March 1, 1946 to December 31, 1948.
In the light of the foregoing undisputed facts, the only questions are as
follows:
1. Was the call Exhibit E-2 valid?
2. Was the defendant released from the obligation of the unpaid balance of
his subscription by virtue of stockholders' resolution Nos. 17 and 4?
3. Is the defendant entitled to compensation as president of the plaintiff
corporation?
In an exhaustive and well prepared decision, Judge M. Mejia of the lower
court found that the call for payment embodied in resolution No. 17 of July
23, 1946 was null and void for lack of publication; consequently, he
dismissed the complaint as premature. He further held said resolution null
and void in so far as it tried to relieve the defend- ant from liability on his
unpaid subscription, on the ground that the resolution was not approved by
648
all the stockholders of the corporation. He also dismissed the defendant's
counterclaim for compensation as president of the corporation.
Inasmuch as in the two appeals, the assignment of errors are related to each
other, and because they refer to the same case, we propose to determine
both appeals in one single decision.
We agree with the lower court that the law requires that notice of any call for
the payment of unpaid subscription should be made not only personally but
also by publication. This is clear from the provisions of section 40 of the
Corporation Law, Act No. 1459, as amended, which reads as follows:
SEC. 40. Notice of call for unpaid subscriptions must be either personally
served upon each stockholder or deposited in the post office, postage
prepaid, addressed to him at his place of residence, if known, and if not
known, addressed to the place where the principal office of the corporation is
situated. The notice must also be published once a week for four successive
weeks in some newspaper of general circulation devoted to the publication of
general news published at the place where the principal office of the
corporation is established or located, and posted in some prominent place at
the works of the corporation if any such there be. If there be no newspaper
published at the place where the principal office of the corporation is
established or located, then such notice may be published in any newspaper
of general news in the Philippines.
It will be noted that section 40 is mandatory as regards publication, using the
word "must". As correctly stated by the trial court, the reason for the
mandatory provision is not only to assure notice to all subscribers, but also to
assure equality and uniformity in the assessment on stockholders. (14 C.J.
639).
This rule finds support in authorities on corporation law, such as, Thompson
on Corporations, Vol. 5, 3rd edition, pages 588-590, from which we make the
following quotation:
SEC. 3744. Provisions requiring notice of calls. The governing statute,
charter or by-laws usually require that notice of calls be given the subscriber
or stockholder. If any particular notice or demand is required by either of
these, or by the contract of subscription, then such notice or demand must be
given, and must be alleged and proved in order to maintain an action for the
call.
xxx xxx xxx
SEC. 3745. Notice. Compliance with requirements-From what has
preceded it is clear that where any particular form or kind of notice is
required, such form or kind must be given-the requirement must be complied
with. Thus, where the charter expressly required notice to be given in certain
newspapers for a certain number of days, the corporation must show
compliance with the conditions before recovery on the call. An action is
ordinarily made effective by notice thereof to the subscribers, in accordance
with the by-laws or general regulations of the corporation in that regard. So,
where there are statutory or other regulations as to the form and sufficiency
of the notice, these must be followed. Thus, where such a notice was
required to be signed by the directors, a notice with the names of the
directors signed by a clerk, was held insufficient. These cases and others
proceed on the theory that where the manner of giving notice is prescribed
by law every condition precedent must be strictly and literally complied with.
(Thompson on Corporations, Vol. 5, 3rd ed.)
This view is shared by Justice Fisher. In his book "The Philippine Law on
Stock Corporations" he says: "Not only must personal notice be given in one
of these manners, but the notice must also be published once a week, for
four consecutive weeks, in some newspaper." (p. 110.).
We find the citation of authorities made by the plaintiff and appellant
inapplicable. In the case of Velasco vs. Poizat(37 Phil. 805), the corporation
involved was insolvent, in which case all unpaid stock subscriptions become
payable on demand and are immediately recoverable in an action instituted
by the assignee. Said the court in that case:
649
. . . . it is now quite well settled that when the corporation becomes insolvent,
with proceedings instituted by creditors to wind up and distribute its assets,
no call or assessment is necessary before the institution of suits to collect
unpaid balance on subscription.
But when the corporation is a solvent concern, the rule is:
It is again insisted that plaintiffs cannot recover because the suit was not
proceeded by a call or assessment against the defendant as a subscriber,
and that until this is done no right of action accrues. In a suit by a solvent
going corporation to collect a subscription, and in certain suits provided by
statute this would be true;. . . . . (Id.)
Going to the claim of defendant and appellant that Resolution No. 17 of 1946
released him from the obligation to pay for his unpaid subscription, the
authorities are generally agreed that in order to effect the release, there must
be unanimous consent of the stockholders of the corporation. We quote
some authorities:
Subject to certain exceptions, considered in subdivision (3) of this section,
the general rule is that a valid and binding subscription for stock of a
corporation cannot be cancelled so as to release the subscriber from liability
thereon without the consent of all the stockholders or subscribers.
Furthermore, a subscription cannot be cancelled by the company, even
under a secret or collateral agreement for cancellation made with the
subscriber at the time of the subscription, as against persons who
subsequently subscribed or purchased without notice of such agreement. (18
C.J.S. 874).
(3) Exceptions.
In particular circumstances, as where it is given pursuant to a bona fide
compromise, or to set off a debt due from the corporation, a release,
supported by consideration, will be effectual as against dissenting
stockholders and subsequent and existing creditors. A release which might
originally have been held invalid may be sustained after a considerable lapse
of time. (18 C.J.S. 874).
In the present case, the release claimed by defendant and appellant does not
fall under the exception above referred to, because it was not given pursuant
to a bona fide compromise, or to set off a debt due from the corporation, and
there was no consideration for it.
Another authority:
SEC. 850. Unanimous consent of stockholders necessary to release
subscriber. It may be asserted as the first rule under this proposition that,
after a valid subscription to the capital stock of a corporation has been made
and accepted, there can be no cancellation or release from the obligation
without the consent of the corporation and all the stockholders; . . . . (2
Thompson on Corporation, p. 186).
He states the reason for the rule as follows:
SEC. 855. Right to withdraw as against subscribers. A contract of
subscription is, at least in the sense which creates as estoppel, a contract
among the several subscribers. For this reason no one of the subscribers
can withdraw from the contract without the consent of all the others, and
thereby diminish, without the universal consent, the common fund in which all
have acquired an interest. . . . (2 Thompson on Corporations, p. 194.).
As already found by the trial court, the release attempted in Resolution No.
17 of 1946 was not valid for lack of a unanimous vote. If found that at least
seven stockholders were absent from the meeting when said resolution was
approved.
650
Defendant and appellant, however, contends that after dismissing the In conclusion we hold that under the Corporation Law, notice of call for
complaint for being premature, there was no necessity or reason for the trial payment for unpaid subscribed stock must be published, except when the
court to go further and say that defendant was not validly released from the corporation is insolvent, in which case, payment is immediately demandable.
payment for his unpaid subscription. It must be borne in mind, however, that We also rule that release from such payment must be made by all the
this was one of the principal issues involved in the case and the trial court stockholders.
was called upon to pass upon it, because unless so passed upon and deter-
mined, it might decisively affect the case on appeal. Supposing that on In view of the foregoing and finding no reversible error in the decision
appeal the appellate court decides that the call was valid, then it would be appealed, the same is hereby affirmed.
important to know whether or not in spite of the validity of the call, defendant
was nevertheless not liable because he had been validly released by a No pronouncement as to costs.
resolution of the corporation. If that question was not decided by the trial
court, and naturally was not touched upon in the appeal, then the appellate
Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Reyes, Jugo, Bautista Angelo
court would have no occasion to pass upon it, and it might be necessary to
and Labrador, JJ., concur.
bring another action to determine the point, which means multiplicity of suits.
Moreover, the authority given to the courts to render judgments for
declaratory relief in order to determine the rights or duties of parties over a
certain transaction or under a certain written instrument, or to remove the
uncertainty or controversy over the same (Rule 66 of the Rules of Court),
justified the trial court in passing upon this question of release.

As regards the compensation of President claimed by defendant and

appellant, it is clear that he is not entitled to the same. The by-laws of the
company are silent as to the salary of the President. And, while resolutions of
the incorporators and stockholders (Exhibits G-1 and I-1) provide salaries for
the general manager, secretary-treasurer and other employees, there was no
provision for the salary of the President. On the other hand, other resolutions
(Exhibits H-1 and J-3) provide for per diems to be paid to the President and
the directors of each meeting attended, P10 for the President and P8 for
each director, which were later increased to P25 and P15, respectively. This
leads to the conclusions that the President and the board of directors were
expected to serve without salary, and that the per diems paid to them were
sufficient compensation for their services. Furthermore, for defendant's
several years of service as President and up to the filing of the action against
him, he never filed a claim for salary. He thought of claiming it only when this
suit was brought against him.

651
G.R. No. L-68097 January 16, 1986

EDWARD A. KELLER & CO., LTD., petitioner-appellant,

vs.
COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE
CASTRO, JOHNNY DE LA FUENTE, SERGIO C. ORDOEZ, TRINIDAD C.
ORDOEZ, MAGNO C. ORDOEZ, ADORACION C. ORDOEZ, TOMAS
C. LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO,
ASUNCION MANAHAN and INTERMEDIATE APPELLATE
COURT, respondents-appellees.

Sycip, Salazar, Feliciano & Hernandez Law Office for petitioner.

Vicente G. Gregorio for private respondents.

Roberto P. Vega for respondent Asuncion Manahan.

AQUINO, C.J.:

This case is about the liability of a marketing distributor under its sales
agreements with the owner of the products. The petitioner presented its
evidence before Judges Castro Bartolome and Benipayo. Respondents
presented their evidence before Judge Tamayo who decided the case.

A review of the record shows that Judge Tamayo acted under a

misapprehension of facts and his findings are contradicted by the evidence.
The Appellate Court adopted the findings of Judge Tamayo. This is a case
where this Court is not bound by the factual findings of the Appellate Court.

652
(See Director of Lands vs. Zartiga, L-46068-69, September 30, 1982, 117
SCRA 346, 355).
Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as
exclusive distributor of its household products, Brite and Nuvan in Panay and
Negros, as shown in the sales agreement dated March 14, 1970 (32-33 RA).
Under that agreement Keller sold on credit its products to COB Group
Marketing.
As security for COB Group Marketing's credit purchases up to the amount of
P35,000, one Asuncion Manahan mortgaged her land to Keller. Manahan
assumed solidarily with COB Group Marketing the faithful performance of all
the terms and conditions of the sales agreement (Exh. D).
In July, 1970 the parties executed a second sales agreement whereby COB
Group Marketing's territory was extended to Northern and Southern Luzon.
As security for the credit purchases up to P25,000 of COB Group Marketing
for that area, Tomas C. Lorenzo, Jr. and his father Tomas, Sr. (now
deceased) executed a mortgage on their land in Nueva Ecija. Like Manahan,
the Lorenzos were solidarily liable with COB Group Marketing for its
obligations under the sales agreement (Exh. E).
The credit purchases of COB Group Marketing, which started on October 15,
1969, limited up to January 22, 1971. On May 8, the board of directors of
COB Group Marketing were apprised by Jose E. Bax the firm's president and
general manager, that the firm owed Keller about P179,000. Bax was
authorized to negotiate with Keller for the settlement of his firm's liability
(Exh. 1, minutes of the meeting).
On the same day, May 8, Bax and R. Oefeli of Keller signed the conditions
for the settlement of COB Group Marketing's liability, Exhibit J, reproduced as
follows:
This formalizes our conditions for the settlement of C.O.B.'s
account with Edward Keller Ltd.
1. Increase of mortgaged collaterals to the full market value
(estimated by Edak at P90,000.00).
2. Turn-over of receivables (estimated outstandings
P70,000.00 to P80,000.00).
3. Turn-over of 4 (four) trucks for outright sale to Edak, to be
credited against C.0.B.'s account.
4. Remaining 8 (eight) trucks to be assigned to Edak, C.O.B
will continue operation with these 8 trucks. They win be
returned to COB after settlement of full account.
5. C.O.B has to put up securities totalling P200,000.00.
P100,000.00 has to be liquidated within one year. The
remaining P100,000.00 has to be settled within the second
year.
6. Edak wig agree to allow C.O.B. to buy goods to the value
of the difference between P200,000.00 and their
outstandings, provided C.O.B. is in a position to put up
securities amounting to P200,000.00.
Discussion held on May 8, 1971.
Twelve days later, or on May 20, COB Group Marketing, through Bax
executed two second chattel mortgages over its 12 trucks (already
mortgaged to Northern Motors, Inc.) as security for its obligation to Keller
amounting to P179,185.16 as of April 30, 1971 (Exh. PP and QQ). However,
the second mortgages did not become effective because the first mortgagee,
Northern Motors, did not give its consent. But the second mortgages served
the purpose of being admissions of the liability COB Group Marketing to
Keller.
The stockholders of COB Group Marketing, Moises P. Adao and Tomas C.
Lorenzo, Jr., in a letter dated July 24, 1971 to Keller's counsel, proposed to
653
pay Keller P5,000 on November 30, 1971 and thereafter every thirtieth day of
the month for three years until COB Group Marketing's mortgage obligation
had been fully satisfied. They also proposed to substitute the Manahan
mortgage with a mortgage on Adao's lot at 72 7th Avenue, Cubao, Quezon
City (Exh. L).
These pieces of documentary evidence are sufficient to prove the liability of
COB Group Marketing and to justify the foreclosure of the two mortgages
executed by Manahan and Lorenzo (Exh. D and E).
Section 22, Rule 130 of the Rules of Court provides that the act, declaration
or omission of a party as to a relevant fact may be given in evidence against
him "as admissions of a party".
The admissions of Bax are supported by the documentary evidence. It is
noteworthy that all the invoices, with delivery receipts, were presented in
evidence by Keller, Exhibits KK-1 to KK-277-a and N to N-149-a, together
with a tabulation thereof, Exhibit KK, covering the period from October 15,
1969 to January 22, 1971. Victor A. Mayo, Keller's finance manager,
submitted a statement of account showing that COB Group Marketing owed
Keller P184,509.60 as of July 31, 1971 (Exh. JJ). That amount is reflected in
the customer's ledger, Exhibit M.
On the other hand, Bax although not an accountant, presented his own
reconciliation statements wherein he showed that COB Group Marketing
overpaid Keller P100,596.72 (Exh. 7 and 8). He claimed overpayment
although in his answer he did not allege at all that there was an overpayment
to Keller.
The statement of the Appellate Court that COB Group Marketing alleged in
its answer that it overpaid Keller P100,596.72 is manifestly erroneous first,
because COB Group Marketing did not file any answer, having been
declared in default, and second, because Bax and the other stockholders,
who filed an answer, did not allege any overpayment. As already stated, even
before they filed their answer, Bax admitted that COB Group Marketing owed
Keller around P179,000 (Exh. 1).
Keller sued on September 16, 1971 COB Group Marketing, its stockholders
and the mortgagors, Manahan and Lorenzo.
COB Group Marketing, Trinidad C. Ordonez and Johnny de la Fuente were
declared in default (290 Record on Appeal).
After trial, the lower court (1) dismissed the complaint; (2) ordered Keller to
pay COB Group Marketing the sum of P100,596.72 with 6% interest a year
from August 1, 1971 until the amount is fully paid: (3) ordered Keller to pay
P100,000 as moral damages to be allocated among the stockholders of COB
Group Marketing in proportion to their unpaid capital subscriptions; (4)
ordered the petitioner to pay Manahan P20,000 as moral damages; (5)
ordered the petitioner to pay P20,000 as attomey's fees to be divided among
the lawyers of all the answering defendants and to pay the costs of the suit;
(6) declared void the mortgages executed by Manahan and Lorenzo and the
cancellation of the annotation of said mortgages on the Torrens titles thereof,
and (7) dismissed Manahan's cross-claim for lack of merit.
The petitioner appealed. The Appellate Court affirmed said judgment except
the award of P20,000 as moral damages which it eliminated. The petitioner
appealed to this Court.
Bax and the other respondents quoted the six assignments of error made by
the petitioner in the Appellate Court, not the four assignments of error in its
brief herein. Manahan did not file any appellee's brief.
We find that the lower courts erred in nullifying the admissions of liability
made in 1971 by Bax as president and general manager of COB Group
Marketing and in giving credence to the alleged overpayment computed by
Bax .
The lower courts not only allowed Bax to nullify his admissions as to the
liability of COB Group Marketing but they also erroneously rendered
judgment in its favor in the amount of its supposed overpayment in the sum
of P100,596.72 (Exh. 8-A), in spite of the fact that COB Group Marketing was
654
declared in default and did not file any counterclaim for the supposed
overpayment.
The lower courts harped on Keller's alleged failure to thresh out with
representatives of COB Group Marketing their "diverse statements of credits
and payments". This contention has no factual basis. In Exhibit J, quoted
above, it is stated by Bax and Keller's Oefeli that "discussion (was) held on
May 8, 1971."
That means that there was a conference on the COB Group Marketing's
liability. Bax in that discussion did not present his reconciliation statements to
show overpayment. His Exhibits 7 and 8 were an afterthought. He presented
them long after the case was filed. The petitioner regards them as
"fabricated" (p. 28, Appellant's Brief).
Bax admitted that Keller sent his company monthly statements of accounts
(20-21 tsn, September 2, 1976) but he could not produce any formal protest
against the supposed inaccuracy of the said statements (22). He lamely
explained that he would have to dig up his company's records for the formal
protest (23-24). He did not make any written demand for reconciliation of
accounts (27-28).
As to the liability of the stockholders, it is settled that a stockholder is
personally liable for the financial obligations of a corporation to the extent of
his unpaid subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757, 763;
18 CJs 1311-2).
While the evidence shows that the amount due from COB Group Marketing is
P184,509.60 as of July 31, 1971 or P186,354.70 as of August 31, 1971 (Exh.
JJ), the amount prayed for in Keller's complaint is P182,994.60 as of July 31,
1971 (18-19 Record on Appeal). This latter amount should be the one
awarded to Keller because a judgment entered against a party in default
cannot exceed the amount prayed for (Sec. 5, Rule 18, Rules of Court).
WHEREFORE, the decisions of the trial court and the Appellate Court are
reversed and set aside.
COB Group marketing, Inc. is ordered to pay Edward A. Keller & Co., Ltd. the
sum of P182,994.60 with 12% interest per annum from August 1, 1971 up to
the date of payment plus P20,000 as attorney's fees.
Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to pay solidarity
with COB Group Marketing the sums of P35,000 and P25,000, respectively.
The following respondents are solidarity liable with COB Group Marketing up
to the amounts of their unpaid subscription to be applied to the company's
liability herein: Jose E. Bax P36,000; Francisco C. de Castro, P36,000;
Johnny de la Fuente, P12,000; Sergio C. Ordonez, P12,000; Trinidad C.
Ordonez, P3,000; Magno C. Ordonez, P3,000; Adoracion C. Ordonez
P3,000; Tomas C. Lorenzo, Jr., P3,000 and Luz M. Aguilar-Adao, P6,000.
If after ninety (90) days from notice of the finality of the judgment in this case
the judgment against COB Group Marketing has not been satisfied fully, then
the mortgages executed by Manahan and Lorenzo should be foreclosed and
the proceeds of the sales applied to the obligation of COB Group Marketing.
Said mortgage obligations should bear six percent legal interest per
annum after the expiration of the said 90-day period. Costs against the
private respondents.
SO ORDERED.
Concepcion, Jr. (Chairman), Escolin, Cuevas and Alampay, JJ., concur.
Abad Santos, J., took no part.
655
G.R. No. L-35961 December 2, 1932

ROMANA MIRANDA, in her capacity as judicial administratrix of the

intestate estate of her deceased father, Alberto Miranda, plaintiff-
appellant,
vs.
THE TARLAC RICE MILL CO., INC., defendant-appellee.

Fausto and Ramos for appellant.

Enrique Maglanoc for appellee.

VICKERS, J.:

656
This is an appeal by the plaintiff from a decision of Judge A. M. Recto of the
Court of First Instance of Tarlac, dismissing the case without a special finding
as to costs.
The case was tried on the following agreed statement of facts:
Comparecen las partes la demandante, asistida de su infrascrito
abogado, y la demandada, por medio de su presidente y abogado
que subscriben y para abreviar la vista de esta causa y sin
perjuicio de practicarse pruebas adicionales sobre hechos en los
que las partes no estan de acuerdo, respetuosamente someten,
para la decision de esta causa, las siguientes estipulaciones:
1. Que la demandante Romana Miranda es la administradora
judicial, debidamente nombrada, del Intestado del finado Don Alberto
Miranda, Civil No. 3090, de este mismo Juzgado; y la entidad
demandada es una corporacion debidamente organizada de
acuerdo con las leyes en vigor en estas Islas, teniendo su domicilio
legal, lo mismo que la demandante, en esta cabecera de Tarlac,
Provincia de Tarlac;
2. Que, con fecha 8 de junio de 1926, el hoy difunto Don Alberto
Miranda de cuyo intestado es administradora judicial la aqui
demandante subscribo acciones de la corporacion demandada,
otorgando al efecto un contrato de subscripcion, copia auntentica del
cual se une al presente y se hace parte integrante del mismo, como
exhibit A;
3. Que, en relacion con el contrato de subcripcion Exhibit A, a que se
contrae el parrafo que precede, Don Alberto Miranda otorgo luego
una escritura de poder a favor de la demandada, cuyo original se
une asimismo al presente, haciendose parte integrante del mismo,
como Exhibit B;
4. Que, por virtud de los documentos a que se contraen los dos
parrafos inmediatamente anteriores la corporacion demandada
contrajo una deuda de P10,000 a los Sres. Mariano Tablante y
Carmen Gueco, de Angeles, Pampanga, como se acredita por la
escritura de prestamo hipotecario otorgada al efecto, que tambien se
adjunta a la presente, como Exhibits C y C-1;
5. Que la demandada no ha pagado en ningun tiempo ni el capital, ni
los intereses, del prestamo arriba mencionado, motivo por el cual el
referido Don Alberto Miranda hubo de entrar en arreglo amistoso con
los acreedores, al expirar el plazo convenido para el pago,
satisfaciendo dicho prestamo y sus intereses devengados, segun
consta en la carta de pago extendida al efecto, que se hace parte
integrante del presente convenio como Anexo o Exhibt D;
6. Que, a partir desde el ano 1928 hasta esta fecha, la demandada
ha dejado de hacer negocios y operaciones de ninguna clase;
7. Que, con excepcion del citado Don Alberto Miranda, ninguno de
las otras accionistas y directores de la corporacion demandada ha
pagado o se le ha hecho pagar, conforme los terminos de los
contratos de subscripcion otorgados al efecto, el importe de sus
respectivas acciones, y a pesar de esta morosidad de los fereridos
accionistas y directores, la corporacion demandada no ha dado,
hasta la fecha, ningun paso tendente a compeler la efectividad de
las referidas acciones morosas.
The only additional evidence presented was the testimony of Marciano
David, which is of no consequence in our view of the case.
The appellant makes the following assignment of errors:
The trial court erred:
1. In declaring that the defendant corporation did not violate the
terms of the power of attorney Exhibit B, for the plaintiff, when she
obtained the loan Exhibit C;
657
 2. In declaring that "all responsibility originating in the execution by
the officers of the defendant corporation of the mortgage contract
Exhibit C has already ceased";
3. In pretending to base the decision in this case upon theories
neither presented by the pleadings of the parties nor deduced from
the evidence produced by the parties;
4. In denying the motion for new trial of the plaintiff-appellant; and
5. In not sentencing the defendant to pay the plaintiff the sum of
P10,000, with interest thereon at P1,200 a year, from the year 1927
until paid, plus the sum of P1,500, which the principal had to pay in
the form of a penal clause for the violation of the terms of the
mortgage contract Exhibit C, aside from the legal interests of all
these amounts from the presentation of the present complaint, and
the costs of the suit.
It appears from the evidence that on June 8, 1926 Alberto Miranda executed
a written contract whereby he subscribed for 100 shares of the capital stock
of a corporation to be organized under the laws of the Philippine Islands for
the purpose of operating a rice mill in Tarlac, said corporation to be known as
Tarlac Rice Mill Company, Inc., that the par value of each share was P100;
and that Alberto Miranda obligated himself to pay to the treasurer of the
corporation or its assign the sum of P10,000 as follows:
On or before September 21, 1926 P1,000.00
On or before January 21, 1927 2,000.00
On or before January 21, 1928 2,000.00
On or before January 21, 1929 2,500.00
On or before January 21, 1930 2,500.00
On July 10, 1926 Alberto Miranda by means of a public document "assigned"
mortgaged, or transferred in lieu of cash for the benefit and to the credit of
the Tarlac Rice Mill Company, Inc., a corporation to be organized and to exist
under and by virtue of the laws of the Philippine Islands", the parcel of land
described in certificate No. 751 in the land records of the Province of Tarlac;
and "to carry out the true intent, meaning, and purposes thereof I have
hereby further voluntarily made, constituted, and appointed and by these
presents do make, constitute and appoint, either jointly, Evaristo Magbag,
duly elected President and Treasurer of said Company, Eusebio R. Cabrera
and Marcos P. Puno, duly elected Vice-Presidents of the same company, or
anyone of the three named elected officers of the Tarlac Rice Mill Company,
Inc., jointly with C. M. Dizon to be my true and lawful attorney-in-fact, for me
and in my name, in my behalf to transfer, mortgage, convey or confirm or in
any way convenient to them to any local or foreign bank, firm or individual in
order to obtain, secure or solicit credit against my above described property
in an amount not to exceed ten thousand pesos (P10,000), Philippine
currency, in accordance with the subscription contract voluntary executed by
me, for or to increase the capital of the said Tarlac Rice Mill Company, Inc., in
order to carry out the purposes for which such firm is to be organized.
That for the foregoing purposes, I hereby transfer my right and
interest in the said described properties, and by these presents do
hereby give and grant unto my said attorneys-in fact full power and
authority to do and perform all and every act and thing whatsoever
requisite and necessary to be done in all about the premises as fully
to all intents and purposes as I might or could do if personally
present with full power of substitution or revocation, hereby ratify and
confirm all that my said attorneys-in-fact, anyone or all of the three
Evaristo Magbag, Eusebio R. Cabrera, and Marcos P. Puno, jointly
658
 with C. M. Dizon or their substitutes shall lawfully do or cause to be
done by virtue of these presents.
On February 19, 1927 the president and vice-president of the Tarlac Rice Mill
Company, Inc., and C. M. Dizon, acting on behalf of said corporation and
Alberto Miranda, borrowed P10,000 from Mariano Tablante, and agreed to
repay said sum on or before February 19, 1928, with interest at 12 per cent
per annum, and to pay a further sum of 25 per cent of the principal for
attorney's fees and expenses of collection in case the promissory note
should not be paid at maturity. Marcos Puno, Evaristo Magbag, and Dizon &
Co., Inc., jointly and severally guaranteed the payment of this sum; and the
president and vice-president of the Tarlac Rice Mill Company, Inc., and C. M.
Dizon as attorneys-in-fact of Alberto Miranda mortgaged to Mariano Tablante
the aforementioned parcel of land to secure the payment of said promissory
note.
The sum of P10,000 obtained from Mariano Tablante was retained by the
corporation. When the promissory note became due, Alberto Miranda
arranged for an extension of time in which to pay it, and on July 19, 1929 he
sold the aforementioned parcel of land under pacto de retro to Vicente
Panlilio for P10,000, and paid Mariano Tablante.
According to an allegation in the complaint, Alberto Miranda died on May 24,
1930.
It is agreed that the defendant corporation ceased to do business from the
year 1928, and that the other stockholders have not paid for their shares in
accordance with their subscription agreement, and that no action has been
taken by the corporation to require them to do so.
The principal contention of the appellant is that the officers of the corporation
violated the terms of the power of attorney in mortgaging the land on
February 19, 1927 for P10,000, because the only sum then due and payable
by Alberto Miranda to the corporation was P3,000, and that when the
remaining instalments of the stock subscription became due, Alberto Miranda
was under no obligation to pay them, because the corporation had already
ceased to do business, and it had taken no steps to compel the other
stockholders to pay for the shares for which they had subscribed.
No question as to the validity of subscription agreement is raised, and no
fraud on the part of the officers of the corporation is alleged or proved. We
shall therefore confine ourselves to the issues raised by the pleading.
It is true that when the property was mortgaged on February 19, 1927 the
amount due from Alberto Miranda in accordance with the subscription
agreement was only P3,000, and it is likewise true that it does not appear
from the evidence that any call was issued by the directors for the payment
of any subscriptions.
The fact that Alberto Miranda agreed on June 8, 1926 to pay the amount of
his subscription installments on certain fixed dates did not, of course prevent
him from authorizing the officers of the corporation as his attorneys-in-fact to
pay his subscription prior to the dates fixed in the subscription agreement.
Great stress is laid by the appellant upon the fact that in one paragraph of
the power of attorney it is stated that the attorneys-in-fact of Alberto Miranda
are authorized to mortgage or convey the property in any way convenient to
them in the amount not to exceed P10,000 in accordance with the
subscription contract, but the phrase "in accordance with the subscription
contract" is followed by the following words "for or to increase the capital of
the said Tarlac Rice Mill Company, Inc., in order to carry out the purposes for
which said firm is to be organized." Under the circumstances, it seems to us
that it would be a strained construction of the power of attorney, taking into
consideration the whole document, to hold that the officers of the corporation
acting as attorneys-in-fact- of Alberto Miranda were authorized to mortgage
or convey the land for only the amount then due from Alberto Miranda in
accordance with the subscription agreement. It can hardly be contended that
the power of attorney contemplated that the property should be mortgaged
three times, that is, each time that an instalment became due. We are
inclined to the view that it was the intention of the parties that the property
should be mortgaged immediately for a sum not to exceed P10,000, not only
for the purpose of paying the subscription agreement of Alberto Miranda, but
also for the purpose, as stated in the power of attorney, of increasing the
capital of the corporation, not the capital stock, in order to carry out the
659
purposes for which it was to be organized. This view of the matter is
confirmed by the subsequent conduct of the parties. Although the corporation
retained the full amount of the loan obtained from Mariano Tablante, and
Alberto Miranda had to pay that obligation, he never sought, so far as the
record shows, to recover from the corporation any part of the sum of
P10,000. As we have already stated, the mortgage was executed on
February 19, 1927; it was satisfied by Alberto Miranda on July 19, 1929, and
he lived until May 24, 1930. It does not appear that he ever sought to evade
the satisfaction of the mortgage by alleging that his attorneys-in-fact
exceeded their authority in mortgaging the property on February 19, 1927 for
P10,000. On the contrary he repaid to Mariano Tablante the amount which
the officers of the corporation had borrowed. The fact that he at no time
sought to recover from the corporation any part of the sum borrowed by the
officers of the corporation in his name certainly tends to show that he
acquiesced in the action taken by them. The phrase "in accordance with the
subscription contract" found in the power of attorney probably was intended
to mean "in pursuance of the subscription agreement", that is, it referred to
the obligation, and had no particular reference to the dates when the different
installments were to be paid.
Section 38 of the Corporation Law provides that the board of directors of
every corporation may at any time declare due and payable to the
corporation unpaid subscriptions to the capital stock and may collect the
same with interest accrued thereon or such percentage of said unpaid
subscriptions as it may deem necessary. In his work, "The Philippine Law of
Stock Corporations", page 97, Justice Fisher expresses the opinion that this
power of the directors is absolute and cannot be limited by the subscription
contract, but this does not mean that the directors may not rely on the
subscription contract if they see fit to do so.
No call is necessary when a subscription is payable, not upon call or
demand by the directors or stockholders, but immediately, or on
specified day, or on or before a specified day, or when it is payable in
installments at specified times. In such cases it is the duty of the
subscriber to pay the subscription or instalment thereof as soon as it
is due, without any call or demand, and, if he fails to do so, an action
may be brought at any time. (Fletcher: Cyclopedia of the Law of
Private Corporations, vol. 2, page 1509.)
When this action was filed on September 2, 1930, the last of the instalments
had already become payable in accordance with the subscription agreement.
it must be borne in mind that this is not an action by the corporation to
recover on a subscription agreement, but an action by the administratrix of a
stockholder to recover what was paid in to the corporation by the stockholder.
It does not appear from the evidence whether or not the corporation has any
debts. Neither the fact that the corporation has ceased to do business nor the
fact that the other stockholders have not been required to pay for their shares
in accordance with their subscription agreement justifies us in ordering the
corporation to return to the plaintiff the amount paid in by Alberto Miranda. If
the directors have failed to perform their duty with respect to the other
stockholders, the law provides a remedy therefor.
In the case of Velasco vs. Poizat (37 Phil., 802), this court held that a stock
subscription is a contract between the corporation and the subscriber, and
courts will enforce it for or against either; that a corporation has no legal
capacity to release a subscriber to its capital stock from the obligation to pay
for his shares, and that any agreement to this effect is invalid.
In the case at bar it is not contended that Alberto Miranda cancelled his
subscription agreement, or that the corporation attempted to release him
therefrom.
For the foregoing reasons, the decision appealed from is affirmed, with the
costs against the appellant.
Street, Malcolm, Ostrand and Imperial, JJ., concur.
660
 was notified by the secretary of the corporation of a resolution adopted by the
board of directors of the corporation on the preceding day, declaring the
unpaid subscriptions to the capital stock of the corporation to have become
due and payable on the following May 31st at the office thereof, the payment
to be made to the treasurer, and stating that all such shares as may have not
been paid then, with the accrued interest up to that date, will be declared
delinquent, advertised for sale at public auction, and sold on the following
June 16th, for the purpose of paying up the amount of the subscription and
accrued interest, with the expenses of the advertisement and sale, unless
said payment was made before. The proper advertisement having been
published, as announced in the aforesaid notice, the plaintiff filed a complaint
in the Court of First Instance of Cebu on May 5th of the same year against
the said corporation, wherein, after relating the above-mentioned facts, he
prayed for a judgment in his favor, decreeing that, in prescribing another
method of paying the subscription to the capital stock different from that
provided in article 46 of its by-laws, in declaring the aforesaid 450 shares
delinquent, and in directing the sale thereof, as advertised, the corporation
had exceeded its executive authority, and as a consequence thereof he
asked that a writ of injunction be issued against the said defendant, enjoining
it from taking any further action of whatever nature in connection with the
acts complained of and that it pay the costs of this suit.

G.R. No. L-19893 March 31, 1923

The plaintiff alleged as the grounds of his petition: (1) That, according to
aforesaid article 46 of the by-law of the corporation, which was inserted in the
ARNALDO F. DE SILVA, plaintiff-appellant, complaint, all the shares subscribed to by the incorporation that were not
vs. paid for at the time of the incorporation, shall be paid out of the 70 per cent of
ABOITIZ & COMPANY, INC., defendant-appellee. the profit obtained, the same to be distributed among the subscribers, who
shall not receive any dividend until said shares were paid in full; (2) that in
Del Rosario and Del Rosario and Andres Jayme for appellant. declaring the plaintiff's unpaid subscription to the capital stock to have
Rodriguez and Zacarias for appellee. become due and payable on May 31st, and in publishing the aforesaid notice
declaring his unpaid shares delinquent, the defendant corporation has
ARAULLO, C. J.: violated the aforesaid article, which prescribes an operative method of paying
for the shares continuously until their full amortization, thus violating and
The plaintiff subscribed for 650 shares of stock of the defendant corporation disregarding a right of the plaintiff vested under the said by-laws; (3) that the
of the value of P500 each, of which he has paid only the total value of 200 aforesaid acts of the defendant corporation were in excess of its powers and
shares, there remaining 450 shares unpaid, for which he was indebted to the executive authority and the plaintiff had no other plain, speedy and adequate
corporation in the sum of P225,000, the value thereof. On April 22, 1922, he remedy in the ordinary course of law than that prayed for in the said

661
complaint, to prevent the defendant from taking any further action in
connection with the sale and alienation of the said shares.
A preliminary injunction having been issued against the defendant, as prayed
for by the plaintiff, upon the giving of the proper bond, and the defendant
having been summoned, the latter filed a demurrer to the complaint on the
ground that the facts alleged therein did not constitute a cause of action, and
that even supposing the plaintiff to have any lawful claim against the
defendant corporation, the special remedy applied for by the plaintiff was not
the most adequate and speedy.
Hearing having been had the court below by an order dated September 21,
1922, sustained the aforesaid demurrer on the first ground, giving the plaintiff
five days within which to amend his complaint, but the said period having
elapsed without the plaintiff having amended his complaint, upon motion of
the defendant, that court, by an order dated the 2d of the following month of
October, dismissed the complaint and ordered the dissolution of the
preliminary injunction previously issued, with costs, to which orders the
plaintiff excepted, asking at the same time for the annulment thereof and a
new hearing, which motion was denied by the lower court. To that ruling the
plaintiff also excepted, and brought the case to this court by the proper bill of
exceptions.
Assuming the truth of the facts alleged in the complaint filed against the
herein defendant, as the filling of a demurrer to a complaint is made on that
assumption, the question to be decided reduces itself to determining whether
or not, under the provision of article 46 of the by-laws of the defendant
corporation, the latter may declare the unpaid shares delinquent, or collect
their value by another method different from that prescribed in the aforecited
article.
Said article reads thus:
ART. 46. The net profit resulting from the annual liquidation shall be
distributed as follows: Ten per cent (10%) for the Board of Directors
and in the manner prescribed in article twenty-six (26) of these by-
laws; ten per cent (10%) for the general manager; ten per cent (10%)
for the reserve fund, and seventy per cent (70%) for the
shareholders in equal parts; Provided, however, That from this
seventy per cent dividend the Board of Directors may deduct such
amount as it may deem fit for the payment of the unpaid subscription
to the capital stock and not pay any dividend to the holders of the
said unpaid shares until they are fully paid; Provided, further, That
when all the shares have been paid in full as provided in the
preceding paragraph, the Board of Directors may also deduct such
amount as it may deem fit for the creation of an emergency special
fund, or extraordinary reserve fund when in its judgment the same
may convenient for the development of the business of the
corporation or for meeting any such contingencies as may arise from
its operation, whenever the distributable dividend is found, after the
foregoing deduction, to be not less than ten per cent (10%) of the
paid up capital stock.
No dividend shall be declared or paid, except when there remains a
net profit after the payment of all the expenses incurred, or
allowances made, by the corporation to carry out the operation of its
business; so that no such dividend may be declared as may affect
the capital of the corporation.
As will be seen from the context of the said article, its first part specifies the
manner in which the net profit from the annual liquidation should be
distributed, fixing a certain per cent for the board of directors; another for the
general manager; another for the reserve fund, and the remaining 70 per
cent to be distributed in equal parts among the shareholders. But it
authorizes or empowers the board of directors to collect the value of the
shares subscribed to and not fully paid by deducting from the 70 per cent,
distributable in equal parts among the shareholders, such amount as may be
deemed convenient, to be applied on the payment of the said shares, and
not to pay the subscriber until the same are fully paid up. In no other way can
the words "Provided, however, that from this seventy per cent dividend the
board of directors may deduct such amount as it may deem fit for the
payment, etc." And this is so clear that in that same article the board of
directors is also authorized to create a special emergency fund or
662
extraordinary reserve fund, when, in its judgment, and in case all the shares
subscribed to have been fully paid, the same is convenient for the
development of the business of the corporation or for meeting any such
contingencies as my arise from its operation, applying said 70 per cent of the
profit on the payment of the shares that may have not been fully paid,
provided that the distributable dividend remaining after the deduction to be
made for the creation of the said special emergency fund or extraordinary
reserve fund is not less than 10 per cent of the capital actually paid. So that it
is discretionary on the part of the board of directors to do whatever is
provided in the said article relative to the application of a part of the 70 per
cent of the profit distributable in equal parts on the payment of the shares
subscribed to and not fully paid, and to the creation of a special emergency
fund or extraordinary reserve fund; and the fact itself that said special fund
may not be created when the dividend appearing to be distributable, after
deducting from the said 70 per cent the amount to be applied on the payment
of the unpaid subscription, is less than 10 per cent of the capital actually
paid, shows that it is the board of directors and not the delinquent subscriber
that may and must judge and decide whether or not such value must be paid
out of a part of the 70 per cent of the profit distributable in equal parts among
the shareholders, as provided in the first part of the said article. It lies
therefore, within the discretion of the board of directors to make use of such
authority.
If the board of directors does not wish to make, or does not make, use of said
authority it has two other remedies for accomplishing the same purpose. As
was said by this court in the case of Velasco vs. Poizat (37 Phil., 802):
The first and most special remedy given by the statute consists in
permitting the corporation to put the unpaid stock for sale and
dispose of it for the account of the delinquent subscriber. In this case
the provisions of sections 38 to 48, inclusive, of the Corporation Law
are applicable and must be followed. The other remedy is by action
in court concerning which we find in section 49 the following
provision:
"Nothing in this Act prevent the directors from collecting, by action in
any court of proper jurisdiction, the amount due on any unpaid
subscription, together with accrued interest and costs and expenses
incurred."
In the instant case the board of directors of the defendant corporation elected
to avail itself of the first of said two remedies, and, complying strictly with the
provisions of sections 37 to 49, inclusive, of the aforesaid Corporation Law,
which is binding upon it and its stockholders. it being an artificial entity
created by virtue of that same law (sec. 2), the board of directors made use
of the discretionary power granted to it by that law and declared that payment
of plaintiff's subscription to 450 shares which had not been paid by him was
due, and that said shares were delinquent, and performed all the other acts
subsequent to said declaration that are mentioned in the complaint, as it did
not deem it advantageous to the corporation to apply on the payment of said
shares, as was authorized by the by-law, a part of the profit that was, or
might have been realized, and was distributable among the stockholders in
equal parts, as to the existence of which profit no allegation is made in the
complaint, or to enforce payment of such shares by bringing in court the
proper action against the debtor or delinquent stockholders. It is, however,
alleged by the appellant that the by-law of the corporation being of the nature
of a contract between it and its stockholders or members, and article 46 of
the by-laws of the said corporation providing an operative method for the
payment of stock subscriptions continuously until the full amortization
thereof, application cannot be made in the present case of the provisions
above cited of the Corporation Law for the purpose contemplated by the
defendant, as the provision of said article must prevail against that law.
Admitting that the provision of article 46 of the said by-laws maybe regarded
as a contract between the defendant corporation and its stockholders , yet as
it is only to the board of directors of the corporation that said articles gives
the authority or right to apply on the payment of unpaid subscriptions such
amount of the 70 per cent of the profit distributable among the shareholders
in equal parts as may be deemed fit, it cannot be maintained that the said
article has prescribe an operative method for the payment of said
subscription continuously until their full amortization, or, what would be the
same thing, that said article has prescribe that sole and exclusive method for
that purpose, for, in the first place, the adoption of that method for the
purpose of collecting the value of subscriptions due and unpaid lies,
663
according to said article, within the discretion of the board of directions, that
is, it is subject to this condition, and this can in no way be reconciled with the
idea of method, which implies something fixed as a rule or permanent
standard, and not variable at the will of somebody and according to the
circumstances; and, in the second place, in connection with the provision of G.R. No. 51765 March 3, 1997
the said article relative to the aforesaid discretionary power of the board of
directors to adopt that method, there is also the discretionary power granted
REPUBLIC PLANTERS BANK, petitioner,
the same board of directors to avail itself, for the same purpose, to either of
vs.
the two remedies prescribed in sections 38 to 49, inclusive, of the aforecited
HON. ENRIQUE A. AGANA, SR., as Presiding Judge, Court of First
Corporation Law.
Instance of Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO
REALTY & DEVELOPMENT CORPORATION and ADALIA F.
In the instant case, the defendant corporation, through its board of directors, ROBES, respondents.
made use of its discretionary power, taking advantage of the first of the two
remedies provided by the aforesaid law. On the other hand, the plaintiff has
no right whatsoever under the provision of the above cited article 46 of the
said by-laws to prevent the board of directors from following, for that
purpose, any other method than that mentioned in the said article, for the HERMOSISIMA, JR., J.:
very reason that the same does not give the stockholders any right in
connection with the determination of the question whether or not there should This is a petition for certiorari seeking the annulment of the Decision 1 of the
be deducted from the 70 per cent of the profit distributable among the then Court of First Instance of Rizal 2 for having been rendered in grave
stockholders such amount as may be deemed fit for the payment of abuse of discretion. Private respondents Robes-Francisco Realty and
subscriptions due and unpaid. Therefore, it is evident that the defendant Development Corporation (hereafter, "the Corporation") and Adalia F. Robes
corporation has not violated, nor disregarded any right of the plaintiff filed in the court a quo, an action for specific performance to compel
recognized by the said by-laws, nor exceeded its authority in the discharge of petitioner to redeem 800 preferred shares of stock with a face value of
its executive functions, nor abused its discretion when it performed the acts P8,000.00 and to pay 1% quarterly interest thereon as quarterly dividend
mentioned in the complaint as grounds thereof, and, consequently, the facts owing them under the terms and conditions of the certificates of stock.
therein alleged do not constitute a cause of action.
The court a quo rendered judgment in favor of private respondents; hence,
For the foregoing, the orders appealed from are affirmed, with the costs of this instant petition.
both instances against the appellant. So ordered.
Herein parties debate only legal issues, no issues of fact having been raised
Street, Malcolm, Avancea, Ostrand, Johns, and Romualdez, JJ., concur. by them in the court a quo. For ready reference, however, the following
narration of pertinent transactions and events is in order:

On September 18, 1961, private respondent Corporation secured a loan from

petitioner in the amount of P120,000.00. As part of the proceeds of the loan,
preferred shares of stocks were issued to private respondent Corporation,

664
through its officers then, private respondent Adalia F. Robes and one Carlos
F. Robes. In other words, instead of giving the legal tender totaling to the full
amount of the loan, which is P120,000.00, petitioner lent such amount
partially in the form of money and partially in the form of stock certificates
numbered 3204 and 3205, each for 400 shares with a par value of P10.00
per share, or for P4,000.00 each, for a total of P8,000.00. Said stock
certificates were in the name of private respondent Adalia F. Robes and
Carlos F. Robes, who subsequently, however, endorsed his shares in favor of
Adalia F. Robes.
Said certificates of stock bear the following terms and conditions:
The Preferred Stock shall have the following rights,
preferences, qualifications and limitations, to wit:
1. Of the right to receive a quarterly dividend of One Per
Centum (1%), cumulative and participating.
xxx xxx xxx
2. That such preferred shares may be redeemed, by the
system of drawing lots, at any time after two (2) years from
the date of issue at the option of the Corporation. . . .
On January 31, 1979, private respondents proceeded against petitioner and
filed a Complaint anchored on private respondents' alleged rights to collect
dividends under the preferred shares in question and to have petitioner
redeem the same under the terms and conditions of the stock certificates.
Private respondents attached to their complaint, a letter-demand dated
January 5, 1979 which, significantly, was not formally offered in evidence.
Petitioner filed a Motion to Dismiss 3 private respondents' Complaint on the
following grounds: (1) that the trial court had no jurisdiction over the subject-
matter of the action; (2) that the action was unenforceable under substantive
law; and (3) that the action was barred by the statute of limitations and/or
laches.
Petitioner's Motion to Dismiss was denied by the trial court in an Order dated
March 16, 1979. 4 Petitioner then filed its Answer on May 2,
1979. 5 Thereafter, the trial court gave the parties ten (10) days from July 30,
1979 to submit their respective memoranda after the submission of which the
case would be deemed submitted for resolution. 6
On September 7, 1979, the trial court rendered the herein assailed decision
in favor of private respondents. In ordering petitioner to pay private
respondents the face value of the stock certificates as redemption price, plus
1% quarterly interest thereon until full payment, the trial court ruled:
There being no issue of fact raised by either of the parties
who filed their respective memoranda delineating their
respective contentions, a judgment on the pleadings,
conformably with an earlier order of the Court, appears to be
in order.
From a further perusal of the pleadings, it appears that the
provision of the stock certificates in question to the effect that
the plaintiffs shall have the right to receive a quarterly
dividend of One Per Centum (1%), cumulative and
participating, clearly and unequivocably [sic] indicates that
the same are "interest bearing stocks" which are stocks
issued by a corporation under an agreement to pay a certain
rate of interest thereon (5 Thompson, Sec. 3439). As such,
plaintiffs become entitled to the payment thereof as a matter
of right without necessity of a prior declaration of dividend.
On the question of the redemption by the defendant of said
preferred shares of stock, the very wordings of the terms and
conditions in said stock certificates clearly allows the same.
To allow the herein defendant not to redeem said preferred
shares of stock and/or pay the interest due thereon despite
the clear import of said provisions by the mere invocation of
alleged Central Bank Circulars prohibiting the same is
665
 tantamount to an impairment of the obligation of contracts
enshrined in no less than the fundamental law itself.
Moreover, the herein defendant is considered in estoppel
from taking shelter behind a General Banking Act provision
to the effect that it cannot buy its own shares of stocks
considering that the very terms and conditions in said stock
certificates allowing their redemption are its own handiwork.
As to the claim by the defendant that plaintiffs' cause of
action is barred by prescription, suffice it to state that the
running of the prescriptive period was considered interrupted
by the written extrajudicial demands made by the plaintiffs
from the defendant. 7
Aggrieved by the decision of the trial court, petitioner elevated the case
before us essentially on pure questions of law. Petitioner's statement of the
issues that it submits for us to adjudicate upon, is as follows:
A. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN ORDERING PETITIONER TO PAY
RESPONDENT ADALIA F. ROBES THE AMOUNT OF
P8213.69 AS INTERESTS FROM 1961 TO 1979 ON HER
PREFERRED SHARES.
B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN ORDERING PETITIONER TO REDEEM
RESPONDENT ADALIA F. ROBES' PREFERRED SHARES
FOR P8,000.00.
C. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN DISREGARDING THE ORDER OF THE
CENTRAL BANK TO PETITIONER TO DESIST FROM
REDEEMING ITS PREFERRED SHARES AND FROM
PAYING DIVIDENDS THEREON . . . .
D. THE TRIAL COURT ERRED IN NOT HOLDING THAT
THE COMPLAINT DOES NOT STATE A CAUSE OF
ACTION.
E. THE TRIAL COURT ERRED IN NOT HOLDING THAT
THE CLAIM OF RESPONDENT ADALIA F. ROBES IS
BARRED BY PRESCRIPTION OR LACHES. 8
The petition is meritorious.
Before passing upon the merits of this petition, it may be pertinent to provide
an overview on the nature of preferred shares and the redemption thereof,
considering that these issues lie at the heart of the dispute.
A preferred share of stock, on one hand, is one which entitles the holder
thereof to certain preferences over the holders of common stock. The
preferences are designed to induce persons to subscribe for shares of a
corporation. 9 Preferred shares take a multiplicity of forms. The most common
forms may be classified into two: (1) preferred shares as to assets; and (2)
preferred shares as to dividends. The former is a share which gives the
holder thereof preference in the distribution of the assets of the corporation in
case of liquidation; 10 the latter is a share the holder of which is entitled to
receive dividends on said share to the extent agreed upon before any
dividends at all are paid to the holders of common stock. 11 There is no
guaranty, however, that the share will receive any dividends. Under the old
Corporation Law in force at the time the contract between the petitioner and
the private respondents was entered into, it was provided that "no
corporation shall make or declare any dividend except from the surplus
profits arising from its business, or distribute its capital stock or property
other than actual profits among its members or stockholders until after the
payment of its debts and the termination of its existence by limitation or
lawful dissolution." 12 Similarly, the present Corporation Code 13 provides that
the board of directors of a stock corporation may declare dividends only out
666
of unrestricted retained earnings. 14 The Code, in Section 43, adopting the
change made in accounting terminology, substituted the phrase "unrestricted
retained earnings," which may be a more precise term, in place of "surplus
profits arising from its business" in the former law. Thus, the declaration of
dividends is dependent upon the availability of surplus profit or unrestricted
retained earnings, as the case may be. Preferences granted to preferred
stockholders, moreover, do not give them a lien upon the property of the
corporation nor make them creditors of the corporation, the right of the
former being always subordinate to the latter. Dividends are thus payable
only when there are profits earned by the corporation and as a general rule,
even if there are existing profits, the board of directors has the discretion to
determine whether or not dividends are to be declared. 15 Shareholders, both
common and preferred, are considered risk takers who invest capital in the
business and who can look only to what is left after corporate debts and
liabilities are fully paid. 16
Redeemable shares, on the other hand, are shares usually preferred, which
by their terms are redeemable at a fixed date, or at the option of either
issuing corporation, or the stockholder, or both at a certain redemption
price.17 A redemption by the corporation of its stock is, in a sense, a
repurchase of it for cancellation. 18 The present Code allows redemption of
shares even if there are no unrestricted retained earnings on the books of the
corporation. This is a new provision which in effect qualifies the general rule
that the corporation cannot purchase its own shares except out of current
retained earnings. 19 However, while redeemable shares may be redeemed
regardless of the existence of unrestricted retained earnings, this is subject
to the condition that the corporation has, after such redemption, assets in its
books to cover debts and liabilities inclusive of capital stock. Redemption,
therefore, may not be made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the corporation to meet its
debts as they mature. 20
We come now to the merits of the case. The petitioner argues that it cannot
be compelled to redeem the preferred shares issued to the private
respondent. We agree. Respondent judge, in ruling that petitioner must
redeem the shares in question, stated that:
On the question of the redemption by the defendant of said
preferred shares of stock, the very wordings of the terms and
conditions in said stock certificates clearly allows the
same. 21
What respondent judge failed to recognize was that while the stock
certificate does allow redemption, the option to do so was clearly
vested in the petitioner bank. The redemption therefore is clearly the
type known as "optional". Thus, except as otherwise provided in the
stock certificate, the redemption rests entirely with the corporation
and the stockholder is without right to either compel or refuse the
redemption of its stock. 22 Furthermore, the terms and conditions set
forth therein use the word "may". It is a settled doctrine in statutory
construction that the word "may" denotes discretion, and cannot be
construed as having a mandatory effect. We fail to see how
respondent judge can ignore what, in his words, are the "very
wordings of the terms and conditions in said stock certificates" and
construe what is clearly a mere option to be his legal basis for
compelling the petitioner to redeem the shares in question.
The redemption of said shares cannot be allowed. As pointed out by the
petitioner, the Central Bank made a finding that said petitioner has been
suffering from chronic reserve deficiency, 23 and that such finding resulted in
a directive, issued on January 31, 1973 by then Gov. G.S. Licaros of the
Central Bank, to the President and Acting Chairman of the Board of the
petitioner bank prohibiting the latter from redeeming any preferred share, on
the ground that said redemption would reduce the assets of the Bank to the
prejudice of its depositors and creditors. 24 Redemption of preferred shares
was prohibited for a just and valid reason. The directive issued by the Central
Bank Governor was obviously meant to preserve the status quo, and to
prevent the financial ruin of a banking institution that would have resulted in
adverse repercussions, not only to its depositors and creditors, but also to
the banking industry as a whole. The directive, in limiting the exercise of a
right granted by law to a corporate entity, may thus be considered as an
exercise of police power. The respondent judge insists that the directive
constitutes an impairment of the obligation of contracts. It has, however,
been settled that the Constitutional guaranty of non-impairment of obligations
667
of contract is limited by the exercise of the police power of the state, the
reason being that public welfare is superior to private rights. 25
The respondent judge also stated that since the stock certificate granted the
private respondents the right to receive a quarterly dividend of One Per
Centum (1%) cumulative and participating, it "clearly and unequivocably (sic)
indicates that the same are "interest bearing stocks" or stocks issued by a
corporation under an agreement to pay a certain rate of interest thereon. As
such, plaintiffs (private respondents herein) become entitled to the payment
thereof as a matter of right without necessity of a prior declaration of
dividend." 26 There is no legal basis for this observation. Both Sec. 16 of the
Corporation Law and Sec. 43 of the present Corporation Code prohibit the
issuance of any stock dividend without the approval of stockholders,
representing not less than two-thirds (2/3) of the outstanding capital stock at
a regular or special meeting duly called for the purpose. These provisions
underscore the fact that payment of dividends to a stockholder is not a matter
of right but a matter of consensus. Furthermore, "interest bearing stocks", on
which the corporation agrees absolutely to pay interest before dividends are
paid to common stockholders, is legal only when construed as requiring
payment of interest as dividends from net earnings or surplus only. 27 Clearly,
the respondent judge, in compelling the petitioner to redeem the shares in
question and to pay the corresponding dividends, committed grave abuse of
discretion amounting to lack or excess of jurisdiction in ignoring both the
terms and conditions specified in the stock certificate, as well as the clear
mandate of the law.
Anent the issue of prescription, this Court so holds that the claim of private
respondent is already barred by prescription as well as laches. Art. 1144 of
the New Civil Code provides that a right of action that is founded upon a
written contract prescribes in ten (10) years. The letter-demand made by the
private respondents to the petitioner was made only on January 5, 1979, or
almost eighteen years after receipt of the written contract in the form of the
stock certificate. As noted earlier, this letter-demand, significantly, was not
formally offered in evidence, nor were any other evidence of demand
presented. Therefore, we conclude that the only time the private respondents
saw it fit to assert their rights, if any, to the preferred shares of stock, was
after the lapse of almost eighteen years. The same clearly indicates that the
right of the private respondents to any relief under the law has already
prescribed. Moreover, the claim of the private respondents is also barred by
laches. Laches has been defined as the failure or neglect, for an
unreasonable length of time, to do that which by exercising due diligence
could or should have been done earlier; it is negligence or omission to assert
a right within a reasonable time, warranting a presumption that the party
entitled to assert it either has abandoned it or declined to assert it. 28
Considering that the terms and conditions set forth in the stock certificate
clearly indicate that redemption of the preferred shares may be made at any
time after the lapse of two years from the date of issue, private respondents
should have taken it upon themselves, after the lapse of the said period, to
inquire from the petitioner the reason why the said shares have not been
redeemed. As it is, not only two years had lapsed, as agreed upon, but an
additional sixteen years passed before the private respondents saw it fit to
demand their right. The petitioner, at the time it issued said preferred shares
to the private respondents in 1961, could not have known that it would be
suffering from chronic reserve deficiency twelve years later. Had the private
respondents been vigilant in asserting their rights, the redemption could have
been effected at a time when the petitioner bank was not suffering from any
financial crisis.
WHEREFORE, the instant petition, being impressed with merit, is hereby
GRANTED. The challenged decision of respondent judge is set aside and
the complaint against the petitioner is dismissed. Costs against the private
respondents. SO ORDERED.
[G.R. No. L-28398. August 6, 1975.]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN L.
MANNING, W.D. McDONALD, E.E. SIMMONS and THE COURT OF TAX
APPEALS, Respondents.
Solicitor General Antonio P. Barredo, Solicitor Lolita O. Gal-lang and
Special Attorney Virgilio J. Saldajena for Petitioner.
Manuel O. Chan for Private Respondents.
668

SYNOPSIS
Under a trust agreement, Julius Reese who owned 24,700 shares of the
25,000 common shares of MANTRASCO, and the three private respondents
who owned the rest, at 100 shares each, deposited all their shares with the
Trustees. The trust agreement provided that upon Reeses death
MANTRASCO shall purchase Reeses shares. The trust agreement was
executed in view of Reeses desire that upon his death the Company would
continue under the management of respondents. Upon Reeses death and
partial payment by the company of Reesess share, a new certificate was
issued in the name of MANTRASCO, and the certificate indorsed to the
Trustees. Subsequently, the stockholders reverted the 24,700 shares in the
Treasury to the capital account of the company as stock dividends to be
distributed to the stockholders. When the entire purchase price of Reeses
interest in the company was paid in full by the latter, the trust agreement was
terminated, and the shares held in trust were delivered to the company.
The Bureau of Internal Revenue concluded that the distribution of the 24,700
shares of Reese as stock dividends was in effect a distribution of the "assets
or property of the corporation." It therefore assessed respondents for
deficiency income taxes as well as for fraud penalty and interest charges.
The Court of Tax Appeals absolved respondent from any liability for receiving
the questioned stock dividends on the ground that their respective one-third
interest in the Company remained the same before and after the declaration
of the stock dividends and only the number of shares held by each of them
had changed.
On a petition for review, the Supreme Court held that the newly acquired
shares were not treasury shares; their declaration as treasury stock
dividends was a complete nullity and that the assessment by the
Commissioner of fraud penalty and the imposition of interest charges
pursuant to the provision of the Tax Code were made in accordance with law.
Judgment of the Court of Tax Appeals se aside.
SYLLABUS
1. PRIVATE CORPORATIONS; SHARES OF STOCKS; TREASURY;
SHARES. Treasury shares are stocks issued and fully paid for and re-
acquired by the corporation either by purchase, donation, forfeiture or other
means. They are therefore issued shares, but being in the treasury they do
not have the status of outstanding shares. Consequently, although a treasury
share, not having been retired by the corporation re-acquiring it, may be re-
issued or sold again, such share, as long as it is held by the corporation as a
treasury share, participates neither in dividends, because dividends cannot
be declared by the corporation to itself, nor in the meetings of the
corporations as voting stock, for otherwise equal distribution of voting powers
among stockholders will be effectively lost and the directors will be able to
perpetuate their control of the corporation though it still represent a paid
for interest in the property of the corporation.
2. ID.; ID.; ID.; DECLARATION OF QUESTIONED SHARES AS TREASURY
STOCK DIVIDENDS, A NULLITY. Where the manifest intention of the
parties to the trust agreement was, in sum and substance, to treat the shares
of a deceased stockholder as absolutely outstanding shares of said
stockholders estate until they were fully paid. the declaration of said shares
as treasury stock dividend was a complete nullity and plainly violative of
public policy.
3. ID.; ID.; STOCK DIVIDEND PAYABLE ONLY FROM RETAINED
EARNINGS. A stock dividend, being one payable in capital stock, cannot
be declared out of outstanding corporate stock, but only from retained
earnings.
4. ID.; ID.; PURCHASE OF HOLDING RESULTING IN DISTRIBUTION OF
EARNINGS TAXABLE. Where by the use of a trust instrument as a
convenient technical device, respondents bestowed unto themselves the full
worth and value of a deceased stockholders corporate holding acquired with
the very earnings of the companies, such package device which obviously is
not designed to carry out the usual stock dividend purpose of corporate
669
expansion reinvestment, e.g., the acquisition of additional facilities and other
capital budget items, but exclusively for expanding the capital base of the
surviving stockholders in the company, cannot be allowed to deflect the
latters responsibilities toward our income tax laws. The conclusion is
ineluctable that whenever the company parted with a portion of its earnings
"to buy" the corporate holdings of the deceased stockholders, it was in
ultimate effect and result making a distribution of such earnings to the
surviving stockholders. All these amounts are consequently subject to
income tax as being, in truth and in fact, a flow of cash benefits to the
surviving stockholders.
5. ID.; ID.; ID.; COMMISSIONER ASSESSMENT BASED ON THE TOTAL
ACQUISITION COST OF THE ALLEGED TREASURY STOCK DIVIDENDS,
ERROR. Where the surviving stockholders, by resolution, partitioned
among themselves, as treasury stock dividends, the deceased stockholders
interest, and earnings of the corporation over a period of years were used to
gradually wipe out the holdings therein of said deceased stockholder, the
earnings (which in effect have been distributed to the surviving stockholders
when they appropriated among themselves the deceased stockholders
interest), should be taxed for each of the corresponding years when
payments were made to the deceaseds estate on account of his shares. In
other words, the Tax Commissioner may not asses the surviving
stockholders, for income tax purposes, the total acquisition cost of the
alleged treasury stock dividends in one lump sum. However, with regard to
payment made with the corporations earnings before the passage of the
resolution declaring as stock dividends the deceased stockholders interest
(while indeed those earnings were utilized in those years to gradually pay off
the value of the deceased stockholders holdings), the surviving stockholders
should be liable (in the absence of evidence that prior to the passage of the
stockholders resolution the contributed of each of the surviving stockholder
rose corresponding), for income tax purposes, to the extent of the aggregate
amount paid by the corporation (prior to such resolution) to buy off the
deceased stockholders shares. The reason is that it was only by virtue of the
authority contained in said resolution that the surviving stockholders actually,
albeit illegally, appropriated and petitioned among themselves the
stockholders equity representing the deceased stockholders interest.
6. TAXATION; INCOME TAX; ASSESSMENT OF FRAUD PENALTY AND
IMPOSITION OF INTEREST CHARGES IN ACCORDANCE WITH LAW
DESPITE NULLITY OF RESOLUTION AUTHORIZING DISTRIBUTION OF
EARNINGS. The fact that the resolution authorizing the distribution of
earnings is null and void is of no moment. Under the National Internal
Revenue Code, income tax is assessed on income received from any
property, activity or service that produces income. The Tax Code stands as
an indifferent, neutral party on the matter of where the income comes from.
The action taken by the Commissioner of assessing fraud penalty and
imposing interest charges pursuant to the provisions of the Tax Code is in
accordance with law.
DECISION
CASTRO, J.:
This is a petition for review of the decision of the Court of Tax Appeals, in
CTA case 1626, which set aside the income tax assessments issued by the
Commissioner of Internal Revenue against John L. Manning, W.D. McDonald
and E.E. Simmons (hereinafter referred to as the respondents), for alleged
undeclared stock dividends received in 1958 from the Manila Trading and
Supply Co. (hereinafter referred to as the MANTRASCO) valued at
P7,973,660.
In 1952 the MANTRASCO had an authorized capital stock of P2,500,000
divided into 25,000 common shares; 24,700 of these were owned by Julius
S. Reese, and the rest, at 100 shares each, by the three respondents.
670

On February 29, 1952, in view of Reeses desire that upon his death
MANTRASCO and its two subsidiaries, MANTRASCO (Guam), Inc. and the
Port Motors, Inc., would continue under the management of the respondents,
a trust agreement on his and the respondents interests in MANTRASCO was
executed by and among Reese (therein referred to as OWNER),
MANTRASCO (therein referred to as COMPANY), the law firm of Ross,
Selph, Carrascoso and Janda (therein referred to as TRUSTEES), and the
respondents (therein referred to as MANAGERS).
The trust agreement pertinently provides as follows:jgc:chanrobles.com.ph
"1. Upon the execution of this agreement the OWNER shall deposit with the
TRUSTEES, duly endorsed and ready for transfer Twenty-Four Thousand
Seven Hundred (24,700) shares of the capital stock of the COMPANY, these
shares being all shares of the capital stock of the COMPANIES belonging to
him . . .
"2. Upon the execution of this Agreement the MANAGERS shall deposit with
the TRUSTEES, duly endorsed and ready for transfer, all shares of the
capital stock of the COMPANIES belonging to any of them.
"3. (a) The OWNER and the MANAGERS, and each of them, agree that if
any of them shall at any time during the life of this trust acquire any additional
shares of stock of any of the COMPANIES, or of any successor company, or
any shares in substitution, exchange or replacement of the shares subject to
this agreement, they shall forthwith endorse and deposit such shares with the
TRUSTEES hereunder and such additional or other shares shall become
subject to this agreement; shares deposited by the OWNER and shares
received by the TRUSTEES as stock dividends on, or in substitution,
exchange or replacement of, such shares so deposited under this agreement
being MANAGERS SHARES.
"(b) All shares deposited under paragraphs 1, 2 and 3(a) hereof shall, during
the life of the OWNER, remain in the name of and shall be voted by the
respective parties making the deposit ...
"4. (a) Upon the death of the OWNER and the receipt by the TRUSTEES of
the initial payment from the company purchasing the OWNERS SHARES,
the TRUSTEES shall cause the OWNERS SHARES to be transferred into
the name of such company and such company shall thereupon transfer such
shares into the name of the TRUSTEES and the TRUSTEES shall hold such
shares until payment for all such shares shall have been made by the
company as provided in this agreement.
x x x
"(c) The TRUSTEES shall vote all stock standing in their name or the name
of their nominees at all meetings and shall be in all respects entitled to all the
rights as owners of said shares, subject, however, to the provisions of this
agreement of trust.
"(d) Any and all dividends paid on said shares after the death of the OWNER
shall be subject to the provisions of this agreement.
x x x
"5. (b) It is expressly agreed and understood, however, that the declaration of
dividends and amount of earnings transferred to surplus shall be subject to
the approval of the TRUSTEES and the TRUSTEES shall participate to such
extent in the affairs of the COMPANIES as they deem necessary to insure
the carrying out of this agreement and the discharge of the obligations of the
COMPANIES and each of them and of the MANAGERS hereunder.
"(c) The TRUSTEES shall designate one or more directors of each of the
COMPANIES as they shall consider advisable and corresponding shares
shall be transferred to such directors to qualify them to act.
x x x
671
 terminate this agreement and dispose of all the shares of stock deposited
hereunder, whether or not payment shall have been made for part of such
"8. (a) Upon the death of the OWNER, the COMPANIES or any one or more stock, applying the proceeds of such sale or disposition to the unpaid
of them shall purchase the OWNERS SHARES; it being the intent that any balance of the purchase price:jgc:chanrobles.com.ph
of the COMPANIES shall purchase all or a proportionate part of the
OWNERS SHARES . . . "(a) If, upon any such sale or disposition of the stock, the TRUSTEES shall
receive an amount in excess of the unpaid balance of the purchase price
"(b) The purchase price of such shares shall be the book value of such share agreed to be paid by the COMPANIES for the OWNERS SHARES such
computed in United States dollars . . . excess, after deducting all expenses, charges and taxes, shall be paid to the
then MANAGERS.
x x x
x x x

"(d) All dividends paid on stock that had been OWNERS SHARES, from the
time of the transfer of such shares by one or more of the COMPANIES to the "17. Until the delivery to him of the shares purchased by him, no MANAGER,
TRUSTEES as provided in Article 4 until payment in full for such OWNERS shall sell, assign, mortgage, pledge, transfer or in anywise encumber or
SHARES shall have been made by each of the COMPANIES which shall hypothecate such shares or his interest in this agreement.
have purchased the same, shall be credited as payments on account of the
purchase price of such shares and shall be a prepayment on account of the x x x
next due installment or installments of such purchase price.

x x x
"19. After the death of the OWNER and during the period of this trust the
COMPANIES shall pay no dividends except as may be authorized by the
TRUSTEES. Dividends on MANAGERS SHARES shall, so long as they
"12. The TRUSTEES may from time to time increase or decrease the unpaid shall not be in default under this agreement, be paid over by the TRUSTEES
balance of the purchase price of the shares being purchased by any to the MANAGERS. Dividends on OWNERS SHARES shall be applied in
COMPANY or COMPANIES should they in their exclusive discretion liquidation of the COMPANIES liabilities hereunder as provided in Article
determine that such increase or decrease would be necessary to carry out 8(d).
the intention of the parties that the Estate and heirs of the OWNER shall
receive the fair value of the shares deposited in Trust as such value existed x x x
at the date of the death of the OWNER. . .

"13. Should the said COMPANIES or any of them be unable or unwilling to

comply with their obligations hereunder when due, the TRUSTEES may "26. The TRUSTEES may, after the death of the OWNER and during the life

672
of this trust, vote any and all shares held in trust, at any general and special December 19, 1958 which action is hereby approved and confirmed."cralaw
meeting of stockholders for all purposes, including but not limited to wholly or virtua1aw library
partially liquidating or reducing the capital of any COMPANY or
COMPANIES, authorizing the sale of any or all assets, and election of On November 25, 1963 the entire purchase price of Reeses interest in
directors . . . MANTRASCO was finally paid in full by the latter, On May 4, 1964 the trust
agreement was terminated and the trustees delivered to MANTRASCO all
x x x the shares which they were holding in trust.

Meanwhile, on September 14, 1962, an examination of MANTRASCOs

books was ordered by the Bureau of Internal Revenue. The examination
"28. The COMPANIES and each of them undertake and agree by proper disclosed that (a) as of December 31, 1958 the 24,700 shares declared as
corporate act to reduce their capitalization, sell or encumber their assets, dividends had been proportionately distributed to the respondents,
amend their articles of incorporation, reorganize, liquidate, dissolve and do representing a total book value or acquisition cost of P7,973,660; (b) the
all other things the TRUSTEES in their discretion determine to be necessary respondents failed to declare the said stock dividends as part of their taxable
to enable them to comply with their obligations hereunder and the income for the year 1958; and (c) from 1956 to 1961 the following amounts
TRUSTEES are hereby irrevocably authorized to vote all shares of the were paid by MANTRASCO to Reeses estate by virtue of the trust
COMPANIES and each of them at any general or special meeting for the agreement, to wit:chanrob1es virtual 1aw library
accomplishment of such purposes. . . ."cralaw virtua1aw library
Amounts
On October 19, 1954 Reese died. The projected transfer of his shares in the
name of MANTRASCO could not, however, be immediately effected for lack Year Liabilities Paid
of sufficient funds to cover initial payment on the shares.
1956 P5,830,587.86 P 2,143,073.00
On February 2, 1955, after MANTRASCO made a partial payment of Reeses
shares, the certificate for the 24,700 shares in Reeses name was cancelled 1957 5,317,137.86 513,450.00
and a new certificate was issued in the name of MANTRASCO. On the same
date, and in the meantime that Reeses interest had not been fully paid, the 1958 4,824,059.28 493,078.58
new certificate was endorsed to the law firm of Ross, Selph, Carrascoso and
Janda, as trustees for and in behalf of MANTRASCO. 1959 4,319,420.14 504,639.14

On December 22, 1958, at a special meeting of MANTRASCO stockholders, 1960 3,849,720.14 469,700.00
the following resolution was passed:jgc:chanrobles.com.ph
1961 3,811,387.69 38,332.45
"RESOLVED, that the 24,700 shares in the Treasury be reverted back to the
capital account of the company as a stock dividend to be distributed to On the basis of their examination, the BIR examiners concluded that the
shareholders of record at the close of business on December 22, 1958, in distribution of Reeses shares as stock dividends was in effect a distribution
accordance with the action of the Board of Directors at its meeting on of the "asset or property of the corporation as may be gleaned from the

673
payment of cash for the redemption of said stock and distributing the same A. National Internal Revenue Code
as stock dividend." On April 14, 1965 the Commissioner of Internal Revenue
issued notices of assessment for deficiency income taxes to the respondents "SEC. 83. Distribution of dividends or assets by corporations (a) Definition
for the year 1958, as follows:chanrob1es virtual 1aw library of Dividends The term dividends when used in this Title means any
distribution made by a corporation to its shareholders out of its earnings or
J.L. Manning W.D. McDonald E.E. Simmons profits accrued since March first, nineteen hundred and thirteen, and payable
to its shareholders, whether in money or in other property.
Deficiency Income Tax P1,416,469.00 P1,442,719.00 P1,450,434.00
"Where a corporation distributes all of its assets in complete liquidation or
Add 50% surcharge* 723,234.50 721,359.507 25,217.00 dissolution the gain realized or loss sustained by the stockholder, whether
individual or corporate, is a taxable income or deductible loss, as the case
1/2% monthly interest from may be.

6-20-59 to 6-20-62 260,364.42 259,689.42 261,078.12 "(b) Stock dividend. A stock dividend representing the transfer of surplus
to capital account shall not be subject to tax. However, if a corporation
cancels or redeems stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or redemption, in whole
TOTAL AMOUNT DUE or in part, essentially equivalent to the distribution of a taxable dividend, the
amount so distributed in redemption or cancellation of the stock shall be
& COLLECTIBLE P2,430,067.92 P2,423,767.92 2,436,729.12 considered as taxable income to the extent that it represents a distribution of
earnings or profits accumulated after March first, nineteen hundred and
The respondents unsuccessfully challenged the foregoing assessments and, thirteen."cralaw virtua1aw library
failing to secure a favorable reconsideration, appealed to the Court of Tax
Appeals. B. B.I.R. Regulations

On October 30, 1967 the CTA rendered judgment absolving the respondents "SEC. 251. Dividends paid in property. Dividends paid in securities or
from any liability for receiving the questioned stock dividends on the ground other property (other than its own stock), in which the earnings of the
that their respective one-third interest in MANTRASCO remained the same corporation have been invested, are income to the recipients to the amount
before and after the declaration of stock dividends and only the number of of the full market value of such property when receivable by individual
shares held by each of them had changed. stockholders . . .

Hence, the present recourse. "SEC. 252. Stock dividend. A stock dividend which represents the transfer
of surplus to capital account is not subject to income tax. However, a
All the parties rely upon the same provisions of the Tax Code and internal dividend in stock may constitute taxable income to the recipients thereof
revenue regulations to bolster their respective positions. These notwithstanding the fact that the officers or directors of the corporation (as
are:chanrob1es virtual 1aw library defined in section 84) choose to call such distribution as a stock dividend.
The distinction between a stock dividend which does not, and one which

674
does, constitute income taxable to the shareholders is the distinction
between a stock dividend which works no change in the corporate entity, the
same interest in the same corporation being represented after the distribution
by more shares of precisely the same character, and a stock dividend where
there either has been change of corporate identity or a change in the nature
of the shares issued as dividends whereby the proportional interest of the
shareholder after the distribution is essentially different from the former
interest. A stock dividend constitutes income if it gives the shareholder an
interest different from that which his former stockholdings represented. A
stock dividend does not constitute income if the new shares confer no
different rights or interests than did the old the new certificate plus the old
representing the same proportionate interest in the net assets of the
corporation as did the old."cralaw virtua1aw library
The parties differ, however, on the taxability of the "treasury" stock dividends
received by the respondents.
The respondents anchor their argument on the same basis as the Court of
Tax Appeals; whereas the Commissioner maintains that the full value
(P7,973,660) of the shares redeemed from Reese by MANTRASCO which
were subsequently distributed to the respondents as stock dividends in 1958
should be taxed as income of the respondents for that year, the said
distribution being in effect a distribution of cash. The respondents interests in
MANTRASCO, he further argues, were only .4% prior to the declaration of
the stock dividends in 1958, but rose to 33 1/3% each after the said
declaration.
In submitting their respective contentions, it is the assumption of both parties
that the 24,700 shares declared as stock dividends were treasury shares. We
are however convinced, after a careful study of the trust agreement, that the
said shares were not, on December 22, 1958 or at anytime before or after
that date, treasury shares. The reasons are quite plain.
Although authorities may differ on the exact legal and accounting status of
so-called "treasury shares," 1 they are more or less in agreement that
treasury shares are stocks issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or other means. 2
Treasury shares are therefore issued shares, but being in the treasury they
do not have the status of outstanding shares. 3 Consequently, although a
treasury share, not having been retired by the corporation re-acquiring it,
may be re-issued or sold again, such share, as long as it is held by the
corporation as a treasury share, participates neither in dividends, because
dividends cannot be declared by the corporation to itself, 4 nor in the
meetings of the corporation as voting stock, for otherwise equal distribution
of voting powers among stockholders will be effectively lost and the directors
will be able to perpetuate their control of the corporation, 5 though it still
represents a paid-for interest in the property of the corporation. 6 The
foregoing essential features of a treasury stock are lacking in the questioned
shares. Thus,
(a) under paragraph 4(c) of the trust agreement, the trustees were authorized
to vote all stock standing in their names at all meetings and to exercise all
rights "as owners of said shares" this authority is reiterated in paragraphs
26 and 28 of the trust agreement;
(b) under paragraph 4(d), "Any and all dividends paid on said shares after the
death of the OWNER shall be subject to the provisions of this agreement;"
(c) under paragraph 5(b), the amount of retained earnings to be declared as
dividends was made subject to the approval of the trustees of the 24,700
shares;
(d) under paragraph 5(c), the choice of corporate directors was delegated
exclusively to the trustees who were also given the authority to transfer
qualifying shares to such directors; and
(e) under paragraph 19, MANTRASCO and its two subsidiaries were
expressly prohibited from paying "dividends except as may be authorized by
the TRUSTEES;" in the same paragraph mention was also made of
"dividends on OWNERS SHARES" which shall be applied to the liquidation
of the liabilities of the three companies for the price of Reeses shares.
The manifest intention of the parties to the trust agreement was, in sum and
substance, to treat the 24,700 shares of Reese as absolutely outstanding
675
shares of Reeses estate until they were fully paid. Such being the true
nature of the 24,700 shares, their declaration as treasury stock dividend in
1958 was a complete nullity and plainly violative of public policy. A stock
dividend, being one payable in capital stock, cannot be declared out of
outstanding corporate stock, but only from retained earnings: 7
Of pointed relevance is this useful discussion of the nature of a stock
dividend: 8 toward our income tax laws. The conclusion is thus ineluctable that whenever
"A stock dividend always involves a transfer of surplus (or profit) to capital
stock. Graham and Katz, Accounting in Law Practice, 2d ed. 1938, No. 70.
As the court said in United States v. Siegel, 8 Cir., 1931, 52 F 2d 63, 65, 78
ALR 672: A stock dividend is a conversion of surplus or undivided profits into
capital stock, which is distributed to stockholders in lieu of a cash dividend.
Congress itself has defined the term dividend in No. 115(a) of the Act as
meaning any distribution made by a corporation to its shareholders, whether
in money or in other property, out of its earnings or profits. In Eisner v.
Macomber, 1920, 252 US 189, 40 S Ct 189, 64 L Ed 521, 9 ALR 1570, both
the prevailing and the dissenting opinions recognized that within the meaning
of the revenue acts the essence of a stock dividend was the segregation out
of surplus account of a definite portion of the corporate earnings as part of
the permanent capital resources of the corporation by the device of
capitalizing the same, and the issuance to the stockholders of additional
shares of stock representing the profits so capitalized."cralaw virtua1aw
library
The declaration by the respondents and Reeses trustees of MANTRASCOs
alleged treasury stock dividends in favor of the former, brings, however, into
clear focus the ultimate purpose which the parties to the trust instrument
aimed to realize: to make the respondents the sole owners of Reeses
interest in MANTRASCO by utilizing the periodic earnings of that company
and its subsidiaries to directly subsidize their purchase of the said interests,
and by making it appear outwardly, through the formal declaration of non-
existent stock dividends in the treasury, that they have not received any
income from those firms when, in fact, by that declaration they secured to
themselves the means to turn around as full owners of Reeses shares. In
other words, the respondents, using the trust instrument as a convenient
technical device, bestowed unto themselves the full worth and value of
Reeses corporate holdings with the use of the very earnings of the
companies. Such package device, obviously not designed to carry out the
usual stock dividend purpose of corporate expansion reinvestment, e.g. the
acquisition of additional facilities and other capital budget items, but
exclusively for expanding the capital base of the respondents in
MANTRASCO, cannot be allowed to deflect the respondents responsibilities
the companies involved herein parted with a portion of their earnings "to buy"
the corporate holdings of Reese, they were in ultimate effect and result
making a distribution of such earnings to the respondents. All these amounts
are consequently subject to income tax as being, in truth and in fact, a flow of
cash benefits to the respondents.
We are of the opinion, however, that the Commissioner erred in assessing
the respondents the total acquisition cost (P7,973,660) of the alleged
treasury stock dividends in one lump sum. The record shows that the
earnings of MANTRASCO over a period of years were used to gradually
wipe out the holdings therein of Reese. Consequently, those earnings, which
we hold, under the facts disclosed in the case at bar, as in effect having been
distributed to the respondents, should be taxed for each of the corresponding
years when payments were made to Reeses estate on account of his 24,700
shares. With regard to payments made with MANTRASCO earnings in 1958
and the years before, while indeed those earnings were utilized in those
years to gradually pay off the value of Reeses holdings in MANTRASCO,
there is no evidence from which it can be inferred that prior to the passage of
the stockholders resolution of December 22, 1958 the contributed equity of
each of the respondents rose correspondingly. It was only by virtue of the
authority contained in the said resolution that the respondents actually, albeit
illegally, appropriated and partitioned among themselves the stockholders
equity representing Reeses interests in MANTRASCO. As those payments
accrued in favor of the respondents in 1958 they are and should be liable, for
income tax purposes, to the extent of the aggregate amount paid, from 1955
to 1958, by MANTRASCO to buy off Reeses shares.
The fact that the resolution authorizing the distribution of the said earnings is
null and void is of no moment. Under the National Internal Revenue Code,
676
income tax is assessed on income received from any property, activity or
service that produces income. 9 The Tax Code stands as an indifferent,
neutral party on the matter of where the income comes from. 10

Subject to the foregoing qualifications, we find the action taken by the G.R. No. L-21601 December 28, 1968
Commissioner in all other respects that is, the assessment of a fraud
penalty and imposition of interest charges pursuant to the provisions of the
NIELSON & COMPANY, INC., plaintiff-appellant,
Tax Code to be in accordance with law.
vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.
ACCORDINGLY, the judgment of the Court of Tax Appeals absolving the
respondents from any deficiency income tax liability is set aside, and this
case is hereby remanded to the Court of Tax Appeals for further proceedings. RESOLUTION
More specifically, the Court of Tax Appeals shall recompute the income tax
liabilities of the respondents in accordance with this decision and with the Tax ZALDIVAR, J.:
Code, and thereafter pronounce and enter judgment accordingly. No costs.
Lepanto seeks the reconsideration of the decision rendered on December
Makasiar, Esguerra, Muoz Palma and Martin, JJ., concur. 17, 1966. The motion for reconsideration is based on two sets of grounds
the first set consisting of four principal grounds, and the second set
Teehankee, J., is on leave. consisting of five alternative grounds, as follows:

Principal Grounds:

1. The court erred in overlooking and failing to apply the proper law
applicable to the agency or management contract in question,
namely, Article 1733 of the Old Civil Code (Article 1920 of the new),
by virtue of which said agency was effectively revoked and
terminated in 1945 when, as stated in paragraph 20 of the complaint,
"defendant voluntarily ... prevented plaintiff from resuming
management and operation of said mining properties."

2. The court erred in holding that paragraph II of the management

contract (Exhibit C) suspended the period of said contract.

3. The court erred in reversing the ruling of the trial judge, based on
well-settled jurisprudence of this Supreme Court, that the

677
 management agreement was only suspended but not extended on
account of the war.
4. The court erred in reversing the finding of the trial judge that
Nielson's action had prescribed, but considering only the first claim
and ignoring the prescriptibility of the other claims.
Alternative Grounds:
5. The court erred in holding that the period of suspension of the
contract on account of the war lasted from February 1942 to June
26, 1948.
6. Assuming arguendo that Nielson is entitled to any relief, the court
erred in awarding as damages (a) 10% of the cash dividends
declared and paid in December, 1941; (b) the management fee of
P2,500.00 for the month of January, 1942; and (c) the full contract
price for the extended period of sixty months, since these damages
were neither demanded nor proved and, in any case, not allowable
under the general law of damages.
7. Assuming arguendo that appellant is entitled to any relief, the
court erred in ordering appellee to issue and deliver to appellant
shares of stock together with fruits thereof.
8. The court erred in awarding to appellant an undetermined amount
of shares of stock and/or cash, which award cannot be ascertained
and executed without further litigation.
9. The court erred in rendering judgment for attorney's fees.
We are going to dwell on these grounds in the order they are presented.
1. In its first principal ground Lepanto claims that its own counsel and this
Court had overlooked the real nature of the management contract entered
into by and between Lepanto and Nielson, and the law that is applicable on
said contract. Lepanto now asserts for the first time and this is done in a
motion for reconsideration - that the management contract in question is a
contract of agency such that it has the right to revoke and terminate the said
contract, as it did terminate the same, under the law of agency, and
particularly pursuant to Article 1733 of the Old Civil Code (Article 1920 of the
New Civil Code).
We have taken note that Lepanto is advancing a new theory. We have
carefully examined the pleadings filed by Lepanto in the lower court, its
memorandum and its brief on appeal, and never did it assert the theory that it
has the right to terminate the management contract because that contract is
one of agency which it could terminate at will. While it is true that in its ninth
and tenth special affirmative defenses, in its answer in the court below,
Lepanto pleaded that it had the right to terminate the management contract
in question, that plea of its right to terminate was not based upon the ground
that the relation between Lepanto and Nielson was that of principal and
agent but upon the ground that Nielson had allegedly not complied with
certain terms of the management contract. If Lepanto had thought of
considering the management contract as one of agency it could have
amended its answer by stating exactly its position. It could have asserted its
theory of agency in its memorandum for the lower court and in its brief on
appeal. This, Lepanto did not do. It is the rule, and the settled doctrine of this
Court, that a party cannot change his theory on appeal that is, that a party
cannot raise in the appellate court any question of law or of fact that was not
raised in the court below or which was not within the issue made by the
parties in their pleadings (Section 19, Rule 49 of the old Rules of Court, and
also Section 18 of the new Rules of Court; Hautea vs. Magallon, L-20345,
November 28, 1964; Northern Motors, Inc. vs. Prince Line, L-13884,
February 29, 1960; American Express Co. vs. Natividad, 46 Phil. 207;
Agoncillo vs. Javier, 38 Phil. 424 and Molina vs. Somes, 24 Phil 49).
At any rate, even if we allow Lepanto to assert its new theory at this very late
stage of the proceedings, this Court cannot sustain the same.
Lepanto contends that the management contract in question (Exhibit C) is
one of agency because: (1) Nielson was to manage and operate the mining
properties and mill on behalf, and for the account, of Lepanto; and (2)
678
Nielson was authorized to represent Lepanto in entering, on Lepanto's
behalf, into contracts for the hiring of laborers, purchase of supplies, and the
sale and marketing of the ores mined. All these, Lepanto claims, show that
Nielson was, by the terms of the contract, destined to execute juridical acts
not on its own behalf but on behalf of Lepanto under the control of the Board
of Directors of Lepanto "at all times". Hence Lepanto claims that the contract
is one of agency. Lepanto then maintains that an agency is revocable at the
will of the principal (Article 1733 of the Old Civil Code), regardless of any
term or period stipulated in the contract, and it was in pursuance of that right
that Lepanto terminated the contract in 1945 when it took over and assumed
exclusive management of the work previously entrusted to Nielson under the
contract. Lepanto finally maintains that Nielson as an agent is not entitled to
damages since the law gives to the principal the right to terminate the agency
at will.
Because of Lepanto's new theory We consider it necessary to determine
the nature of the management contract whether it is a contract of agency
or a contract of lease of services. Incidentally, we have noted that the lower
court, in the decision appealed from, considered the management contract
as a contract of lease of services.
Article 1709 of the Old Civil Code, defining contract of agency, provides:
By the contract of agency, one person binds himself to render some
service or do something for the account or at the request of another.
Article 1544, defining contract of lease of service, provides:
In a lease of work or services, one of the parties binds himself to
make or construct something or to render a service to the other for a
price certain.
In both agency and lease of services one of the parties binds himself to
render some service to the other party. Agency, however, is distinguished
from lease of work or services in that the basis of agency is representation,
while in the lease of work or services the basis is employment. The lessor of
services does not represent his employer, while the agent represents his
principal. Manresa, in his "Commentarios al Codigo Civil Espaol" (1931,
Tomo IX, pp. 372-373), points out that the element of representation
distinguishes agency from lease of services, as follows:
Nuestro art. 1.709 como el art. 1.984 del Codigo de Napoleon y
cuantos textos legales citamos en las concordancias, expresan
claramente esta idea de la representacion, "hacer alguna cosa por
cuenta o encargo de otra" dice nuestro Codigo; "poder de hacer
alguna cosa para el mandante o en su nombre" dice el Codigo de
Napoleon, y en tales palabras aparece vivo y luminoso el concepto y
la teoria de la representacion, tan fecunda en ensenanzas, que a su
sola luz es como se explican las diferencias que separan el mandato
del arrendamiento de servicios, de los contratos inominados, del
consejo y de la gestion de negocios.
En efecto, en el arrendamiento de servicios al obligarse para su
ejecucion, se trabaja, en verdad, para el dueno que remunera la
labor, pero ni se le representa ni se obra en su nombre....
On the basis of the interpretation of Article 1709 of the old Civil Code, Article
1868 of the new Civil Code has defined the contract of agency in more
explicit terms, as follows:
By the contract of agency a person binds himself to render some
service or to do something in representation or on behalf of another,
with the consent or authority of the latter.
There is another obvious distinction between agency and lease of services.
Agency is a preparatory contract, as agency "does not stop with the agency
because the purpose is to enter into other contracts." The most characteristic
feature of an agency relationship is the agent's power to bring about
business relations between his principal and third persons. "The agent is
destined to execute juridical acts (creation, modification or extinction of
relations with third parties). Lease of services contemplate only material
679
(non-juridical) acts." (Reyes and Puno, "An Outline of Philippine Civil Law,"
Vol. V, p. 277).
In the light of the interpretations we have mentioned in the foregoing
paragraphs let us now determine the nature of the management contract in
question. Under the contract, Nielson had agreed, for a period of five years,
with the right to renew for a like period, to explore, develop and operate the
mining claims of Lepanto, and to mine, or mine and mill, such pay ore as
may be found therein and to market the metallic products recovered
therefrom which may prove to be marketable, as well as to render for
Lepanto other services specified in the contract. We gather from the contract
that the work undertaken by Nielson was to take complete charge subject at
all times to the general control of the Board of Directors of Lepanto, of the
exploration and development of the mining claims, of the hiring of a sufficient
and competent staff and of sufficient and capable laborers, of the prospecting
and development of the mine, of the erection and operation of the mill, and of
the benefication and marketing of the minerals found on the mining
properties; and in carrying out said obligation Nielson should proceed
diligently and in accordance with the best mining practice. In connection with
its work Nielson was to submit reports, maps, plans and recommendations
with respect to the operation and development of the mining properties,
make recommendations and plans on the erection or enlargement of any
existing mill, dispatch mining engineers and technicians to the mining
properties as from time to time may reasonably be required to investigate
and make recommendations without cost or expense to Lepanto. Nielson
was also to "act as purchasing agent of supplies, equipment and other
necessary purchases by Lepanto, provided, however, that no purchase shall
be made without the prior approval of Lepanto; and provided further, that no
commission shall be claimed or retained by Nielson on such purchase"; and
"to submit all requisition for supplies, all constricts and arrangement with
engineers, and staff and all matters requiring the expenditures of money,
present or future, for prior approval by Lepanto; and also to make contracts
subject to the prior approve of Lepanto for the sale and marketing of the
minerals mined from said properties, when said products are in a suitable
condition for marketing."1
It thus appears that the principal and paramount undertaking of Nielson
under the management contract was the operation and development of the
mine and the operation of the mill. All the other undertakings mentioned in
the contract are necessary or incidental to the principal undertaking these
other undertakings being dependent upon the work on the development of
the mine and the operation of the mill. In the performance of this principal
undertaking Nielson was not in any way executing juridical acts for Lepanto,
destined to create, modify or extinguish business relations between Lepanto
and third persons. In other words, in performing its principal undertaking
Nielson was not acting as an agent of Lepanto, in the sense that the term
agent is interpreted under the law of agency, but as one who was performing
material acts for an employer, for a compensation.
It is true that the management contract provides that Nielson would also act
as purchasing agent of supplies and enter into contracts regarding the sale of
mineral, but the contract also provides that Nielson could not make any
purchase, or sell the minerals, without the prior approval of Lepanto. It is
clear, therefore, that even in these cases Nielson could not execute juridical
acts which would bind Lepanto without first securing the approval of Lepanto.
Nielson, then, was to act only as an intermediary, not as an agent.
Lepanto contends that the management contract in question being one of
agency it had the right to terminate the contract at will pursuant to the
provision of Article 1733 of the old Civil Code. We find, however, a proviso in
the management contract which militates against this stand of Lepanto.
Paragraph XI of the contract provides:
Both parties to this agreement fully recognize that the terms of this
Agreement are made possible only because of the faith or
confidence that the Officials of each company have in the other;
therefore, in order to assure that such confidence and faith shall
abide and continue, NIELSON agrees that LEPANTO may cancel
this Agreement at any time upon ninety (90) days written notice, in
the event that NIELSON for any reason whatsoever, except acts of
God, strike and other causes beyond its control, shall cease to
prosecute the operation and development of the properties herein
680
 described, in good faith and in accordance with approved mining
practice.
GENTLEMEN:
It is thus seen, from the above-quoted provision of paragraph XI of the
management contract, that Lepanto could not terminate the agreement at
will. Lepanto could terminate or cancel the agreement by giving notice of
termination ninety days in advance only in the event that Nielson should
prosecute in bad faith and not in accordance with approved mining practice
the operation and development of the mining properties of Lepanto. Lepanto
could not terminate the agreement if Nielson should cease to prosecute the
operation and development of the mining properties by reason of acts of
God, strike and other causes beyond the control of Nielson.
Re: Mankayan Copper Mines
After an examination of your property by our engineers, we
have decided to offer as we hereby offer to underwrite the
entire issue of stock of a corporation to be formed for the
purpose of taking over said properties, said corporation to
have an authorized capital of P1,750,000.00, of which
P700,000.00 will be issued in escrow to the claim-owners in
exchange for their claims, and the balance of P1,050,000.00
we will sell to the public at par or take ourselves.

The phrase "Both parties to this agreement fully recognize that the terms of The arrangement will be under the following conditions:
this agreement are made possible only because of the faith and confidence
of the officials of each company have in the other" in paragraph XI of the 1. The subscriptions for cash shall be payable 50% at time of
management contract does not qualify the relation between Lepanto and subscription and the balance subject to the call of the Board
Nielson as that of principal and agent based on trust and confidence, such of Directors of the proposed corporation.
that the contractual relation may be terminated by the principal at any time
that the principal loses trust and confidence in the agent. Rather, that phrase
2. We shall have an underwriting and brokerage commission
simply implies the circumstance that brought about the execution of the
of 10% of the P1,050,000.00 to be sold for cash to the
management contract. Thus, in the annual report for 1936 2, submitted by Mr.
public, said commission to be payable from the first payment
C. A. Dewit, President of Lepanto, to its stockholders, under date of March
of 50% on each subscription.
15, 1937, we read the following:

3. We will bear the cost of preparing and mailing any

To the stockholders
prospectus that may be required, but no such prospectus will
be sent out until the text thereof has been first approved by
xxx xxx xxx the Board of Directors of the proposed corporation.

The incorporation of our Company was effected as a result of

negotiations with Messrs. Nielson & Co., Inc., and an offer by these
gentlemen to Messrs. C. I. Cookes and V. L. Lednicky, dated August
11, 1936, reading as follows:

Messrs. Cookes and Lednicky,

Present

681
 4. That after the organization of the corporation, all operating
contract be entered into between ourselves and said
corporation, under the terms which the property will be
developed and mined and a mill erected, under our
supervision, our compensation to be P2,000.00 per month
until the property is put on a profitable basis and P2,500.00
per month plus 10% of the net profits for a period of five
years thereafter.
5. That we shall have the option to renew said operating
contract for an additional period of five years, on the same
basis as the original contract, upon the expiration thereof.
It is understood that the development and mining operations
on said property, and the erection of the mill thereon, and the
expenditures therefor shall be subject to the general control
of the Board of Directors of the proposed corporation, and, in
case you accept this proposition, that a detailed operating
contract will be entered into, covering the relationships
between the parties.
Yours very truly,
(Sgd.) L. R. Nielson
Pursuant to the provisions of paragraph 2 of this offer, Messrs.
Nielson & Co., took subscriptions for One Million Fifty Thousand
Pesos (P1,050,000.00) in shares of our Company and their
underwriting and brokerage commission has been paid. More than
fifty per cent of these subscriptions have been paid to the Company
in cash. The claim owners have transferred their claims to the
Corporation, but the P700,000.00 in stock which they are to receive
therefor, is as yet held in escrow.
Immediately upon the formation of the Corporation Messrs. Nielson
& Co., assumed the Management of the property under the control of
the Board of Directors. A modification in the Management Contract
was made with the consent of all the then stockholders, in virtue of
which the compensation of Messrs. Nielson & Co., was increased to
P2,500.00 per month when mill construction began. The formal
Management Contract was not entered into until January 30, 1937.
xxx xxx xxx
Manila, March 15, 1937
(Sgd.) C. A. DeWitt
President
We can gather from the foregoing statements in the annual report for 1936,
and from the provision of paragraph XI of the Management contract, that the
employment by Lepanto of Nielson to operate and manage its mines was
principally in consideration of the know-how and technical services that
Nielson offered Lepanto. The contract thus entered into pursuant to the offer
made by Nielson and accepted by Lepanto was a "detailed operating
contract". It was not a contract of agency. Nowhere in the record is it shown
that Lepanto considered Nielson as its agent and that Lepanto terminated the
management contract because it had lost its trust and confidence in Nielson.
The contention of Lepanto that it had terminated the management contract in
1945, following the liberation of the mines from Japanese control, because
the relation between it and Nielson was one of agency and as such it could
terminate the agency at will, is, therefore, untenable. On the other hand, it
can be said that, in asserting that it had terminated or cancelled the
management contract in 1945, Lepanto had thereby violated the express
terms of the management contract. The management contract was renewed
to last until January 31, 1947, so that the contract had yet almost two years
to go upon the liberation of the mines in 1945. There is no showing that
Nielson had ceased to prosecute the operation and development of the
mines in good faith and in accordance with approved mining practice which
would warrant the termination of the contract upon ninety days written notice.
In fact there was no such written notice of termination. It is an admitted fact
that Nielson ceased to operate and develop the mines because of the war
682
a cause beyond the control of Nielson. Indeed, if the management contract in
question was intended to create a relationship of principal and agent
between Lepanto and Nielson, paragraph XI of the contract should not have
been inserted because, as provided in Article 1733 of the old Civil Code,
agency is essentially revocable at the will of the principal that means, with
or without cause. But precisely said paragraph XI was inserted in the
management contract to provide for the cause for its revocation. The
provision of paragraph XI must be given effect.
In the construction of an instrument where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give
effect to all,3 and if some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.4
It is Our considered view that by express stipulation of the parties, the
management contract in question is not revocable at the will of Lepanto. We
rule that this management contract is not a contract of agency as defined in
Article 1709 of the old Civil Code, but a contract of lease of services as
defined in Article 1544 of the same Code. This contract can not be
unilaterally revoked by Lepanto.
The first ground of the motion for reconsideration should, therefore, be
brushed aside.
2. In the second, third and fifth grounds of its motion for reconsideration,
Lepanto maintains that this Court erred, in holding that paragraph 11 of the
management contract suspended the period of said contract, in holding that
the agreement was not only suspended but was extended on account of the
war, and in holding that the period of suspension on account of the war
lasted from February, 1942 to June 26, 1948. We are going to discuss these
three grounds together because they are interrelated.
In our decision we have dwelt lengthily on the points that the management
contract was suspended because of the war, and that the period of the
contract was extended for a period equivalent to the time when Nielson was
unable to perform the work of mining and milling because of the adverse
effects of the war on the work of mining and milling.
It is the contention of Lepanto that the happening of those events, and the
effects of those events, simply suspended the performance of the obligations
by either party in the contract, but did not suspend the period of the contract,
much less extended the period of the contract.
We have conscientiously considered the arguments of Lepanto in support of
these three grounds, but We are not persuaded to reconsider the rulings that
We made in Our decision.
We want to say a little more on these points, however. Paragraph II of the
management contract provides as follows:
In the event of inundation, flooding of the mine, typhoon, earthquake
or any other force majeure, war, insurrection, civil commotion,
organized strike, riot, fire, injury to the machinery or other event or
cause reasonably beyond the control of NIELSON and which
adversely affects the work of mining and milling; NIELSON shall
report such fact to LEPANTO and without liability or breach of the
terms of this Agreement,the same shall remain in suspense, wholly
or partially during the terms of such inability. (Emphasis supplied)
A reading of the above-quoted paragraph II cannot but convey the idea that
upon the happening of any of the events enumerated therein, which
adversely affects the work of mining and milling, the agreement is deemed
suspended for as long as Nielson is unable to perform its work of mining and
milling because of the adverse effects of the happening of the event on the
work of mining and milling. During the period when the adverse effects on the
work of mining and milling exist, neither party in the contract would be held
liable for non-compliance of its obligation under the contract. In other words,
the operation of the contract is suspended for as long as the adverse effects
of the happening of any of those events had impeded or obstructed the work
of mining and milling. An analysis of the phraseology of the above-quoted
paragraph II of the management contract readily supports the conclusion that
683
it is the agreement, or the contract, that is suspended. The phrase "the
same" can refer to no other than the term "Agreement" which immediately
precedes it. The "Agreement" may be wholly or partially suspended, and this
situation will depend on whether the event wholly or partially affected
adversely the work of mining and milling. In the instant case, the war had
adversely affected and wholly at that the work of mining and milling. We
have clearly stated in Our decision the circumstances brought about by the
war which caused the whole or total suspension of the agreement or of the
management contract.
LEPANTO itself admits that the management contract was suspended. We
quote from the brief of LEPANTO:
Probably, what Nielson meant was, it was prevented by Lepanto to
assume again the management of the mine in 1945, at the precise
time when defendant was at the feverish phase of rehabilitation and
although the contract had already been suspended. (Lepanto's Brief,
p. 9).
... it was impossible, as a result of the destruction of the mine, for the
plaintiff to manage and operate the same and because, as provided
in the agreement, the contract was suspended by reason of the war
(Lepanto's Brief, pp. 9-10).
Clause II, by its terms, is clear that the contract is suspended in case
fortuitous event or force majeure, such as war, adversely affects the
work of mining and milling. (Lepanto's Brief, p. 49).
Lepanto is correct when it said that the obligations under the contract were
suspended upon the happening of any of the events enumerated in
paragraph II of the management contract. Indeed, those obligations were
suspended because the contract itself was suspended. When we talk of a
contract that has been suspended we certainly mean that the contract
temporarily ceased to be operative, and the contract becomes operative
again upon the happening of a condition or when a situation obtains
which warrants the termination of the suspension of the contract.
In Our decision We pointed out that the agreement in the management
contract would be suspended when two conditions concur, namely: (1) the
happening of the event constituting a force majeure that was reasonably
beyond the control of Nielson, and (2) that the event constituting the force
majeure adversely affected the work of mining and milling. The suspension,
therefore, would last not only while the event constituting the force majeure
continued to occur but also for as long as the adverse effects of the force
majeure on the work of mining and milling had not been eliminated. Under
the management contract the happening alone of the event constituting the
force majeure which did not affect adversely the work of mining and milling
would not suspend the period of the contract. It is only when the two
conditions concur that the period of the agreement is suspended.
It is not denied that because of the war, in February 1942, the mine, the
original mill, the original power plant, the supplies and equipment, and all
installations at the Mankayan mines of Lepanto, were destroyed upon order
of the United States Army, to prevent their utilization by the enemy. It is not
denied that for the duration of the war Nielson could not undertake the work
of mining and milling. When the mines were liberated from the enemy in
August, 1945, the condition of the mines, the mill, the power plant and other
installations, was not the same as in February 1942 when they were ordered
destroyed by the US army. Certainly, upon the liberation of the mines from
the enemy, the work of mining and milling could not be undertaken by
Nielson under the same favorable circumstances that obtained before
February 1942. The work of mining and milling, as undertaken by Nielson in
January, 1942, could not be resumed by Nielson soon after liberation
because of the adverse effects of the war, and this situation continued until
June of 1948. Hence, the suspension of the management contract did not
end upon the liberation of the mines in August, 1945. The mines and the mill
and the installations, laid waste by the ravages of war, had to be
reconstructed and rehabilitated, and it can be said that it was only on June
26, 1948 that the adverse effects of the war on the work of mining and milling
had ended, because it was on that date that the operation of the mines and
the mill was resumed. The period of suspension should, therefore, be
reckoned from February 1942 until June 26, 1948, because it was during this
period that the war and the adverse effects of the war on the work of mining
and milling had lasted. The mines and the installations had to be rehabilitated
684
because of the adverse effects of the war. The work of rehabilitation started
soon after the liberation of the mines in August, 1945 and lasted until June
26, 1948 when, as stated in Lepanto's annual report to its stockholders for
the year 1948, "June 28, 1948 marked the official return to operation of this
company at its properties at Mankayan, Mountain Province, Philippines"
(Exh. F-1).
Lepanto would argue that if the management contract was suspended at all
the suspension should cease in August of 1945, contending that the effects
of the war should cease upon the liberation of the mines from the enemy.
This contention cannot be sustained, because the period of rehabilitation was
still a period when the physical effects of the war the destruction of the
mines and of all the mining installations adversely affected, and made
impossible, the work of mining and milling. Hence, the period of the
reconstruction and rehabilitation of the mines and the installations must be
counted as part of the period of suspension of the contract.
Lepanto claims that it would not be unfair to end the period of suspension
upon the liberation of the mines because soon after the liberation of the
mines Nielson insisted to resume the management work, and that Nielson
was under obligation to reconstruct the mill in the same way that it was under
obligation to construct the mill in 1937. This contention is untenable. It is true
that Nielson insisted to resume its management work after liberation, but this
was only for the purpose of restoring the mines, the mill, and other
installations to their operating and producing condition as of February 1942
when they were ordered destroyed. It is not shown by any evidence in the
record, that Nielson had agreed, or would have agreed, that the period of
suspension of the contract would end upon the liberation of the mines. This is
so because, as found by this Court, the intention of the parties in the
management contract, and as understood by them, the management
contract was suspended for as long as the adverse effects of the force
majeure on the work of mining and milling had not been removed, and the
contract would be extended for as long as it was suspended. Under the
management contract Nielson had the obligation to erect and operate the
mill, but not to erect or reconstruct the mill in case of its destruction by force
majeure.
It is the considered view of this court that it would not be fair to Nielson to
consider the suspension of the contract as terminated upon the liberation of
the mines because then Nielson would be placed in a situation whereby it
would have to suffer the adverse effects of the war on the work of mining and
milling. The evidence shows that as of January 1942 the operation of the
mines under the management of Nielson was already under beneficial
conditions, so much so that dividends were already declared by Lepanto for
the years 1939, 1940 and 1941. To make the management contract
immediately operative after the liberation of the mines from the Japanese, at
the time when the mines and all its installations were laid waste as a result of
the war, would be to place Nielson in a situation whereby it would lose all the
benefits of what it had accomplished in placing the Lepanto mines in
profitable operation before the outbreak of the war in December, 1941. The
record shows that Nielson started its management operation way back in
1936, even before the management contract was entered into. As early as
August 1936 Nielson negotiated with Messrs. C. I. Cookes and V. L. Lednicky
for the operation of the Mankayan mines and it was the result of those
negotiations that Lepanto was incorporated; that it was Nielson that helped to
capitalize Lepanto, and that after the formation of the corporation (Lepanto)
Nielson immediately assumed the management of the mining properties of
Lepanto. It was not until January 30, 1937 when the management contract in
question was entered into between Lepanto and Nielson (Exhibit A).
A contract for the management and operation of mines calls for a speculative
and risky venture on the part of the manager-operator. The manager-
operator invests its technical know-how, undertakes back-breaking efforts
and tremendous spade-work, so to say, in the first years of its management
and operation of the mines, in the expectation that the investment and the
efforts employed might be rewarded later with success. This expected
success may never come. This had happened in the very case of the
Mankayan mines where, as recounted by Mr. Lednicky of Lepanto, various
persons and entities of different nationalities, including Lednicky himself,
invested all their money and failed. The manager-operator may not strike
sufficient ore in the first, second, third, or fourth year of the management
contract, or he may not strike ore even until the end of the fifth year. Unless
the manager-operator strikes sufficient quantity of ore he cannot expect
profits or reward for his investment and efforts. In the case of Nielson, its
685
corps of competent engineers, geologists, and technicians begun working on
the Mankayan mines of Lepanto since the latter part of 1936, and continued
their work without success and profit through 1937, 1938, and the earlier part
of 1939. It was only in December of 1939 when the efforts of Nielson started
to be rewarded when Lepanto realized profits and the first dividends were
declared. From that time on Nielson could expect profit to come to it as in
fact Lepanto declared dividends for 1940 and 1941 if the development and
operation of the mines and the mill would continue unhampered. The
operation, and the expected profits, however, would still be subject to
hazards due to the occurrence of fortuitous events, fires, earthquakes,
strikes, war, etc., constituting force majeure, which would result in the
destruction of the mines and the mill. One of these diverse causes, or one
after the other, may consume the whole period of the contract, and if it should
happen that way the manager-operator would reap no profit to compensate
for the first years of spade-work and investment of efforts and know-how.
Hence, in fairness to the manager-operator, so that he may not be deprived
of the benefits of the work he had accomplished, the force majeure clause is
incorporated as a standard clause in contracts for the management and
operation of mines.
The nature of the contract for the management and operation of mines
justifies the interpretation of the force majeure clause, that a period equal to
the period of suspension due to force majeure should be added to the
original term of the contract by way of an extension. We, therefore, reiterate
the ruling in Our decision that the management contract in the instant case
was suspended from February, 1942 to June 26, 1948, and that from the
latter date the contract had yet five years to go.
3. In the fourth ground of its motion for reconsideration, Lepanto maintains
that this Court erred in reversing the finding of the trial court that Nielson's
action has prescribed, by considering only the first claim and ignoring the
prescriptibility of the other claims.
This ground of the motion for reconsideration has no merit.
In Our decision We stated that the claims of Nielson are based on a written
document, and, as such, the cause of action prescribes in ten
years.5 Inasmuch as there are different claims which accrued on different
dates the prescriptive periods for all the claims are not the same. The claims
of Nielson that have been awarded by this Court are itemized in the
dispositive part of the decision.
The first item of the awards in Our decision refers to Nielson's compensation
in the sum of P17,500.00, which is equivalent to 10% of the cash dividends
declared by Lepanto in December, 1941. As we have stated in Our decision,
this claim accrued on December 31, 1941, and the right to commence an
action thereon started on January 1, 1942. We declared that the action on
this claim did not prescribe although the complaint was filed on February 6,
1958 or after a lapse of 16 years, 1 month and 5 days because of the
operation of the moratorium law.
We declared that under the applicable decisions of this Court 6 the
moratorium period of 8 years, 2 months and 8 days should be deducted from
the period that had elapsed since the accrual of the cause of action to the
date of the filing of the complaint, so that there is a period of less than 8
years to be reckoned for the purpose of prescription.
This claim of Nielson is covered by Executive Order No. 32, issued on March
10, 1945, which provides as follows:
Enforcement of payments of all debts and other monetary
obligations payable in the Philippines, except debts and other
monetary obligations entered into in any area after declaration by
Presidential Proclamation that such area has been freed from enemy
occupation and control, is temporarily suspended pending action by
the Commonwealth Government. (41 O.G. 56-57; Emphasis
supplied)
Executive Order No. 32 covered all debts and monetary obligation contracted
before the war (or before December 8, 1941) and those contracted
subsequent to December 8, 1941 and during the Japanese occupation.
686
Republic Act No. 342, approved on July 26, 1948, lifted the moratorium
provided for in Executive Order No. 32 on pre-war (or pre-December 8, 1941)
debts of debtors who had not filed war damage claims with the United States
War Damage Commission. In other words, after the effectivity of Republic Act
No. 342, the debt moratorium was limited: (1) to debts and other monetary
obligations which were contracted after December 8, 1941 and during the
Japanese occupation, and (2) to those pre-war (or pre-December 8, 1941)
debts and other monetary obligations where the debtors filed war damage
claims. That was the situation up to May 18, 1953 when this Court declared
Republic Act No. 342 unconstitutional. 7 It has been held by this Court,
however, that from March 10, 1945 when Executive Order No. 32 was
issued, to May 18, 1953 when Republic Act No. 342 was declared
unconstitutional or a period of 8 years, 2 months and 8 days the debt
moratorium was in force, and had the effect of suspending the period of
prescription.8
Lepanto is wrong when in its motion for reconsideration it claims that the
moratorium provided for in Executive Order No. 32 was continued by
Republic Act No. 342 "only with respect to debtors of pre-war obligations or
those incurred prior to December 8, 1941," and that "the moratorium
was lifted and terminated with respect to obligations incurred after December
8, 1941."9
This Court has held that Republic Act No. 342 does not apply to debts
contracted during the war and did not lift the moratorium in relations
thereto.10 In the case of Abraham, et al. vs. Intestate Estate of Juan C.
Ysmael, et al., L-16741, Jan. 31, 1962, this Court said:
Respondents, however, contend that Republic Act No. 342, which
took effect on July 26, 1948, lifted the moratorium on debts
contracted during the Japanese occupation. The court has already
held that Republic Act No. 342 did not lift the moratorium on debts
contracted during the war (Uy vs. Kalaw Katigbak, G.R. No. L-1830,
Dec. 31, 1949) but modified Executive Order No. 32 as to pre-war
debts, making the protection available only to debtors who had war
damage claims (Sison v. Mirasol, G.R. No. L-4711, Oct. 3, 1952).
We therefore reiterate the ruling in Our decision that the claim involved in the
first item awarded to Nielson had not prescribed.
What we have stated herein regarding the non-prescription of the cause of
action of the claim involved in the first item in the award also holds true with
respect to the second item in the award, which refers to Nielson's claim for
management fee of P2,500.00 for January, 1942. Lepanto admits that this
second item, like the first, is a monetary obligation. The right of action of
Nielson regarding this claim accrued on January 31, 1942.
As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the
moratorium law is not applicable. That is the reason why in Our decision We
did not discuss the question of prescription regarding these items. The claims
of Nielson involved in these items are based on the management contract,
and Nielson's cause of action regarding these claims prescribes in ten years.
Corollary to Our ruling that the management contract was suspended from
February, 1942 until June 26, 1948, and that the contract was extended for
five years from June 26, 1948, the right of action of Nielson to claim for what
is due to it during that period of extension accrued during the period from
June 26, 1948 till the end of the five-year extension period or until June 26,
1953. And so, even if We reckon June 26, 1948 as the starting date of the
ten-year period in connection with the prescriptibility of the claims involved in
items 3, 4, 5, 6 and 7 of the awards in the decision, it is obvious that when
the complaint was filed on February 6, 1958 the ten-year prescriptive period
had not yet lapsed.
In Our decision We have also ruled that the right of action of Nielson against
Lepanto had not prescribed because of the arbitration clause in the
Management contract. We are satisfied that there is evidence that Nielson
had asked for arbitration, and an arbitration committee had been constituted.
The arbitration committee, however, failed to bring about any settlement of
the differences between Nielson and Lepanto. On June 25, 1957 counsel for
Lepanto definitely advised Nielson that they were not entertaining any claim
of Nielson. The complaint in this case was filed on February 6, 1958.
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4. In the sixth ground of its motion for reconsideration, Lepanto maintains
that this Court "erred in awarding as damages (a) 10% of the cash dividends
declared and paid in December, 1941; (b) the management fee of P2,500.00
for the month of January 1942; and (c) the full contract price for the extended
period of 60 months, since the damages were never demanded nor proved
and, in any case, not allowable under the general law on damages."
We have stated in Our decision that the original agreement in the
management contract regarding the compensation of Nielson was modified,
such that instead of receiving a monthly compensation of P2,500.00 plus
10% of the net profits from the operation of the properties for the preceding
month,11 Nielson would receive a compensation of P2,500.00 a month, plus
(1) 10% of the dividends declared and paid, when and as paid, during the
period of the contract, and at the end of each year, (2) 10% of any depletion
reserve that may be set up, and (3) 10% of any amount expended during the
year out of surplus earnings for capital account.
It is shown that in December, 1941, cash dividends amounting to
P175,000.00 was declared by Lepanto.12Nielson, therefore, should receive
the equivalent of 10% of this amount, or the sum of P17,500.00. We have
found that this amount was not paid to Nielson.
In its motion for reconsideration, Lepanto inserted a photographic copy of
page 127 of its cash disbursement book, allegedly for 1941, in an effort to
show that this amount of P17,500.00 had been paid to Nielson. It appears,
however, in this photographic copy of page 127 of the cash disbursement
book that the sum of P17,500.00 was entered on October 29 as "surplus a/c
Nielson & Co. Inc." The entry does not make any reference to dividends or
participation of Nielson in the profits. On the other hand, in the photographic
copy of page 89 of the 1941 cash disbursement book, also attached to the
motion for reconsideration, there is an entry for P17,500.00 on April 23, 1941
which states "Accts. Pay. Particip. Nielson & Co. Inc." This entry for April 23,
1941 may really be the participation of Nielson in the profits based on
dividends declared in April 1941 as shown in Exhibit L. But in the same
Exhibit L it is not stated that any dividend was declared in October 1941. On
the contrary it is stated in Exhibit L that dividends were declared in December
1941. We cannot entertain this piece of evidence for several reasons: (1)
because this evidence was not presented during the trial in the court below;
(2) there is no showing that this piece of evidence is newly discovered and
that Lepanto was not in possession of said evidence when this case was
being tried in the court below; and (3) according to Exhibit L cash dividends
of P175,000.00 were declared in December, 1941, and so the sum of
P17,500.00 which appears to have been paid to Nielson in October 1941
could not be payment of the equivalent of 10% of the cash dividends that
were later declared in December, 1941.
As regards the management fee of Nielson corresponding to January, 1942,
in the sum of P2,500.00, We have also found that Nielson is entitled to be
paid this amount, and that this amount was not paid by Lepanto to Nielson.
Whereas, Lepanto was able to prove that it had paid the management fees of
Nielson for November and December, 1941,13 it was not able to present any
evidence to show that the management fee of P2,500.00 for January, 1942
had been paid.
It having been declared in Our decision, as well as in this resolution, that the
management contract had been extended for 5 years, or sixty months, from
June 27, 1948 to June 26, 1953, and that the cause of action of Nielson to
claim for its compensation during that period of extension had not prescribed,
it follows that Nielson should be awarded the management fees during the
whole period of extension, plus the 10% of the value of the dividends
declared during the said period of extension, the 10% of the depletion
reserve that was set up, and the 10% of any amount expended out of surplus
earnings for capital account.
5. In the seventh ground of its motion for reconsideration, Lepanto maintains
that this Court erred in ordering Lepanto to issue and deliver to Nielson
shares of stock together with fruits thereof.
In Our decision, We declared that pursuant to the modified agreement
regarding the compensation of Nielson which provides, among others, that
Nielson would receive 10% of any dividends declared and paid, when and as
paid, Nielson should be paid 10% of the stock dividends declared by Lepanto
during the period of extension of the contract.
688
It is not denied that on November 28, 1949, Lepanto declared stock
dividends worth P1,000,000.00; and on August 22, 1950, it declared stock
dividends worth P2,000,000.00). In other words, during the period of
extension Lepanto had declared stock dividends worth P3,000,000.00. We
held in Our decision that Nielson is entitled to receive l0% of the stock
dividends declared, or shares of stock worth P300,000.00 at the par value of
P0.10 per share. We ordered Lepanto to issue and deliver to Nielson those
shares of stocks as well as all the fruits or dividends that accrued to said
shares.
In its motion for reconsideration, Lepanto contends that the payment to
Nielson of stock dividends as compensation for its services under the
management contract is a violation of the Corporation Law, and that it was
not, and it could not be, the intention of Lepanto and Nielson as
contracting parties that the services of Nielson should be paid in shares of
stock taken out of stock dividends declared by Lepanto. We have
assiduously considered the arguments adduced by Lepanto in support of its
contention, as well as the answer of Nielson in this connection, and We have
arrived at the conclusion that there is merit in the contention of Lepanto.
Section 16 of the Corporation Law, in part, provides as follows:
No corporation organized under this Act shall create or issue bills,
notes or other evidence of debt, for circulation as money, and no
corporation shall issue stock or bonds except in exchange for actual
cash paid to the corporation or for: (1) property actually received by it
at a fair valuation equal to the par or issued value of the stock or
bonds so issued; and in case of disagreement as to their value, the
same shall be presumed to be the assessed value or the value
appearing in invoices or other commercial documents, as the case
may be; and the burden or proof that the real present value of the
property is greater than the assessed value or value appearing in
invoices or other commercial documents, as the case may be, shall
be upon the corporation, or for (2) profits earned by it but not
distributed among its stockholders or members; Provided, however,
That no stock or bond dividend shall be issued without the approval
of stockholders representing not less than two-thirds of all stock then
outstanding and entitled to vote at a general meeting of the
corporation or at a special meeting duly called for the purpose.
xxx xxx xxx
No corporation shall make or declare any dividend except from the
surplus profits arising from its business, or divide or distribute its
capital stock or property other than actual profits among its members
or stockholders until after the payment of its debts and the
termination of its existence by limitation or lawful
dissolution: Provided, That banking, savings and loan, and trust
corporations may receive deposits and issue certificates of deposit,
checks, drafts, and bills of exchange, and the like in the transaction
of the ordinary business of banking, savings and loan, and trust
corporations. (As amended by Act No. 2792, and Act No. 3518;
Emphasis supplied.)
From the above-quoted provision of Section 16 of the Corporation Law, the
consideration for which shares of stock may be issued are: (1) cash; (2)
property; and (3) undistributed profits. Shares of stock are given the special
name "stock dividends" only if they are issued in lieu of undistributed profits.
If shares of stocks are issued in exchange of cash or property then those
shares do not fall under the category of "stock dividends". A corporation may
legally issue shares of stock in consideration of services rendered to it by a
person not a stockholder, or in payment of its indebtedness. A share of stock
issued to pay for services rendered is equivalent to a stock issued in
exchange of property, because services is equivalent to property.14 Likewise
a share of stock issued in payment of indebtedness is equivalent to issuing a
stock in exchange for cash. But a share of stock thus issued should be part
of the original capital stock of the corporation upon its organization, or part of
the stocks issued when the increase of the capitalization of a corporation is
properly authorized. In other words, it is the shares of stock that are originally
issued by the corporation and forming part of the capital that can be
exchanged for cash or services rendered, or property; that is, if the
corporation has original shares of stock unsold or unsubscribed, either
coming from the original capitalization or from the increased capitalization.
Those shares of stock may be issued to a person who is not a stockholder, or
689
to a person already a stockholder in exchange for services rendered or for
cash or property. But a share of stock coming from stock dividends declared
cannot be issued to one who is not a stockholder of a corporation.
A "stock dividend" is any dividend payable in shares of stock of the
corporation declaring or authorizing such dividend. It is, what the term itself
implies, a distribution of the shares of stock of the corporation among the
stockholders as dividends. A stock dividend of a corporation is a dividend
paid in shares of stock instead of cash, and is properly payable only out of
surplus profits.15 So, a stock dividend is actually two things: (1) a dividend,
and (2) the enforced use of the dividend money to purchase additional
shares of stock at par.16 When a corporation issues stock dividends, it shows
that the corporation's accumulated profits have been capitalized instead of
distributed to the stockholders or retained as surplus available for
distribution, in money or kind, should opportunity offer. Far from being a
realization of profits for the stockholder, it tends rather to postpone said
realization, in that the fund represented by the new stock has been
transferred from surplus to assets and no longer available for actual
distribution.17 Thus, it is apparent that stock dividends are issued only to
stockholders. This is so because only stockholders are entitled to dividends.
They are the only ones who have a right to a proportional share in that part of
the surplus which is declared as dividends. A stock dividend really adds
nothing to the interest of the stockholder; the proportional interest of each
stockholder remains the same.18If a stockholder is deprived of his stock
dividends - and this happens if the shares of stock forming part of the stock
dividends are issued to a non-stockholder then the proportion of the
stockholder's interest changes radically. Stock dividends are civil fruits of the
original investment, and to the owners of the shares belong the civil fruits. 19
The term "dividend" both in the technical sense and its ordinary acceptation,
is that part or portion of the profits of the enterprise which the corporation, by
its governing agents, sets apart for ratable division among the holders of the
capital stock. It means the fund actually set aside, and declared by the
directors of the corporation as dividends and duly ordered by the director, or
by the stockholders at a corporate meeting, to be divided or distributed
among the stockholders according to their respective interests. 20
It is Our considered view, therefore, that under Section 16 of the Corporation
Law stock dividends can not be issued to a person who is not a stockholder
in payment of services rendered. And so, in the case at bar Nielson can not
be paid in shares of stock which form part of the stock dividends of Lepanto
for services it rendered under the management contract. We sustain the
contention of Lepanto that the understanding between Lepanto and Nielson
was simply to make the cash value of the stock dividends declared as the
basis for determining the amount of compensation that should be paid to
Nielson, in the proportion of 10% of the cash value of the stock dividends
declared. And this conclusion of Ours finds support in the record.
We had adverted to in Our decision that in 1940 there was some dispute
between Lepanto and Nielson regarding the application and interpretation of
certain provisions of the original contract particularly with regard to the 10%
participation of Nielson in the net profits, so that some adjustments had to be
made. In the minutes of the meeting of the Board of Directors of Lepanto on
August 21, 1940, We read the following:
The Chairman stated that he believed that it would be better to tie
the computation of the 10% participation of Nielson & Company, Inc.
to the dividend, because Nielson will then be able to definitely
compute its net participation by the amount of the dividends
declared. In addition to the dividend, we have been setting up a
depletion reserve and it does not seem fair to burden the 10%
participation of Nielson with the depletion reserve, as the depletion
reserve should not be considered as an operating expense. After a
prolonged discussion, upon motion duly made and seconded, it was
RESOLVED, That the President, be, and he hereby is, authorized to
enter into an agreement with Nielson & Company, Inc., modifying
Paragraph V of management contract of January 30, 1937, effective
January 1, 1940, in such a way that Nielson & Company, Inc. shall
receive 10% of any dividends declared and paid, when and as paid
during the period of the contract and at the end of each year, 10% of
any depletion reserve that may be set up and 10% of any amount
690
 expended during the year out of surplus earnings for capital account.
(Emphasis supplied.)
From the sentence, "The Chairman stated that he believed that it would be
better to tie the computation of the 10% participation of Nielson & Company,
Inc., to the dividend, because Nielson will then be able to definitely compute
its net participation by the amount of the dividends declared" the idea is
conveyed that the intention of Lepanto, as expressed by its Chairman C. A.
DeWitt, was to make the value of the dividends declared whether the
dividends were in cash or in stock as the basis for determining the amount
of compensation that should be paid to Nielson, in the proportion of 10% of
the cash value of the dividends so declared. It does not mean, however, that
the compensation of Nielson would be taken from the amount actually
declared as cash dividend to be distributed to the stockholder, nor from the
shares of stocks to be issued to the stockholders as stock dividends, but
from the other assets or funds of the corporation which are not burdened by
the dividends thus declared. In other words, if, for example, cash dividends of
P300,000.00 are declared, Nielson would be entitled to a compensation of
P30,000.00, but this P30,000.00 should not be taken from the P300,000.00
to be distributed as cash dividends to the stockholders but from some other
funds or assets of the corporation which are not included in the amount to
answer for the cash dividends thus declared. This is so because if the
P30,000.00 would be taken out from the P300,000.00 declared as cash
dividends, then the stockholders would not be getting P300,000.00 as
dividends but only P270,000.00. There would be a dilution of the dividend
that corresponds to each share of stock held by the stockholders. Similarly, if
there were stock dividends worth one million pesos that were declared, which
means an issuance of ten million shares at the par value of ten centavos per
share, it does not mean that Nielson would be given 100,000 shares. It only
means that Nielson should be given the equivalent of 10% of the aggregate
cash value of those shares issued as stock dividends. That this was the
understanding of Nielson itself is borne out by the fact that in its appeal brief
Nielson urged that it should be paid "P300,000.00 being 10% of the
P3,000,000.00 stock dividends declared on November 28, 1949 and August
20, 1950...."21
We, therefore, reconsider that part of Our decision which declares that
Nielson is entitled to shares of stock worth P300,000.00 based on the stock
dividends declared on November 28, 1949 and on August 20, 1950, together
with all the fruits accruing thereto. Instead, We declare that Nielson is entitled
to payment by Lepanto of P300,000.00 in cash, which is equivalent to 10% of
the money value of the stock dividends worth P3,000,000.00 which were
declared on November 28, 1949 and on August 20, 1950, with interest
thereon at the rate of 6% from February 6, 1958.
6. In the eighth ground of its motion for reconsideration Lepanto maintains
that this Court erred in awarding to Nielson an undetermined amount of
shares of stock and/or cash, which award can not be ascertained and
executed without further litigation.
In view of Our ruling in this resolution that Nielson is not entitled to receive
shares of stock as stock dividends in payment of its compensation under the
management contract, We do not consider it necessary to discuss this
ground of the motion for reconsideration. The awards in the present case are
all reduced to specific sums of money.
7. In the ninth ground of its motion for reconsideration Lepanto maintains that
this Court erred in rendering judgment or attorney's fees.
The matter of the award of attorney's fees is within the sound discretion of
this Court. In Our decision We have stated the reason why the award of
P50,000.00 for attorney's fees is considered by this Court as reasonable.
Accordingly, We resolve to modify the decision that We rendered on
December 17, 1966, in the sense that instead of awarding Nielson shares of
stock worth P300,000.00 at the par value of ten centavos (P0.10) per share
based on the stock dividends declared by Lepanto on November 28, 1949
and August 20, 1950, together with their fruits, Nielson should be awarded
the sum of P300,000.00 which is an amount equivalent to 10% of the cash
value of the stock dividends thus declared, as part of the compensation due
Nielson under the management contract. The dispositive portion of the
decision should, therefore, be amended, to read as follows:
691
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the (7) Six hundred ninety four thousand three hundred sixty four pesos and
decision of the court a quo and enter in lieu thereof another, ordering the seventy six centavos (P694,364.76), equivalent to 10% of the expenses for
appellee Lepanto to pay the appellant Nielson the different amounts as capital account during the period of extension, with legal interest thereon
specified hereinbelow: from the date of the filing of the complaint;

(1) Seventeen thousand five hundred pesos (P17,500.00), equivalent to 10% (8) Fifty thousand pesos (P50,000.00) as attorney's fees; and
of the cash dividends of December, 1941, with legal interest thereon from the
date of the filing of the complaint; (9) The costs.

(2) Two thousand five hundred pesos (P2,500.00) as management fee for It is so ordered.
January 1942, with legal interest thereon from the date of the filing of the
complaint; Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez and Castro,
JJ., concur.
(3) One hundred fifty thousand pesos (P150,000.00), representing
management fees for the sixty-month period of extension of the management Fernando, Capistrano, Teehankee and Barredo, JJ., took no part.
contract, with legal interest thereon from the date of the filing of the
complaint;

(4) One million four hundred thousand pesos (P1,400,000.00), equivalent to

10% of the cash dividends declared during the period of extension of the
management contract, with legal interest thereon from the date of the filing of
the complaint; G.R. No. 108576 January 20, 1999

(5) Three hundred thousand pesos (P300,000.00), equivalent to 10% of the COMMISSIONER OF INTERNAL REVENUE, petitioner,
cash value of the stock dividends declared on November 28, 1949 and vs.
August 20, 1950, with legal interest thereon from the date of the filing of the THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO
complaint; CORP., respondents.

(6) Fifty three thousand nine hundred twenty eight pesos and eighty eight
centavos (P53,928.88), equivalent to 10% of the depletion reserve set up
during the period of extension, with legal interest thereon from the date of the
filing of the complaint;
MARTINEZ, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the
decision of the Court of Appeals (CA) 1 which affirmed the ruling of the Court
of Tax Appeals (CTA) 2 that private respondent A. Soriano Corporation's
(hereinafter ANSCOR) redemption and exchange of the stocks of its foreign

692
stockholders cannot be considered as "essentially equivalent to a distribution
of taxable dividends" under, Section 83(b) of the 1939 Internal Revenue Act. 3
The undisputed facts are as follows:
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the
United States, formed the corporation "A. Soriano Y Cia", predecessor of
ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common
shares at a par value of P100/share. ANSCOR is wholly owned and
controlled by the family of Don Andres, who are all non-resident aliens. 4 In
1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally
issued. 5
On September 12, 1945, ANSCOR's authorized capital stock was increased
to P2,500,000.00 divided into 25,000 common shares with the same par
value of the additional 15,000 shares, only 10,000 was issued which were all
subscribed by Don Andres, after the other stockholders waived in favor of the
former their pre-emptive rights to subscribe to the new issues. 6 This
increased his subscription to 14,963 common shares. 7 A month later, 8 Don
Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr.,
as their initial investments in ANSCOR. 9 Both sons are foreigners. 10
By 1947, ANSCOR declared stock dividends. Other stock dividend
declarations were made between 1949 and December 20, 1963. 11 On
December 30, 1964 Don Andres died. As of that date, the records revealed
that he has a total shareholdings of 185,154 shares 12 50,495 of which are
original issues and the balance of 134.659 shares as stock dividend
declarations. 13Correspondingly, one-half of that shareholdings or
92,577 14 shares were transferred to his wife, Doa Carmen Soriano, as her
conjugal share. The other half formed part of his estate. 15
A day after Don Andres died, ANSCOR increased its capital stock to
P20M 16 and in 1966 further increased it to P30M. 17 In the same year
(December 1966), stock dividends worth 46,290 and 46,287 shares were
respectively received by the Don Andres estate 18 and Doa Carmen from
ANSCOR. Hence, increasing their accumulated shareholdings to 138,867
and 138,864 19 common shares each. 20
On December 28, 1967, Doa Carmen requested a ruling from the United
States Internal Revenue Service (IRS), inquiring if an exchange of common
with preferred shares may be considered as a tax avoidance scheme 21under
Section 367 of the 1954 U.S. Revenue Act. 22 By January 2, 1968, ANSCOR
reclassified its existing 300,000 common shares into 150,000 common and
150,000 preferred shares. 23
In a letter-reply dated February 1968, the IRS opined that the exchange is
only a recapitalization scheme and not tax avoidance. 24 Consequently, 25 on
March 31, 1968 Doa Carmen exchanged her whole 138,864 common
shares for 138,860 of the newly reclassified preferred shares. The estate of
Don Andres in turn, exchanged 11,140 of its common shares, for the
remaining 11,140 preferred shares, thus reducing its (the estate) common
shares to 127,727. 26
On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed
28,000 common shares from the Don Andres' estate. By November 1968, the
Board further increased ANSCOR's capital stock to P75M divided into
150,000 preferred shares and 600,000 common shares. 27 About a year later,
ANSCOR again redeemed 80,000 common shares from the Don Andres'
estate, 28 further reducing the latter's common shareholdings to 19,727. As
stated in the Board Resolutions, ANSCOR's business purpose for both
redemptions of stocks is to partially retire said stocks as treasury shares in
order to reduce the company's foreign exchange remittances in case cash
dividends are declared. 29
In 1973, after examining ANSCOR's books of account and records, Revenue
examiners issued a report proposing that ANSCOR be assessed for
deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the
1939 Revenue Code, 30 for the year 1968 and the second quarter of 1969
based on the transactions of exchange 31 and redemption of stocks. 31The
Bureau of Internal Revenue (BIR) made the corresponding assessments
despite the claim of ANSCOR that it availed of the tax amnesty under
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Presidential Decree
(P.D.) 23 32 which were amended by P.D.'s 67 and 157. 33 However, petitioner
ruled that the invoked decrees do not cover Sections 53 and 54 in relation to
Article 83(b) of the 1939 Revenue Act under which ANSCOR was
assessed. 34ANSCOR's subsequent protest on the assessments was denied
in 1983 by petitioner. 35
Subsequently, ANSCOR filed a petition for review with the CTA assailing the
tax assessments on the redemptions and exchange of stocks. In its decision,
the Tax Court reversed petitioner's ruling, after finding sufficient evidence to
overcome the prima facie correctness of the questioned assessments. 36 In a
petition for review the CA as mentioned, affirmed the ruling of the
CTA. 37 Hence, this petition.
The bone of contention is the interpretation and application of Section 83(b)
of the 1939 Revenue Act 38 which provides:
Sec. 83. Distribution of dividends or assets by corporations.
(b) Stock dividends A stock dividend representing the
transfer of surplus to capital account shall not be subject to
tax. However, if a corporation cancels or redeems stock
issued as a dividend at such time and in such manner as to
make the distribution and cancellation or redemption, in
whole or in part, essentially equivalent to the distribution of
a taxable dividend, the amount so distributed in redemption
or cancellation of the stock shall be considered as taxable
income to the extent it represents a distribution of earnings
or profits accumulated after March first, nineteen hundred
and thirteen. (Emphasis supplied)
Specifically, the issue is whether ANSCOR's redemption of stocks
from its stockholder as well as the exchange of common with
preferred shares can be considered as "essentially equivalent to the
distribution of taxable dividend" making the proceeds thereof taxable
under the provisions of the above-quoted law.
Petitioner contends that the exchange transaction a tantamount to
"cancellation" under Section 83(b) making the proceeds thereof taxable. It
also argues that the Section applies to stock dividends which is the bulk of
stocks that ANSCOR redeemed. Further, petitioner claims that under the "net
effect test," the estate of Don Andres gained from the redemption.
Accordingly, it was the duty of ANSCOR to withhold the tax-at-source arising
from the two transactions, pursuant to Section 53 and 54 of the 1939
Revenue Act. 39
ANSCOR, however, avers that it has no duty to withhold any tax either from
the Don Andres estate or from Doa Carmen based on the two transactions,
because the same were done for legitimate business purposes which are (a)
to reduce its foreign exchange remittances in the event the company would
declare cash dividends, 40 and to (b) subsequently "filipinized" ownership of
ANSCOR, as allegedly, envisioned by Don Andres. 41 It likewise invoked the
amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on the
special factual circumstances of each case. 42 The findings of facts of a
special court (CTA) exercising particular expertise on the subject of tax,
generally binds this Court, 43 considering that it is substantially similar to the
findings of the CA which is the final arbiter of questions of facts. 44 The issue
in this case does not only deal with facts but whether the law applies to a
particular set of facts. Moreover, this Court is not necessarily bound by the
lower courts' conclusions of law drawn from such facts. 45
AMNESTY:
We will deal first with the issue of tax amnesty. Section 1 of P.D.
67 46 provides:
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 1. In all cases of voluntary disclosures of previously untaxed
income and/or wealth such as earnings, receipts, gifts,
bequests or any other acquisitions from any source
whatsoever which are taxable under the National Internal
Revenue Code, as amended, realized here or abroad by any
taxpayer, natural or judicial; the collection of all internal
revenue taxes including the increments or penalties or
account of non-payment as well as all civil, criminal or
administrative liabilities arising from or incident to such
disclosures under the National Internal Revenue Code, the
Revised Penal Code, the Anti-Graft and Corrupt Practices
Act, the Revised Administrative Code, the Civil Service laws
and regulations, laws and regulations on Immigration and
Deportation, or any other applicable law or proclamation, are
hereby condoned and, in lieu thereof, a tax of ten (10%) per
centum on such previously untaxed income or wealth, is
hereby imposed, subject to the following conditions:
(conditions omitted) [Emphasis supplied].
The decree condones "the collection of all internal revenue taxes
including the increments or penalties or account of non-payment as
well as all civil, criminal or administrative liable arising from or
incident to" (voluntary) disclosures under the NIRC of previously
untaxed income and/or wealth "realized here or abroad by any
taxpayer, natural or juridical."
May the withholding agent, in such capacity, be deemed a taxpayer for it to
avail of the amnesty? An income taxpayer covers all persons who derive
taxable income. 47 ANSCOR was assessed by petitioner for deficiency
withholding tax under Section 53 and 54 of the 1939 Code. As such, it is
being held liable in its capacity as a withholding agent and not its personality
as a taxpayer.
In the operation of the withholding tax system, the withholding agent is the
payor, a separate entity acting no more than an agent of the government for
the collection of the tax 48 in order to ensure its payments; 49 the payer is the
taxpayer he is the person subject to tax impose by law; 50 and the payee is
the taxing authority. 51 In other words, the withholding agent is merely a tax
collector, not a taxpayer. Under the withholding system, however, the agent-
payor becomes a payee by fiction of law. His (agent) liability is direct and
independent from the taxpayer, 52 because the income tax is still impose on
and due from the latter. The agent is not liable for the tax as no wealth flowed
into him he earned no income. The Tax Code only makes the agent
personally liable for the tax 53arising from the breach of its legal duty to
withhold as distinguish from its duty to pay tax since:
the government's cause of action against the withholding is
not for the collection of income tax, but for the enforcement
of the withholding provision of Section 53 of the Tax Code,
compliance with which is imposed on the withholding agent
and not upon the taxpayer. 54
Not being a taxpayer, a withholding agent, like ANSCOR in this
transaction is not protected by the amnesty under the decree.
Codal provisions on withholding tax are mandatory and must be complied
with by the withholding agent. 55 The taxpayer should not answer for the non-
performance by the withholding agent of its legal duty to withhold unless
there is collusion or bad faith. The former could not be deemed to have
evaded the tax had the withholding agent performed its duty. This could be
the situation for which the amnesty decree was intended. Thus, to curtail tax
evasion and give tax evaders a chance to reform, 56 it was deemed
administratively feasible to grant tax amnesty in certain instances. In
addition, a "tax amnesty, much like a tax exemption, is never favored nor
presumed in law and if granted by a statute, the term of the amnesty like that
of a tax exemption must be construed strictly against the taxpayer and
liberally in favor of the taxing authority. 57 The rule on strictissimi juris equally
applies. 58 So that, any doubt in the application of an amnesty law/decree
should be resolved in favor of the taxing authority.
Furthermore, ANSCOR's claim of amnesty cannot prosper.
The implementing rules of P.D. 370 which expanded
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 amnesty on previously untaxed income under P.D. 23 is very
explicit, to wit:
Sec. 4. Cases not covered by amnesty. The following
cases are not covered by the amnesty subject of these
regulations:
xxx xxx xxx
(2) Tax liabilities with or without assessments, on withholding
tax at source provided under Section 53 and 54 of the
National Internal Revenue Code, as amended; 59
ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax
Code. Thus, by specific provision of law, it is not covered by the
amnesty.
TAX ON STOCK DIVIDENDS
General Rule
Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the
U.S. Revenue Code of 1928. 60 It laid down the general rule known as the
proportionate test 61 wherein stock dividends once issued form part of the
capital and, thus, subject to income tax. 62 Specifically, the general rule states
that:
A stock dividend representing the transfer of surplus to
capital account shall not be subject to tax.
Having been derived from a foreign law, resort to the jurisprudence of its
origin may shed light. Under the US Revenue Code, this provision originally
referred to "stock dividends" only, without any exception. Stock dividends,
strictly speaking, represent capital and do not constitute income to its
recipient. 63 So that the mere issuance thereof is not yet subject to income
tax 64 as they are nothing but an "enrichment through increase in value of
capital
investment." 65 As capital, the stock dividends postpone the realization of
profits because the "fund represented by the new stock has been transferred
from surplus to capital and no longer available for actual
distribution." 66 Income in tax law is "an amount of money coming to a person
within a specified time, whether as payment for services, interest, or profit
from investment." 67 It means cash or its equivalent. 68 It is gain derived and
severed from capital, 69 from labor or from both combined 70 so that to tax
a stock dividend would be to tax a capital increase rather than the
income. 71 In a loose sense, stock dividends issued by the corporation, are
considered unrealized gain, and cannot be subjected to income tax until that
gain has been realized. Before the realization, stock dividends are nothing
but a representation of an interest in the corporate properties. 72 As capital, it
is not yet subject to income tax. It should be noted that capital and income
are different. Capital is wealth or fund; whereas income is profit or gain or the
flow of wealth.73 The determining factor for the imposition of income tax is
whether any gain or profit was derived from a transaction. 74
The Exception
However, if a corporation cancels or redeems stock issued
as a dividend at such time and in such manner as to make
the distribution and cancellation or redemption, in whole or in
part, essentially equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable
income to the extent it represents a distribution of earnings
or profits accumulated after March first, nineteen hundred
and thirteen. (Emphasis supplied).
In a response to the ruling of the American Supreme Court in the case
of Eisner v. Macomber 75 (that pro ratastock dividends are not taxable
income), the exempting clause above quoted was added because provision
corporation found a loophole in the original provision. They resorted to
devious means to circumvent the law and evade the tax. Corporate earnings
would be distributed under the guise of its initial capitalization by declaring
the stock dividends previously issued and later redeem said dividends by
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paying cash to the stockholder. This process of issuance-redemption
amounts to a distribution of taxable cash dividends which was lust delayed
so as to escape the tax. It becomes a convenient technical strategy to avoid
the effects of taxation.
Thus, to plug the loophole the exempting clause was added. It provides
that the redemption or cancellation of stock dividends, depending on the
"time" and "manner" it was made, is essentially equivalent to a distribution of
taxable dividends," making the proceeds thereof "taxable income" "to the
extent it represents profits". The exception was designed to prevent the
issuance and cancellation or redemption of stock dividends, which is
fundamentally not taxable, from being made use of as a device for the actual
distribution of cash dividends, which is taxable. 76 Thus,
the provision had the obvious purpose of preventing a
corporation from avoiding dividend tax treatment by
distributing earnings to its shareholders in two transactions
a pro rata stock dividend followed by a pro
rata redemption that would have the same economic
consequences as a simple dividend. 77
Although redemption and cancellation are generally considered
capital transactions, as such. they are not subject to tax. However, it
does not necessarily mean that a shareholder may not realize a
taxable gain from such transactions. 78 Simply put, depending on the
circumstances, the proceeds of redemption of stock dividends are
essentially distribution of cash dividends, which when paid becomes
the absolute property of the stockholder. Thereafter, the latter
becomes the exclusive owner thereof and can exercise the freedom
of choice. 79Having realized gain from that redemption, the income
earner cannot escape income tax. 80
As qualified by the phrase "such time and in such manner," the exception
was not intended to characterize as taxable dividend every distribution of
earnings arising from the redemption of stock dividend. 81 So that, whether
the amount distributed in the redemption should be treated as the equivalent
of a "taxable dividend" is a question of fact, 82 which is determinable on "the
basis of the particular facts of the transaction in question. 83 No decisive test
can be used to determine the application of the exemption under Section
83(b). The use of the words "such manner" and "essentially equivalent"
negative any idea that a weighted formula can resolve a crucial issue
Should the distribution be treated as taxable dividend. 84 On this aspect,
American courts developed certain recognized criteria, which includes the
following: 85
1) the presence or absence of real business
purpose,
2) the amount of earnings and profits
available for the declaration of a regular
dividends and the corporation's past record
with respect to the declaration of dividends,
3) the effect of the distribution, as compared
with the declaration of regular dividend,
4) the lapse of time between issuance and
redemption, 86
5) the presence of a substantial
surplus 87 and a generous supply of cash
which invites suspicion as does a meager
policy in relation both to current earnings
and accumulated surplus, 88
REDEMPTION AND CANCELLATION
For the exempting clause of Section, 83(b) to apply, it is
indispensable that: (a) there is redemption or cancellation; (b) the
transaction involves stock dividends and (c) the "time and manner" of
the transaction makes it "essentially equivalent to a distribution of
taxable dividends." Of these, the most important is the third.
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Redemption is repurchase, a reacquisition of stock by a corporation which
issued the stock 89 in exchange for property, whether or not the acquired
stock is cancelled, retired or held in the treasury. 90 Essentially, the
corporation gets back some of its stock, distributes cash or property to the
shareholder in payment for the stock, and continues in business as before.
The redemption of stock dividends previously issued is used as a veil for the
constructive distribution of cash dividends. In the instant case, there is no
dispute that ANSCOR redeemed shares of stocks from a stockholder (Don
Andres) twice (28,000 and 80,000 common shares). But where did the
shares redeemed come from? If its source is the original capital subscriptions
upon establishment of the corporation or from initial capital investment in an
existing enterprise, its redemption to the concurrent value of acquisition may
not invite the application of Sec. 83(b) under the 1939 Tax Code, as it is not
income but a mere return of capital. On the contrary, if the redeemed shares
are from stock dividend declarations other than as initial capital investment,
the proceeds of the redemption is additional wealth, for it is not merely a
return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be
deemed as taxable dividends. Here, it is undisputed that at the time of the
last redemption, the original common shares owned by the estate were only
25,247.5 91 This means that from the total of 108,000 shares redeemed from
the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come
from stock dividends. Besides, in the absence of evidence to the contrary,
the Tax Code presumes that every distribution of corporate property, in whole
or in part, is made out of corporate profits 92such as stock dividends. The
capital cannot be distributed in the form of redemption of stock dividends
without violating the trust fund doctrine wherein the capital stock, property
and other assets of the corporation are regarded as equity in trust for the
payment of the corporate creditors. 93 Once capital, it is always
capital. 94 That doctrine was intended for the protection of corporate
creditors. 95
With respect to the third requisite, ANSCOR redeemed stock dividends
issued just 2 to 3 years earlier. The time alone that lapsed from the issuance
to the redemption is not a sufficient indicator to determine taxability. It is a
must to consider the factual circumstances as to the manner of both the
issuance and the redemption. The "time" element is a factor to show a device
to evade tax and the scheme of cancelling or redeeming the same shares is
a method usually adopted to accomplish the end sought. 96 Was this
transaction used as a "continuing plan," "device" or "artifice" to evade
payment of tax? It is necessary to determine the "net effect" of the
transaction between the shareholder-income taxpayer and the acquiring
(redeeming) corporation. 97 The "net effect" test is not evidence or testimony
to be considered; it is rather an inference to be drawn or a conclusion to be
reached. 98 It is also important to know whether the issuance of stock
dividends was dictated by legitimate business reasons, the presence of
which might negate a tax evasion plan. 99
The issuance of stock dividends and its subsequent redemption must be
separate, distinct, and not related, for the redemption to be considered a
legitimate tax scheme. 100 Redemption cannot be used as a cloak to
distribute corporate earnings. 101 Otherwise, the apparent intention to avoid
tax becomes doubtful as the intention to evade becomes manifest. It has
been ruled that:
[A]n operation with no business or corporate purpose is a
mere devise which put on the form of a corporate
reorganization as a disguise for concealing its real character,
and the sole object and accomplishment of which was the
consummation of a preconceived plan, not to reorganize a
business or any part of a business, but to transfer a parcel of
corporate shares to a stockholder. 102
Depending on each case, the exempting provision of Sec. 83(b) of the 1939
Code may not be applicable if the redeemed shares were issued with bona
fide business purpose, 103 which is judged after each and every step of the
transaction have been considered and the whole transaction does not
amount to a tax evasion scheme.
ANSCOR invoked two reasons to justify the redemptions (1) the alleged
"filipinization" program and (2) the reduction of foreign exchange remittances
in case cash dividends are declared. The Court is not concerned with the
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wisdom of these purposes but on their relevance to the whole transaction
which can be inferred from the outcome thereof. Again, it is the "net effect
rather than the motives and plans of the taxpayer or his corporation" 104 that
is the fundamental guide in administering Sec. 83(b). This tax provision is
aimed at the result. 105 It also applies even if at the time of the issuance of the
stock dividend, there was no intention to redeem it as a means of distributing
profit or avoiding tax on dividends. 106 The existence of legitimate business
purposes in support of the redemption of stock dividends is immaterial in
income taxation. It has no relevance in determining "dividend
equivalence". 107 Such purposes may be material only upon the issuance of
the stock dividends. The test of taxability under the exempting clause, when
it provides "such time and manner" as would make the redemption
"essentially equivalent to the distribution of a taxable dividend", is whether
the redemption resulted into a flow of wealth. If no wealth is realized from the
redemption, there may not be a dividend equivalence treatment. In the
metaphor of Eisner v. Macomber, income is not deemed "realize" until the
fruit has fallen or been plucked from the tree.
The three elements in the imposition of income tax are: (1) there must be
gain or and profit, (2) that the gain or profit is realized or received, actually or
constructively, 108 and (3) it is not exempted by law or treaty from income tax.
Any business purpose as to why or how the income was earned by the
taxpayer is not a requirement. Income tax is assessed on income received
from any property, activity or service that produces the income because the
Tax Code stands as an indifferent neutral party on the matter of where
income comes
from. 109
As stated above, the test of taxability under the exempting clause of Section
83(b) is, whether income was realized through the redemption of stock
dividends. The redemption converts into money the stock dividends which
become a realized profit or gain and consequently, the stockholder's
separate property. 110 Profits derived from the capital invested cannot escape
income tax. As realized income, the proceeds of the redeemed stock
dividends can be reached by income taxation regardless of the existence of
any business purpose for the redemption. Otherwise, to rule that the said
proceeds are exempt from income tax when the redemption is supported by
legitimate business reasons would defeat the very purpose of imposing tax
on income. Such argument would open the door for income earners not to
pay tax so long as the person from whom the income was derived has
legitimate business reasons. In other words, the payment of tax under the
exempting clause of Section 83(b) would be made to depend not on the
income of the taxpayer, but on the business purposes of a third party (the
corporation herein) from whom the income was earned. This is absurd,
illogical and impractical considering that the Bureau of Internal Revenue
(BIR) would be pestered with instances in determining the legitimacy of
business reasons that every income earner may interposed. It is not
administratively feasible and cannot therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR that "the
redeemed shares are the equivalent of dividend only if the shares were
not issued for genuine business purposes", 111 or the "redeemed shares have
been issued by a corporation bona fide" 112 bears no relevance in determining
the non-taxability of the proceeds of redemption ANSCOR, relying heavily
and applying said cases, argued that so long as the redemption is supported
by valid corporate purposes the proceeds are not subject to tax. 113 The
adoption by the courts below 114 of such argument is misleading if not
misplaced. A review of the cited American cases shows that the presence or
absence of "genuine business purposes" may be material with respect to the
issuance or declaration of stock dividends but not on its subsequent
redemption. The issuance and the redemption of stocks are two different
transactions. Although the existence of legitimate corporate purposes may
justify a corporation's acquisition of its own shares under Section 41 of the
Corporation Code, 115such purposes cannot excuse the stockholder from the
effects of taxation arising from the redemption. If the issuance of stock
dividends is part of a tax evasion plan and thus, without legitimate business
reasons, the redemption becomes suspicious which exempting clause. The
substance of the whole transaction, not its form, usually controls the tax
consequences. 116
The two purposes invoked by ANSCOR, under the facts of this case are no
excuse for its tax liability. First, the alleged "filipinization" plan cannot be
considered legitimate as it was not implemented until the BIR started making
assessments on the proceeds of the redemption. Such corporate plan was
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not stated in nor supported by any Board Resolution but a mere afterthought
interposed by the counsel of ANSCOR. Being a separate entity, the
corporation can act only through its Board of Directors. 117 The Board
Resolutions authorizing the redemptions state only one purpose reduction
of foreign exchange remittances in case cash dividends are declared. Not
even this purpose can be given credence. Records show that despite the
existence of enormous corporate profits no cash dividend was ever declared
by ANSCOR from 1945 until the BIR started making assessments in the early
1970's. Although a corporation under certain exceptions, has the prerogative
when to issue dividends, yet when no cash dividends was issued for about
three decades, this circumstance negates the legitimacy of ANSCOR's
alleged purposes. Moreover, to issue stock dividends is to increase the
shareholdings of ANSCOR's foreign stockholders contrary to its "filipinization"
plan. This would also increase rather than reduce their need for foreign
exchange remittances in case of cash dividend declaration, considering that
ANSCOR is a family corporation where the majority shares at the time of
redemptions were held by Don Andres' foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate,
the same cannot be a valid excuse for the imposition of tax. Otherwise, the
taxpayer's liability to pay income tax would be made to depend upon a third
person who did not earn the income being taxed. Furthermore, even if the
said purposes support the redemption and justify the issuance of stock
dividends, the same has no bearing whatsoever on the imposition of the tax
herein assessed because the proceeds of the redemption are deemed
taxable dividends since it was shown that income was generated therefrom.
Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of
the redeemed stock dividends would be to impose on such stock an
undisclosed lien and would be extremely unfair to intervening purchase, i.e.
those who buys the stock dividends after their issuance. 118 Such argument,
however, bears no relevance in this case as no intervening buyer is involved.
And even if there is an intervening buyer, it is necessary to look into the
factual milieu of the case if income was realized from the transaction. Again,
we reiterate that the dividend equivalence test depends on such "time and
manner" of the transaction and its net effect. The undisclosed lien 119 may be
unfair to a subsequent stock buyer who has no capital interest in the
company. But the unfairness may not be true to an original subscriber like
Don Andres, who holds stock dividends as gains from his investments. The
subsequent buyer who buys stock dividends is investing capital. It just so
happen that what he bought is stock dividends. The effect of its (stock
dividends) redemption from that subsequent buyer is merely to return his
capital subscription, which is income if redeemed from the original
subscriber.
After considering the manner and the circumstances by which the issuance
and redemption of stock dividends were made, there is no other conclusion
but that the proceeds thereof are essentially considered equivalent to a
distribution of taxable dividends. As "taxable dividend" under Section 83(b), it
is part of the "entire income" subject to tax under Section 22 in relation to
Section 21 120 of the 1939 Code. Moreover, under Section 29(a) of said Code,
dividends are included in "gross income". As income, it is subject to income
tax which is required to be withheld at source. The 1997 Tax Code may have
altered the situation but it does not change this disposition.
EXCHANGE OF COMMON WITH PREFERRED SHARES 121
Exchange is an act of taking or giving one thing for another
involving 122 reciprocal transfer 123 and is generally considered as a taxable
transaction. The exchange of common stocks with preferred stocks, or
preferred for common or a combination of either for both, may not produce a
recognized gain or loss, so long as the provisions of Section 83(b) is not
applicable. This is true in a trade between two (2) persons as well as a trade
between a stockholder and a corporation. In general, this trade must be parts
of merger, transfer to controlled corporation, corporate acquisitions or
corporate reorganizations. No taxable gain or loss may be recognized on
exchange of property, stock or securities related to reorganizations. 124
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified
its shares into common and preferred, and that parts of the common shares
of the Don Andres estate and all of Doa Carmen's shares were exchanged
for the whole 150.000 preferred shares. Thereafter, both the Don Andres
estate and Doa Carmen remained as corporate subscribers except that
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their subscriptions now include preferred shares. There was no change in
their proportional interest after the exchange. There was no cash flow. Both
stocks had the same par value. Under the facts herein, any difference in their
market value would be immaterial at the time of exchange because no
income is yet realized it was a mere corporate paper transaction. It would
have been different, if the exchange transaction resulted into a flow of
wealth, in which case income tax may be imposed. 125
Reclassification of shares does not always bring any substantial alteration in
the subscriber's proportional interest. But the exchange is different there
would be a shifting of the balance of stock features, like priority in dividend
declarations or absence of voting rights. Yet neither the reclassification nor
exchange per se, yields realize income for tax purposes. A common stock
represents the residual ownership interest in the corporation. It is a basic
class of stock ordinarily and usually issued without extraordinary rights or
privileges and entitles the shareholder to a pro rata division of
profits. 126 Preferred stocks are those which entitle the shareholder to some
priority on dividends and asset distribution. 127
Both shares are part of the corporation's capital stock. Both stockholders are
no different from ordinary investors who take on the same investment risks.
Preferred and common shareholders participate in the same venture, willing
to share in the profits and losses of the enterprise. 128 Moreover, under the
doctrine of equality of shares all stocks issued by the corporation are
presumed equal with the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such differences. 129
In this case, the exchange of shares, without more, produces no realized
income to the subscriber. There is only a modification of the subscriber's
rights and privileges which is not a flow of wealth for tax purposes. The
issue of taxable dividend may arise only once a subscriber disposes of his
entire interest and not when there is still maintenance of proprietary
interest. 130
WHEREFORE, premises considered, the decision of the Court of Appeals is
MODIFIED in that ANSCOR's redemption of 82,752.5 stock dividends is
herein considered as essentially equivalent to a distribution of taxable
dividends for which it is LIABLE for the withholding tax-at-source. The
decision is AFFIRMED in all other respects.
SO ORDERED.
Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur.
G.R. No. L-30460 March 12, 1929
C. H. STEINBERG, as Receiver of the Sibuguey Trading Company,
Incorporated, plaintiff-appellant,
vs.
GREGORIO VELASCO, ET AL., defendants-appellees.
Frank H. Young for appellant.
Pablo Lorenzo and Delfin Joven for appellees.
STATEMENT
Plaintiff is the receiver of the Sibuguey Trading Company, a domestic
corporation. The defendants are residents of the Philippine Islands.
It is alleged that the defendants, Gregorio Velasco, as president, Felix del
Castillo, as vice-president, Andres L. Navallo, as secretary-treasurer, and
Rufino Manuel, as director of Trading Company, at a meeting of the board of
directors held on July 24, 1922, approved and authorized various lawful
purchases already made of a large portion of the capital stock of the
company from its various stockholders, thereby diverting its funds to the
injury, damage and in fraud of the creditors of the corporation. That pursuant
to such resolution and on March 31, 1922, the corporation purchased from
701
the defendant S. R. Ganzon 100 shares of its capital stock of the par value of
P10, and on June 29, 1922, it purchased from the defendant Felix D.
Mendaros 100 shares of the par value of P10, and on July 16, 1922, it
purchased from the defendant Felix D. Mendaros 100 shares of the par value
of P10, each, and on April 5, 1922, it purchased from the defendant Dionisio
Saavedra 10 shares of the same par value, and on June 29, 1922, it
purchased from the defendant Valentin Matias 20 shares of like value. That
the total amount of the capital stock unlawfully purchased was P3,300. That
at the time of such purchase, the corporation had accounts payable
amounting to P13,807.50, most of which were unpaid at the time petition for
the dissolution of the corporation was financial condition, in contemplation of
an insolvency and dissolution.
As a second cause of action, plaintiff alleges that on July 24, 1922, the
officers and directors of the corporation approved a resolution for the
payment of P3,000 as dividends to its stockholders, which was wrongfully
done and in bad faith, and to the injury and fraud of its creditors. That at the
time the petition for the dissolution of the corporation was presented it had
accounts payable in the sum of P9,241.19, "and practically worthless
accounts receivable."
Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio
Velasco, Felix del Castillo, Andres L. Navallo and Rufino Manuel, personally
as members of the Board of Directors, or for the recovery from the
defendants S. R. Ganzon, of the sum of P1,000, from the defendant Felix D.
Mendaros, P2,000, and from the defendant Dionisio Saavedra, P100, and
under his second cause of action, he prays judgment for the sum of P3,000,
with legal interest against the board of directors, and costs.
For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon,
Dionisio Saavedra and Valentin Matias made a general and specific denial.
In his amended answer, the defendant Gregorio Velasco admits paragraphs,
1, 2 and 3 of each cause of action of the complaint, and that the shares
mentioned in paragraph 4 of the first cause of action were purchased, but
alleges that they were purchased by virtue of a resolution of the board of
directors of the corporation "when the business of the company was going on
very well." That the defendant is one of the principal shareholders, and that
about the same time, he purchase other shares for his own account, because
he thought they would bring profits. As to the second cause of action, he
admits that the dividends described in paragraph 4 of the complaint were
distributed, but alleges that such distribution was authorized by the board of
directors, "and that the amount represented by said dividends really
constitutes a surplus profit of the corporation," and as counterclaim, he asks
for judgment against the receiver for P12,512.47 for and on account of his
negligence in failing to collect the accounts.
Although duly served, the defendant Mendaros did not appear or answer.
The defendant Navallo was not served, and the case against him was
dismissed.
April 30, 1928, the case was tried and submitted on a stipulation of facts,
based upon which the lower court dismissed plaintiff's complaint, and
rendered judgment for the defendants, with costs against the plaintiff, and
absolved him from the cross-complaint of the defendant Velasco, and on
appeal, the plaintiff assigns the following errors:
1. In holding that the Sibuguey Trading Company, Incorporated,
could legally purchase its own stock.
2. In holding that the Board of Directors of the said Corporation could
legally declared a dividend of P3,000, July 24, 1922.
JOHNS, J.:
It is stipulated that on July 24, 1922, the directors of the corporation
approved the purchase of stocks as follows:
One hundred shares from S. R. Ganzon for P1,000;
One hundred shares from Felix D. Mendaros at the same price; which
purchase was made on June 29, 1922; another
702
One hundred shares from Felix D. Mendaros at the same price on July 16,
1922;
Ten shares from Dionisio Saavedra at the same price on June 29, 1922.
That during such times, the defendant Gregorio Velasco purchased 13
shares for the corporation for P130; Felix del Castillo 42 shares for P420;
Andres Navallo 15 shares for P150; and the defendant Mendaros 10
shares for P100. That during the time these various purchases were made,
the total amount of subscribed and paid up capital stock of the corporation
was P10,030, out of the authorized capital stock 2,000 shares of the par
value of P10 each.
Paragraph 4 of the stipulation also recites:
Be it also admitted as a fact that the time of the said purchases there
was a surplus profit of the corporation above-named of P3,314.72.
Paragraph 5 is as follows:
That at the time of the repeatedly mentioned various purchases of
the said capital stock were made, the said corporation had Accounts
Payable in the total amount of P13,807.50 as shown by the
statement of the corporation, dated June 30, 1922, and the Accounts
Receivable in the sum of P19,126.02 according to the books, and
that the intention of the Board of Directors was to resell the stocks
purchased by the corporations at a sum above par for each stock,
this expectation being justified by the then satisfactory and sound
financial condition of the business of the corporation.
It is also stipulated that on September 11, 1923, when the petition for the
dissolution of the corporation was presented to the court, according to a
statement made June 30, 1923, it has accounts payable aggregating
P9,41.19, and accounts receivable for P12,512.47.
Paragraph 7 of the stipulation recites:
That the same defendants, mentioned in paragraph 2 of this
stipulation of facts and in the same capacity, on the same date of
July 24, 1922, and at the said meeting of the said Board of Directors,
approved and authorized by resolution the payment of dividends to
its stockholders, in the sum of three thousand pesos (P3,000),
Philippine currency, which payments were made at different dates,
between September 30, 1922, and May 12, 1923, both dates
inclusive, at a time when the corporation had accounts less in
amount than the accounts receivable, which resolution was based
upon the balance sheet made as June 30, 1922, said balance sheet
showing that the corporation had a surplus of P1,069.41, and a profit
on the same date of P2,656.08, or a total surplus amount of
P3,725.49, and a reserve fund of P2,889.23 for bad and doubtful
accounts and depreciation of equipment, thereby leaving a balance
of P3,314.72 of net surplus profit after paying this dividend.
It is also stipulated at a meeting of the board of directors held on July 24,
1922, as follows:
6. The president and manager submitted to the Board of Directors
his statement and balance sheet for the first semester ending June
30, 1922 and recommended that P3,000 out of the surplus
account be set aside for dividends payable, and that payments be
made in installments so as not to effect the financial condition of the
corporation. That stockholders having outstanding account with the
corporation should settle first their accounts before payments of their
dividends could be made. Mr. Castillo moved that the statement and
balance sheet be approved as submitted, and also the
recommendations of the president. Seconded by Mr. Manuel.
Approved.
Paragraph 8 of the stipulation is as follows:
That according to the balance sheet of the corporation, dated June
30, 1923, it had accounts receivable in the sum of P12,512.47, due
from various contractor and laborers of the National Coal Company,
703
 and also employees of the herein corporation, which the herein
receiver, after his appointment on February 28, 1924, although he
made due efforts by personally visiting the location of the
corporation, and of National Coal Company, at its offices, at
Malangas, Mindanao, and by writing numerous letters of demand to
the debtors of the corporation, in order to collect these accounts
receivable, he was unable to do so as most of them were without
goods or property, and he could not file any suit against them that
might have any property, for the reason that he had no funds on
hand with which to pay the filing and sheriff fees to Malangas, and
other places of their residences.
From all of which, it appears that on June 30, 1922, the board of directors of
the corporation authorized the purchase of, purchased and paid for, 330
shares of the capital stock of the corporation at the agreed price of P3,300,
and that at the time the purchase was made, the corporation was indebted in
the sum of P13,807.50, and that according to its books, it had accounts
receivable in the sum of P19,126.02. That on September 11, 1923, when the
petition was filed for its dissolution upon the ground that it was insolvent, its
accounts payable amounted to P9,241.19, and its accounts receivable
P12,512.47, or an apparent asset of P3,271.28 over and above its liabilities.
But it will be noted that there is no stipulation or finding of facts as to what
was the actual cash value of its accounts receivable. Neither is there any
stipulation that those accounts or any part of them ever have been or will be
collected, and it does appear that after his appointment on February 28,
1924, the receiver made a diligent effort to collect them, and that he was
unable to do so, and it also appears from the minutes of the board of
directors that the president and manager "recommended that P3,000 out
of the surplus account to be set aside for dividends payable, and that
payments be made in installments so as not to effect the financial condition
of the corporation."
If in truth and in fact the corporation had an actual bona fide surplus of
P3,000 over and above all of its debt and liabilities, the payment of the
P3,000 in dividends would not in the least impair the financial condition of the
corporation or prejudice the interests of its creditors.
It is very apparent that on June 24, 1922, the board of directors acted on
assumption that, because it appeared from the books of the corporation that
it had accounts receivable of the face value of P19,126.02, therefore it had a
surplus over and above its debts and liabilities. But as stated there is no
stipulation as to the actual cash value of those accounts, and it does appear
from the stipulation that on February 28, 1924, P12,512.47 of those accounts
had but little, if any, value, and it must be conceded that, in the purchase of
its own stock to the amount of P3,300 and in declaring the dividends to the
amount of P3,000, the real assets of the corporation were diminished
P6,300. It also appears from paragraph 4 of the stipulation that the
corporation had a "surplus profit" of P3,314.72 only. It is further stipulated
that the dividends should "be made in installments so as not to effect
financial condition of the corporation." In other words, that the corporation did
not then have an actual bona fidesurplus from which the dividends could be
paid, and that the payment of them in full at the time would "affect the
financial condition of the corporation."
It is, indeed, peculiar that the action of the board in purchasing the stock from
the corporation and in declaring the dividends on the stock was all done at
the same meeting of the board of directors, and it appears in those minutes
that the both Ganzon and Mendaros were formerly directors and resigned
before the board approved the purchase and declared the dividends, and
that out of the whole 330 shares purchased, Ganzon, sold 100 and
Mendaros 200, or a total of 300 shares out of the 330, which were purchased
by the corporation, and for which it paid P3,300. In other words, that the
directors were permitted to resign so that they could sell their stock to the
corporation. As stated, the authorized capital stock was P20,000 divided into
2,000 shares of the par value of P10 each, which only P10,030 was
subscribed and paid. Deducting the P3,300 paid for the purchase of the
stock, there would be left P7,000 of paid up stock, from which deduct P3,000
paid in dividends, there would be left P4,000 only. In this situation and upon
this state of facts, it is very apparent that the directors did not act in good
faith or that they were grossly ignorant of their duties.
Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7,
p. 473, section 454 where it is said:
704
 General Duty to Exercise Reasonable Care. The directors of a
corporation are bound to care for its property and manage its affairs
in good faith, and for a violation of these duties resulting in waste of
its assets or injury to the property they are liable to account the same
as other trustees. Are there can be no doubt that if they do acts
clearly beyond their power, whereby loss ensues to the corporation,
or dispose of its property or pay away its money without authority,
they will be required to make good the loss out of their private
estates. This is the rule where the disposition made of money or
property of the corporation is one either not within the lawful power of
the corporation, or, if within the authority of the particular officer or
officers.
And section 458 which says:
Want of Knowledge, Skill, or Competency. It has been said that
directors are not liable for losses resulting to the corporation from
want of knowledge on their part; or for mistake of judgment, provided
they were honest, and provided they are fairly within the scope of the
powers and discretion confided to the managing body. But the
acceptance of the office of a director of a corporation implies a
competent knowledge of the duties assumed, and directors cannot
excuse imprudence on the ground of their ignorance or inexperience;
and if they commit an error of judgment through mere recklessness
or want of ordinary prudence or skill, they may be held liable for the
consequences. Like a mandatory, to whom he has been likened, a
director is bound not only to exercise proper care and diligence, but
ordinary skill and judgment. As he is bound to exercise ordinary skill
and judgment, he cannot set up that he did not possess them.
Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets
of the corporation to purchase its own stock, and that it will not declare
dividends to stockholders when the corporation is insolvent.
The amount involved in this case is not large, but the legal principles are
important, and we have given them the consideration which they deserve.
The judgment of the lower court is reversed, and (a), as to the first cause of
action, one will be entered for the plaintiff and against the defendant S. R.
Ganzon for the sum of P1,000, with legal interest from the 10th of February,
1926, and against the defendant Felix D. Medaros for P2,000, with like
interests, and against the defendant Dionisio Saavedra for P100, with like
interest, and against each of them for costs, each on their primary liability as
purchasers of stock, and (b) against the defendants Gregorio Velasco, Felix
del Castillo and Rufino Manuel, personally, as members of the board of
directors of the Sibuguey Trading Company, Incorporated, as secondarily
liable for the whole amount of such stock sold and purchased as above
stated, and on the second cause of action, judgment will be entered (c) for
the plaintiff and jointly and severally against the defendants Gregorio
Velasco, Felix del Castillo and Rufino Manuel, personally, as members of the
board of directors of the Sibuguey Trading Company, Incorporated, for
P3,000, with interest thereon from February 10, 1926, at the rate of 6 per
cent per annum, and costs. So ordered.
Johnson, Street, Malcolm, Ostrand, Romualdez and Villa-Real, JJ., concur.
G.R. No. L-42091 November 2, 1935
GONZALO CHUA GUAN, plaintiff-appellant,
vs.
705
SAMAHANG MAGSASAKA, INC., and SIMPLICIO OCAMPO, ADRIANO
G. SOTTO, and EMILIO VERGARA, as president, secretary and
treasurer respectively of the same, defendants-appellees.
Buenaventura C. Lopez for appellant.
Domingo L. Vergara for appellees.
BUTTE, J.:
This is an appeal from a judgment of the Court of First Instance of Nueva
Ecija in an action for a writ of mandamus. The case is remarkable for the
following reason: that the parties entered into a stipulation in which the
defendants admitted all of the allegations of the complaint and the plaintiff
admitted all of the special defenses in the answer of the defendants, and on
this stipulation they submitted the case for decision.
The complaint alleges that the defendant Samahang Magsasaka, Inc., is a
corporation duly organized under the laws of the Philippine Islands with
principal office in Cabanatuan, Nueva Ecija, and that the individual
defendants are the president, secretary and treasurer respectively of the
same; that on June 18, 1931, Gonzalo H. Co Toco was the owner of 5,894
shares of the capital stock of the said corporation represented by nine
certificates having a par value of P5 per share; that on said date Gonzalo H.
Co Toco, a resident of Manila, mortgaged said 5,894 shares to Chua Chiu to
guarantee the payment of a debt of P20,000 due on or before June 19, 1932.
The said certificates of stock were delivered with the mortgage to the
mortgagee, Chua Chiu. The said mortgage was duly registered in the office
of the register of deeds of Manila on June 23, 1931, and in the office of the
said corporation on September 30, 1931.
On November 28, 1931, Chua Chiu assigned all his right and interest in the
said mortgage to the plaintiff and the assignment was registered in the office
of the register of deeds in the City of Manila on December 28, 1931, and in
the office of the said corporation on January 4, 1932.
The debtor, Gonzalo H. Co Toco, having defaulted in the payment of said
debt at maturity, the plaintiff foreclosed said mortgage and delivered the
certificates of stock and copies of the mortgage and assignment to the sheriff
of the City of Manila in order to sell the said shares at public auction. The
sheriff auctioned said 5,894 shares of stock on December 22, 1932, and the
plaintiff having been the highest bidder for the sum of P14,390, the sheriff
executed in his favor a certificate of sale of said shares.
The plaintiff tendered the certificates of stock standing in the name of
Gonzalo H. Co Toco to the proper officers of the corporation for cancellation
and demanded that they issue new certificates in the name of the plaintiff.
The said officers (the individual defendants) refused and still refuse to issue
said new shares in the name of the plaintiff.
The prayer is that a writ of mandamus be issued requiring the defendants to
transfer the said 5,894 shares of stock to the plaintiff by cancelling the old
certificates and issuing new ones in their stead.
The special defenses set up in the answer are as follows: that the defendants
refuse to cancel the said certificates standing in the name of Gonzalo H. Co
Toco on the books of the corporation and to issue new ones in the name of
the plaintiff because prior to the date when the plaintiff made his demand, to
wit, February 4, 1933, nine attachments had been issued and served and
noted on the books of the corporation against the shares of Gonzalo H. Co
Toco and the plaintiff objected to having these attachments noted on the new
certificates which he demanded. These attachments noted on the books of
the corporation against the shares of Gonzalo H. Co Toco are as follows:
MISSING PAGES: 475-477.
It will be noted that the first eight of the said writs of attachment were served
on the corporation and noted on its records before the corporation received
notice from the mortgagee Chua Chiu of the mortgage of said shares dated
June 18, 1931. No question is raised as to the validity of said mortgage or of
said writs of attachment and the sole question presented for decision is
whether the said mortgage takes priority over the said writs of attachment.
706
It is not alleged that the said attaching creditors had actual notice of the said
mortgage and the question therefore narrows itself down to this: Did the
registration of said chattel mortgage in the registry of chattel mortgages in
the office of the register of deeds of Manila, under date of July 23, 1931, give
constructive notice to the said attaching creditors?
In passing, let it be noted that the registration of the said chattel mortgage in
the office of the corporation was not necessary and had no legal effect.
(Monserrat vs. Ceron, 58 Phil., 469.) The long mooted question as to
whether or not shares of a corporation could be hypothecated by placing a
chattel mortgage on the certificate representing such shares we now regard
as settled by the case of Monserrat vs. Ceron, supra. But that case did not
deal with any question relating to the registration of such a mortgage or the
effect of such registration. Nothing appears in the record of that case even
tending to show that the chattel mortgage there involved was ever registered
anywhere except in the office of the corporation, and there was no question
involved there as to the right of priority among conflicting claims of creditors
of the owner of the shares.
The Chattel Mortgage Law, Act No. 1508, as amended by Act No. 2496,
contains the following provision:
SEC. 4. A chattel mortgage shall not be valid against any person
except the mortgagor, his executors or administrators, unless the
possession of the property is delivered to and retained by the
mortgagee or unless the mortgage is recorded in the office of the
register of deeds of the province in which the mortgagor resides at
the time of making the same, or, if he resides the Philippine Islands,
in the province in which the property is situated: Provided,
however, That if the property is situated in a different province from
that in which the mortgagor resides, the mortgage shall be recorded
in the office of the register of deeds of both the province in which the
mortgagor resides and that in which the property is situated, and for
the purposes of this Act the City of Manila Shall be deemed to be a
province.
The practical application of the Chattel Mortgage Law to shares of stock of a
corporation presents considerable difficulty and we have obtained little aid
from the decisions of other jurisdictions because that form of mortgage is ill
suited to the hypothecation of shares of stock and has been rarely used
elsewhere. In fact, it has been doubted whether shares of stock in a
corporation are chattels in the sense in which that word is used chattel
mortgage statutes. This doubt is reflected in our own decision in the case
of Fua Cun vs. Summers and China Banking Corporation (44 Phil., 705), in
which we said:
". . . an equity in shares of stock is of such an intangible character that it is
somewhat difficult to see how it can be treated as a chattel and mortgaged in
such a manner that the recording of the mortgage will furnish constructive
notice to third parties. . . ."And we held that the chattel mortgage there
involved: "at least operated as a conditional equitable assignment." In that
case we quoted the following from Spalding vs. Paine's Adm'r. (81 Ky., 416),
with regard to a chattel mortgage of shares of stock:
"These certificates of stock are in the pockets of the owner, and go
with him where he may happen to locate, as choses in action, or
evidence of his right, without any means on the part of those with
whom he proposes to deal on the faith of such a security of
ascertaining whether or not this stock is in pledge or mortgaged to
others. He finds the name of the owner on the books of the company
as a subscriber of paid-up stock, amounting to 180 shares, with the
certificates in his possession, pays for these certificates their full
value, and has the transfer to him made on the books of the
company, thereby obtaining a perfect title. What other inquiry is he to
make, so as to make his investment certain and secure? Where is he
to look, in order to ascertain whether or not this stock has been
mortgaged? The chief office of the company may be at one place
today and at another tomorrow. The owner may have no fixed or
permanent abode, and with his notes in one pocket and his
certificates of stock in the other the one evidencing the extent of
his interest in the stock of the corporation, the other his right to
money owing him by his debtor, we are asked to say that the
mortgage is effectual as to the one and inoperative as to the other."
707
But the case of Fua Cun vs. Summers and China Banking Corporation,
supra, did not decide the question here presented and gave no light as to the
registration of a chattel mortgage of shares of stock of a corporation under
the provisions of section 4 of the Chattel Mortgage Law, supra.
Section 4 of Act No. 1508 provides two ways for executing a valid chattel
mortgage which shall be effective against third persons. First, the possession
of the property mortgage must be delivered to and retained by the
mortgagee; and, second, without such delivery the mortgage must be
recorded in the proper office or offices of the register or registers of deeds. If
a chattel mortgage of shares of stock of a corporation may validly be made
without the delivery of possession of the property to the mortgagee and the
mere registration of the mortgage is sufficient to constructive notice to third
parties, we are confronted with the question as to the proper place of
registration of such a mortgage. Section 4 provides that in such a case the
mortgage resides at the time of making the same or, if he is a non-resident,
in the province in which the property is situated; and it also provides that if
the property is situated in a different province from that in which the
mortgagor resides the mortgage shall be recorded both in the province of the
mortgagor's residence and in the province where the property is situated.
If with respect to a chattel mortgage of shares of stock of a corporation,
registration in the province of the owner's domicile should be sufficient, those
who lend on such security would be confronted with the practical difficulty of
being compelled not only to search the records of every province in which the
mortgagor might have been domiciled but also every province in which a
chattel mortgage by any former owner of such shares might be registered.
We cannot think that it was the intention of the legislature to put this almost
prohibitive impediment upon the hypothecation of shares of stock in view of
the great volume of business that is done on the faith of the pledge of shares
of stock as collateral.
It is a common but not accurate generalization that the situs of shares of
stock is at the domicile of the owner. The term situs is not one of fixed of
invariable meaning or usage. Nor should we lose sight of the difference
between the situs of the shares and the situs of the certificates of shares.
The situs of shares of stock for some purposes may be at the domicile of the
owner and for others at the domicile of the corporation; and even elsewhere.
(Cf. Vidal vs. South American Securities Co., 276 Fed., 855; Black Eagle
Min. Co. vs. Conroy, 94 Okla., 199; 221 Pac,, 425 Norrie vs. Kansas City
Southern Ry. Co., 7 Fed. [2d]. 158.) It is a general rule that for purposes of
execution, attachment and garnishment, it is not the domicile of the owner of
a certificate but the domicile of the corporation which is decisive. (Fletcher,
Cyclopedia of the Law of Private Corporations, vol. 11, paragraph 5106. Cf.
sections 430 and 450, Code of Civil Procedure.)
By analogy with the foregoing and considering the ownership of shares in a
corporation as property distinct from the certificates which are merely the
evidence of such ownership, it seems to us a reasonable construction of
section 4 of Act No. 1508 to hold that the property in the shares may be
deemed to be situated in the province in which the corporation has its
principal office or place of business. If this province is also the province of the
owner's domicile, a single registration sufficient. If not, the chattel mortgage
should be registered both at the owner's domicile and in the province where
the corporation has its principal office or place of business. In this sense the
property mortgaged is not the certificate but the participation and share of the
owner in the assets of the corporation.
Apart from the cumbersome and unusual method of hypothecating shares of
stock by chattel mortgage, it appears that in the present state of our law, the
only safe way to accomplish the hypothecation of share of stock of a
Philippine corporation is for the creditor to insist on the assignment and
delivery of the certificate and to obtain the transfer of the legal title to him on
the books of the corporation by the cancellation of the certificate and the
issuance of a new one to him. From the standpoint of the debtor this may be
unsatisfactory because it leaves the creditor as the ostensible owner of the
shares and the debtor is forced to rely upon the honesty and solvency of the
creditor. Of course, the mere possession and retention of the debtor's
certificate by the creditor gives some security to the creditor against an
attempted voluntary transfer by the debtor, provided the by-laws of the
corporation expressly enact that transfers may be made only upon the
surrender of the certificate. It is to be noted, however, that section 35 of the
Corporation Law (Act No. 1459) enacts that shares of stock "may be
transferred by delivery of the certificate endorsed by the owner or his
708
attorney in fact or other person legally authorized to make the transfer." The
use of the verb "may" does not exclude the possibility that a transfer may be
made in a different manner, thus leaving the creditor in an insecure position
even though he has the certificate in his possession. Moreover, the shares
still standing in the name of the debtor on the books of the corporation will be
liable to seizure by attachment or levy on execution at the instance of other
creditors. (Cf. Uy Piaoco vs.McMicking, 10 Phil., 286, and
Uson vs. Diosomito, 61 Phil., 535.) This unsatisfactory state of our law is well
known to the bench and bar. (Cf. Fisher, The Philippine Law of Stock
Corporations, pages 163-168.) Loans upon stock securities should be
facilitated in order to foster economic development. The transfer by
endorsement and delivery of a certificate with intention to pledge the shares
covered thereby should be sufficient to give legal effect to that intention and
to consummate the juristic act without necessity for registration.lawphil.net

We are fully conscious of the fact that our decisions in the case of Monserrat
vs. Ceron, supra, and in the present case have done little perhaps to
ameliorate the present uncertain and unsatisfactory state of our law
applicable to pledges and chattel mortgages of shares of stock of Philippine
corporations. The remedy lies with the legislature.

In view of the premises, the attaching creditors are entitled to priority over the
defectively registered mortgage of the appellant and the judgment appealed
from must be affirmed without special pronouncement as to costs in this
instance. 1

Malcolm, Villa-Real, Imperial, and Goddard, JJ., concur.

709
 In support of this appeal, the appellants assign nine alleged errors in the
decision of the trial court, which we shall discuss in the course of this
decision.

Some of the following facts are undisputed and others proven by a

preponderance of the evidence:

The plaintiff herein, Enrique Monserrat, was the president and manager of
the Manila Yellow Taxicab Co., Inc., and the owner of P1,200 common
shares of stock thereof.
G.R. No. 37078 September 27, 1933
On March 25, 1930, in consideration of the interest shown and the financial
aid extended him in the organization of the corporation by Carlos G. Ceron,
ENRIQUE MONSERRAT, plaintiff-appellee,
one of the defendants herein, Enrique Monserrat assigned to the former the
vs.
usufruct of half of the aforesaid common shares of stock, the corresponding
CARLOS G. CERON, ET AL., defendants.
certificate of stock No. 7, having been issued in the name of said Carlos G,
ERMA, INC., and, THE SHERIFF OF MANILA, respondents.
Ceron to that effect on March 24, 1930. (Exhibit 1.) Said assignment or
transfer only gave the transferee the right to enjoy, during his lifetime, the
Juan T. Santos and Arsenio Solidum for appellants. profits which might be derived from the shares assigned him, prohibiting him
Cardenas and Casal for appellee. from selling, mortgaging, encumbering, alienating or otherwise exercising
any act implying absolute ownership of all or any of the shares in question,
VILLA-REAL, J.: the transferor having reserved for himself and his heirs the right to vote
derived from said shares of stock and to recover the ownership thereof at the
This is an appeal taken by the defendant-entity, Erma, Inc., and by the sheriff termination of the usufruct (Exhibit A). Stock certificate No. 7 was recorded in
of the City of Manila, from the judgment rendered by the Court of First the name of Carlos G. Ceron and the aforesaid deed of transfer Exhibit A,
Instance of Manila, the dispositive part of which reads as follows: was noted by himself as secretary, on page 22 of the Stock and Transfer
Book of the Manila Yellow Taxicab Co., Inc.
In view of the foregoing considerations, judgment is rendered in favor
of the plaintiff declaring the preliminary injunction issued herein final By way of defense, the defendants herein alleged that on February 20, 1931,
and permanent; declaring the plaintiff herein the owner of the 600 Eduardo R. Matute, president of the defendant corporation, Erma, Inc., and
shares of stock, Exhibit 1; declaring the mortgage constituted on the the defendant Carlos G. Ceros. appeared at the plaintiff's office on Mabini
ownership of the shares of stock in question null and void and Street, Manila, and there Ceron, at a distance of about three meters from the
without force and effect, although the mortgage on the usufruct plaintiff, showed Matute the stock book of the Manila Yellow Taxicab Co.,
enjoyed by the mortgage debtor Carlos G. Ceron in the said 600 Inc., Matute did not see the annotation on page 22 thereof regarding exhibit A
shares of stock is hereby declared valid, with costs against the which, according to Ceron, was executed two months after March 25, 1930,
defendants. It is so ordered. the date on which it appears to have been executed. Ceron alleges that,

710
upon instructions of the plaintiff, he did not make any notation of said
document in the stock book until May 5, 1931, the date on which the shares
of stock in question were to be sold at public auction to satisfy his debt to
Matute.
On February 26, 1931, Carlos G. Ceron mortgaged to Eduardo R. Matute
some shares of stock of the Manila Yellow Taxicab Co., Inc., among which
were the 600 common shares of stock in question, for the sum of P30,000.
Ceron endorsed to Matute the certificate of stock Exhibit 1, of which Matute
has been in possession ever since. When Ceron mortgaged the shares in
question to Matute, he did not inform Matute of the existence of the
document, Exhibit A, and the latter never had any knowledge thereof. When
he was asked by the plaintiff whether he succeeded in carrying out his
transaction with Matute, Carlos G. Ceron informed him of the aforesaid
mortgage at the beginning of March 1931. Ceron continued as secretary of
the Manila Yellow Taxicab Co., Inc., until May 5, 1931.
The first question to decide in the present appeal is whether or not it is
necessary to enter upon the books of the corporation a mortgage constituted
on common shares of stock in order that such mortgage may be valid and
may have force and effect as against third persons.
Section 35 of the Corporation Law provides the following:
SEC. 35. The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or the vice-
president, counter signed by the secretary or clerk and sealed with
the seal of the corporation, shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property and may
be transferred by delivery of the certificate indorsed by the owner or
his attorney in fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the
transaction, the date of the transfer the number of the certificate, and
the number of shares transferred.
No share of stock against which the corporation hold, any unpaid
claim shall be transferable on the books of the corporation.
The legal provision just quoted does not require any entry except of transfers
of shares of stock in order that such transfers may be valid as against third
persons. Now, what did the Legislature mean in using the word "transfer"?
It is a rule of statutory construction that the words of a statute are to be taken
in their natural, plain and ordinary signification in accordance with the
common and approved usage of the language, giving to words of common
use their popularly accepted meaning and to technical terms or words of art,
their accepted special signification, unless there is reason to believe from the
context of the statute that such words have been used in another sense.
(Black, Construction and Interpretation of Laws, section 57.) Inasmuch as it
does not appear from the text of the Corporation Law that an attempt was
made to give a special signification to the word "transfer", we shall construe it
according to its accepted meaning in ordinary parlance.
The word "transferencia" (transfer) is defined by the "Diccionario de la
Academia de la Lengua Castellana" as "accion y efecto de transferir" (the act
and effect of transferring); and the verb "transferir", as "ceder o renunciar en
otro el derecho o dominio que se tiene sobre una cosa, haciendole dueno de
ella" (to assign or waive the right in, or absolute ownership of, a thing in favor
of another, making him the owner thereof).
In the Law Dictionary of "Words and Phrases", third series, volume 7, p. 589,
the word "transfer" is defined as follows:
"Transfer" means any act by which property of one person is vested
in another, and "transfer of shares", as used in Uniform Stock
Transfer Act (Comp. St. Supp., 690), implies any means whereby
one may be divested of and another acquire ownership of stock.
(Wallach vs. Stein [N.J.], 136 A., 209, 210.)"
In view of the definitions cited above, the question arises as to whether or not
a mortgage constituted on certain shares of stock in accordance with Act No.
711
1508, as amended by Act No. 2496, is a transfer of such shares in the
abovementioned sense.
Section 3 of the aforesaid Act No. 1508, as amended by Act No. 2496,
defines the phrase "hipoteca mobiliaria" (chattel mortgage) as follows:
SEC. 3. A chattel mortgage is a conditional sale of personal property
as security for the payment of a debt, or the performance of some
other obligation specified therein, the condition being that the sale
shall be avoided upon the seller paying to the purchaser a sum of
money or doing some other act named. If the condition is performed
according to its terms the mortgage and sale immediately become
void, and the mortgage is hereby divested of his title.
According to the legal provision just quoted, although a chattel mortgage,
accompanied by delivery of the mortgaged thing, transfers the title and
ownership thereof to the mortgage creditor, such transfer is not absolute but
constitutes a mere security for the payment of the mortgage debt, the
transfer in question becoming null and void from the time the mortgage
debtor complies with his obligation to pay his debt.
In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac., 14, 17;
34 Okl., 662; 46 L. R. A. [N.S.], 455), cited in Words and Phrases, second
series, vol. 4, p. 978, the following appears:
A "transfer" is the act by which owner of a thing delivers it to another
with the intent of passing the rights which he has in it to the latter,
and a chattel mortgage is not within the meaning of such term.
Therefore, the chattel mortgage is not the transfer referred to in section 35 of
Act No. 1459 commonly known as the Corporation law, which transfer should
be entered and noted upon the books of a corporation in order to be valid,
and which, as has already been said, means the absolute and unconditional
conveyance of the title and ownership of a share of stock.
If, in accordance with said section 35 of the Corporation Law, only the
transfer or absolute conveyance of the ownership of the title to a share need
be entered and noted upon the books of the corporation in order that such
transfer may ba valid, therefore, inasmuch as a chattel mortgage of the
aforesaid title is not a complete and absolute alienation of the dominion and
ownership thereof, its entry and notation upon the books of the corporation is
not necessary requisite to its validity.
The second question to decide is whether or not the defendant entity, Erma,
Inc., had knowledge of the execution of the deed Exhibit A, dated March 25,
1930, wherein the defendant Carlos G. Ceron states that the transfer to him
by Enrique Monserrat of 600 shares of common stock of the Manila Yellow
Taxicab Co., Inc., covered by certificate No. 7, was only for the usufruct
thereof, reserving to the assignor the right to vote said share and binding
himself not to alienate nor encumber them.
The evidence shows that when Matute as president of Erma, Inc., went to the
office of the Manila Yellow Taxicab Co., Inc., at Mabini Street, manila, on
February 20, 1931, to examine the Stock and Transfer Book of the said
corporation, for the purpose of ascertaining the actual status of Carlos G.
Ceron's shares of stock, Ceron as secretary of said corporation and in
charge of said stock book, showed it to him, and Matute found nothing but
that the shares in question were recorded therein in the name of said Carlos
G. Ceron, free from all liens and encumbrances and no reference made to
the Exhibit A. the defendant, Carlos G. Ceron himself, testified that when he
mortgaged his shares, he said nothing to Erma, Inc., about the existence of
the deed, Exhibit A, for fear he might not succeed in obtaining the loan he
applied for, with the said shares as security, and that the notation of Exhibit A
in question appearing in the books of the corporation was place there only on
May 5, 1931, the same date on which the 600 common shares were to have
been sold at public auction, together with the preferred shares, which were
delivered to the sheriff for that purpose by Erma, Inc., in view of Carlos G.
Ceron's default in the payment of the loan secured by them. From the time
said shares of stocks in question were mortgaged by Carlos G. Ceron on
February 26, 1931, the corresponding certificate has been in possession of
the defendant entity, Erma, Inc., without any notation thereon relative to the
deed Exhibit A. It is obvious, therefore, that the defendant entity Erma, Inc.,
712
as a conditional purchaser of the shares of stock in question given as
security for the payment of his credit, acquired in good faith Carlos G.
Ceron's right and title to the 600 common shares of stock evidenced by
certificate No. 7 of the Manila Yellow Taxicab Co., Inc., and as such
conditional purchaser in good faith, it is entitled to the protection of the law.
In view of the foregoing considerations, we are of the opinion and so hold
that, inasmuch as section 35 of the Corporation Law does not require the
notation upon the books of a corporation of transactions relating to its shares,
except the transfer of possession and ownership thereof, as a necessary
requisite to the validity of such transfer, the notation upon the aforesaid
books of the corporation, of a chattel mortgage constituted on the shares of
stock in question is not necessary to its validity.
Wherefore, the judgment appealed from is hereby reversed and the
defendants are absolved from the complaint herein which is dismissed with
costs against the appellee. So ordered.
Malcolm, Abad Santos, Hull, and Imperial, JJ., concur.
G.R. No. L-19441 March 27, 1923
FUA CUN (alias Tua Cun), plaintiff-appellee,
vs.
RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the City of
Manila, and the CHINA BANKING CORPORATION, defendants-appellants.
Araneta and Zaragoza for appellants.
Canillas and Cardenas for appellee.
OSTRAND, J.:
It appears from the evidence that on August 26, 1920, one Chua Soco
subscribed for five hundred shares of stock of the defendant Banking
Corporation at a par value of P100 per share, paying the sum of P25,000,
one-half of the subscription price, in cash, for which a receipt was issued in
the following terms:
This is to certify, That Chua Soco, a subscriber for five hundred
shares of the capital stock of the China Banking Corporation at its
par value of P100 per share, has paid into the Treasury of the
Corporation, on account of said subscription and in accordance with
its terms, the sum of twenty-five thousand pesos (P25,000),
Philippine currency.
Upon receipt of the balance of said subscription in accordance with
the terms of the calls of the Board of Directors, and surrender of this
certificate, duly executed certificates for said five hundred shares of
stock will be issued to the order of the subscriber.
It is expressly understood that the total number of shares specified in
this receipt is subject to sale by the China Banking Corporation for
the payment of any unpaid subscriptions, should the subscriber fail
to pay the whole or any part of the balance of his subscription upon
30 days' notice issued therefor by the Board of Directors.
Witness our official signatures at Manila, P. I., this 25th day of
August, 1920.
(Sgd.) MERVIN WEBSTER
Cashier
(Sgd.) DEE C. CHUAN
President
713
On May 18, 1921, Chua Soco executed a promissory note in favor of the
plaintiff Fua Cun for the sum of P25,000 payable in ninety days and drawing
interest at the rate of 1 per cent per month, securing the note with a chattel
mortgage on the shares of stock subscribed for by Chua Soco, who also
endorsed the receipt above mentioned and delivered it to the mortgagee.
The plaintiff thereupon took the receipt to the manager of the defendant Bank
and informed him of the transaction with Chua Soco, but was told to await
action upon the matter by the Board of Directors.
In the meantime Chua Soco appears to have become indebted to the China
Banking Corporation in the sum of P37,731.68 for dishonored acceptances of
commercial paper and in an action brought against him to recover this
amount, Chua Soco's interest in the five hundred shares subscribed for was
attached and the receipt seized by the sheriff. The attachment was levied
after the defendant bank had received notice of the facts that the receipt had
been endorsed over to the plaintiff.
Fua Cun thereupon brought the present action maintaining that by virtue of
the payment of the one-half of the subscription price of five hundred shares
Chua Soco in effect became the owner of two hundred and fifty shares and
praying that his, the plaintiff's, lien on said shares, by virtue of the chattel
mortgage, be declared to hold priority over the claim of the defendant
Banking Corporation; that the defendants be ordered to deliver the receipt in
question to him; and that he be awarded the sum of P5,000 in damages for
wrongful attachment.
The trial court rendered judgment in favor of the plaintiff declaring that Chua
Soco, through the payment of the P25,000, acquired the right to two hundred
and fifty shares fully paid up, upon which shares the plaintiff holds a lien
superior to that of the defendant Banking Corporation and ordering that the
receipt be returned to said plaintiff. From this judgment the defendants
appeal.
Though the court below erred in holding that Chua Soco, by paying one-half
of the subscription price of five hundred shares, in effect became the owner
of two hundred and fifty shares, the judgment appealed from is in the main
correct.
The claim of the defendant Banking Corporation upon which it brought the
action in which the writ of attachment was issued, was for the non-payment
of drafts accepted by Chua Soco and had no direct connection with the
shares of stock in question. At common law a corporation has no lien upon
the shares of stockholders for any indebtedness to the corporation (Jones on
Liens, 3d ed., sec. 375) and our attention has not been called to any statute
creating such lien here. On the contrary, section 120 of the Corporation Act
provides that "no bank organized under this Act shall make any loan or
discount on the security of the shares of its own capital stock, nor be the
purchaser or holder of any such shares, unless such security or purchase
shall be necessary to prevent loss upon a debt previously contracted in good
faith, and stock so purchased or acquired shall, within six months from the
time of its purchase, be sold or disposed of at public or private sale, or, in
default thereof, a receiver may be appointed to close up the business of the
bank in accordance with law."
Section 35 of the United States National Banking Act of 1864 contains a
similar provision and it has been held in various decisions of the United
States Supreme Court that a bank organized under that Act can have no lien
on its own stock for the indebtedness of the stockholders even when the by-
laws provide that the shares shall be transferable only on the books of the
corporation and that no such transfer shall be made if the holder of the
shares is indebted to the corporation. (Jones on Liens, 3d ed., sec. 384; First
National Bank of South Bend vs.Lanier and Handy, 11 Wall., 369;
Bullard vs. National Eagle Bank, 18 Wall., 589; First National Bank of
Xenia vs.Stewart and McMillan, 107 U.S., 676.) The reasons for this doctrine
are obvious; if banking corporations were given a lien on their own stock for
the indebtedness of the stockholders, the prohibition against granting loans
or discounts upon the security of the stock would become largely ineffective.
Turning now to the rights of the plaintiff in the stock in question, it is argued
that the interest held by Chua Soco was merely an equity which could not be
714
made the subject of a chattel mortgage. Though the courts have uniformly For value received, I assign all my rights in these shares in favor of
held that chattel mortgages on shares of stock and other choses in action are Mr. Tua Cun.
valid as between the parties, there is still much to be said in favor of the
defendants' contention that the chattel mortgage here in question would not Manila, P. I., May 18, 1921.
prevail over liens of third parties without notice; an equity in shares of stock is
of such an intangible character that it is somewhat difficult to see how it can (Sgd.) CHUA SOCO
be treated as a chattel and mortgaged in such a manner that the recording of
the mortgage will furnish constructive notice to third parties. As said by the
This endorsement was accompanied by the delivery of the receipt to the
court in the case of Spalding vs. Paine's Adm'r. (81 Ky., 416), in regard to a
plaintiff and further strengthened by the execution of the chattel mortgage,
chattel mortgage of shares of stock:
which mortgage, at least, operated as a conditional equitable assignment.

These certificates of stock are in the pockets of the owner, and go

As against the rights of the plaintiff the defendant bank had, as we have
with him where he may happen to locate, as choses in action, or
seen, no lien unless by virtue of the attachment. But the attachment was
evidence of his right, without any means on the part of those with
levied after the bank had received notice of the assignment of Chua Soco's
whom he proposes to deal on the faith of such a security of
interests to the plaintiff and was therefore subject to the rights of the latter. It
ascertaining whether or not this stock is in pledge or mortgaged to
follows that as against these rights the defendant bank holds no lien
others. He finds the name of the owner on the books of the company
whatever.
as a subscriber of paid-up stock, amounting to 180 shares, with the
certificates in his possession, pays for these certificates their full
value, and has the transfer to him made on the books of the As we have already stated, the court erred in holding the plaintiff as the
company, thereby obtaining a perfect title. What other inquiry is he to owner of two hundred and fifty shares of stock; "the plaintiff's rights consist in
make, so as to make his investment certain and secure? Where is he an equity in five hundred shares and upon payment of the unpaid portion of
to look, in order to ascertain whether or not this stock has been the subscription price he becomes entitled to the issuance of certificate for
mortgaged? The chief office of the company may be at one place to- said five hundred shares in his favor."
day and at another tomorrow. The owner may have no fixed or
permanent abode, and with his notes in one pocket and his The judgment appealed from is modified accordingly, and in all other
certificates of stock in the other the one evidencing the extent of respects it is affirmed, with the costs against the appellants Banking
his interest in the stock of the corporation, the other his right to Corporation. So ordered.
money owing him by his debtor, we are asked to say that the
mortgage is effectual as to the one and inoperative as to the other. Araullo, C.J., Street, Malcolm, Avancea, Villamor, Johns, and Romualdez,
JJ., concur.
But a determination of this question is not essential in the present case.
There can be no doubt that an equity in shares of stock may be assigned and
that the assignment is valid as between the parties and as to persons to
whom notice is brought home. Such an assignment exists here, though it
was made for the purpose of securing a debt. The endorsement to the
plaintiff of the receipt above mentioned reads:

715
G.R. No. L-28120 November 25, 1976

RICARDO A. NAVA, petitioner-appellant.

vs.
PEERS MARKETING CORPORATION, RENATO R. CUSI and AMPARO
CUSI, respondents-appellees.

Rolando M. Medalla, for appellant.

Jose Y. Montalvo, for appellees.

AQUINO, J:

This is a mandamus case, Teofilo Po as an incorporator subscribed to eighty

shares of Peers Marketing Corporation at one hundred pesos a share or a
total par value of eight thousand pesos. Po paid two thousand pesos or
twenty-five percent of the amount of his subscription. No certificate of stock
was issued to him or, for that matter, to any incorporator, subscriber or
stockholder.

On April 2, 1966 Po sold to Ricardo A. Nava for two thousand pesos twenty
of his eighty shares. In the deed of sale Po represented that he was "the
absolute and registered owner of twenty shares" of Peers Marketing
Corporation.

716
Nava requested the officers of the corporation to register the sale in the
books of the corporation. The request was denied because Po has not paid
fully the amount of his subscription. Nava was informed that Po was
delinquent in the payment of the balance due on his subscription and that the
corporation had a claim on his entire subscription of eighty shares which
included the twenty shares that had been sold to Nava.
On December 21, 1966 Nava filed this mandamus action in the Court of First
Instance of Negros Occidental, Bacolod City Branch to compel the
corporation and Renato R. Cusi and Amparo Cusi, its executive vice-
president and secretary, respectively, to register the said twenty shares in
Nava's name in the corporation's transfer book.
The respondents in their answer pleaded the defense that no shares of stock
against which the corporation holds an unpaid claim are transferable in the
books of the corporation.
After hearing, the trial court dismissed the petition. Nava appealed on the
ground that the decision "is contrary to law ". His sole assignment of error is
that the trial court erred in applying the ruling in Fua Cun vs. Summers and
China Banking Corporation, 44 Phil. 705 to justify respondents' refusal in
registering the twenty shares in Nava's name in the books of the corporation.
The rule enunciated in the Fua Cun case is that payment of one-half of the
subscription does not entitle the subscriber to a certificate of stock for one-
half of the number of shares subscribed.
Appellant Nava contends that the Fua Cun case was decided under section
36 of the Corporation Law which provides that "no certificate of stock shall be
issued to a subscriber as fully paid up until the full par value thereof has been
paid by him to the corporation". Section 36 was amended by Act No. 3518. It
is now section 37. Section 37 provides that "no certificate of stock shall be
issued to a subscriber as fully paid up until the full par valuethereof, or
the full subscription in case of no par stock, has been paid by him to the
corporation".
The issue is whether the officers of Peers Marketing Corporation can be
compelled by mandamus to enter in its stock and transfer book the sale
made by Po to Nava of the twenty shares forming part of Po's subscription of
eighty shares, with a total par value of P8,000 and for which Po had paid only
P2,000, it being admitted that the corporation has an unpaid claim of P6,000
as the balance due on Po's subscription and that the twenty shares are not
covered by any stock certificate.
Apparently, no provision of the by-laws of the corporation covers that
situation. The parties did not bother to submit in evidence the by-laws nor
invoke any of its provisions. The corporation can include in its by-laws rules,
not inconsistent with law, governing the transfer of its shares of stock (Sec.
137 , Act No. 1459; Fleischer vs. Botica Nolasco Co., 47 Phil. 583, 589).
We hold that the transfer made by Po to Nava is not the "alienation, sale, or
transfer of stock" that is supposed to be recorded in the stock and transfer
book, as contemplated in section 52 of the Corporation Law.
As a rule, the shares which may be alienated are those which are covered by
certificates of stock, as shown in the following provisions of the Corporation
Law and as intimated in Hager vs. Bryan, 19 Phil. 138 (overruling the
decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil. 616, notes, and
Hodges vs. Lezama, 14 SCRA 1030).
SEC. 35. The capital stock of stock corporations shall be
divided into shares for which certificatessigned by the
president or the vice-president, countersigned by the
secretary or clerk and sealed with the seal of the
corporation, shall be issued in accordance with the by-laws.
Shares of stock so issued are personal property and may be
transferred by delivery of the certificate indorsed by the
owner or his attorney in fact or other person legally
authorized to make the transfer. No transfer, however, shall
be valid, except as between the, parties, until the transfer is
entered and noted upon the books of the corporation so as
to show the names of the parties to the transaction, the date
717
 of the transfer, the number of the certificate, and the number
of shares transferred.
No share of stock against which the corporation holds any
unpaid claim shall be transferable on the books of the
corporation.
SEC. 36. (re voting trust agreement) ...
The certificates of stock so transferred shall be surrendered
and cancelled, and new certificates therefor issued to such
person or persons, or corporation, as such trustee or
trustees, in which new certificates it shall appear that they
are issued pursuant to said agreement.
xxx xxx xxx
(Emphasis supplied).
(In the case of nonstock corporations a membership certificate is usually
issued. Lee E. Won vs. Wack Wack Golf & Country Club, Inc., 104 Phil. 466;
Wack Wack Golf & Country Club, Inc. vs. Won, L-23851, March 26, 1976, 70
SCRA 165).
As prescribed in section 35, shares of stock may be transferred by delivery to
the transferee of the certificate properly indorsed. "Title may be vested in the
transferee by delivery of the certificate with a written assignment or
indorsement thereof" (18 C.J.S. 928). There should be compliance with the
mode of transfer prescribed by law (18 C.J.S. 930).
The usual practice is for the stockholder to sign the form on the back of the
stock certificate. The certificate may thereafter be transferred from one
person to another. If the holder of the certificate desires to assume the legal
rights of a shareholder to enable him to vote at corporate elections and to
receive dividends, he fills up the blanks in the form by inserting his own name
as transferee. Then he delivers the certificate to the secretary of the
corporation so that the transfer may be entered in the corporation's books.
The certificate is then surrendered and a new one issued to the transferee.
(Hager vs. Bryan, 19 Phil. 138, 143-4).
That procedure cannot be followed in the instant case because, as already
noted, the twenty shares in question are not covered by any certificate of
stock in Po's name. Moreover, the corporation has a claim on the said shares
for the unpaid balance of Po's subscription. A stock subscription is a
subsisting liability from the time the subscription is made. The subscriber is
as much bound to pay his subscription as he would be to pay any other debt.
The right of the corporation to demand payment is no less incontestable.
(Velasco vs. Poizat, 37 Phil. 802; Lumanlan vs. Cura, 59 Phil. 746).
A corporation cannot release an original subscriber from paying for his
shares without a valuable consideration (Philippine National Bank vs. Bitulok
Sawmill, Inc.,
L-24177-85, June 29, 1968, 23 SCRA 1366) or without the unanimous
consent of the stockholders (Lingayen Gulf Electric Power Co., Inc. vs.
Baltazar, 93 Phil 404).
Under the facts of this case, there is no clear legal duty on the part of the
officers of the corporation to register the twenty shares in Nava's name,
Hence, there is no cause of action for mandamus.
Nava argues that under section 37 a certificate of stock may be issued for
shares the par value of which have already been paid for although the entire
subscription has not been fully paid. He contends that Peers Marketing
Corporation should issue a certificate of stock for the twenty shares,
notwithstanding that Po had not paid fully his subscription for the eighty
shares, because section 37 requires full payment for the subscription, as a
condition precedent for the issuance of the certificate of stock, only in the
case of no par stock.
Nava relies on Baltazar v Lingayen Gulf Electric Power Co., Inc., L-16236-38,
June 30, 1965, 14 SCRA 522, where it was held that section 37 "requires as
a condition before a shareholder can vote his shares that his full subscription
718
be paid in the case of no par value stock; and in case of stock corporation
with par value, the stockholder can vote the shares fully paid by him only,
irrespective of the unpaid delinquent shares".

There is no parallelism between this case and the Baltazar case. It is

noteworthy that in the Baltazar case the stockholder, an incorporator, was the
holder of a certificate of stock for the shares the par value of which had been
paid by him. The issue was whether the said shares had voting rights
although the incorporator had not paid fully the total amount of his
subscription. That is not the issue in this case.

In the Baltazar case, it was held that where a stockholder subscribed to a

certain number of shares with par value and he made a partial payment and
was issued a certificate for the shares covered by his partial payment, he is
entitled to vote the said shares, although he has not paid the balance of his
subscription and a call or demand had been made for the payment of the par
value of the delinquent shares.

As already stressed, in this case no stock certificate was issued to Po.

Without stock certificate, which is the evidence of ownership of corporate
stock, the assignment of corporate shares is effective only between the
parties to the transaction (Davis vs. Wachter, 140 So. 361).

The delivery of the stock certificate, which represents the shares to be G.R. No. L-42135 June 17, 1935
alienated , is essential for the protection of both the corporation and its
stockholders (Smallwood vs. Moretti, 128 So. 2d 628). TORIBIA USON, plaintiff-appellee,
vs.
In view of the foregoing considerations, the trial court's judgment dismissing VICENTE DIOSOMITO, ET AL., defendants.
the petition for mandamus is affirmed. Costs against the petitioner-appellant. VICENTE DIOSOMITO, EMETERIO BARCELON, H.P.L. JOLLYE and
NORTH ELECTRIC COMPANY, INC.,appellants.
SO ORDERED.
Lino S. Gabriel for appellant Diosomito.
Fernando (Chairman), Barredo, Antonio and Concepcion, Jr., JJ., concur. Emeterio Barcelon and M.B. Villanueva for appellant Barcelon.
Ross, Lawrence and Selph for appellants Jollye and North Electric Co., Inc.
Encarnacion and Arca for appellee.

719
BUTTE, J.:
This is an appeal from a decision of the Court of First Instance of Cavite
involving the ownership of seventy-five shares of stock in the North Electric
Company, Inc. The plaintiff-appellee claims to be the owner of these shares
by virtue of purchase at a sheriff's sale for the sum of P2,617.18.
It appears that Toribia Uson had filed a civil action for debt in the Court of
First Instance of Cavite, No. 2525, against Vicente Diosomito and that upon
institution of said action an attachment was duly issued and levied upon the
property of the defendant Diosomito, including seventy-five shares of the
North Electric Co., Inc., which stood in his name on the books of the
company when the attachment was levied on January 18, 1932.
Subsequently, on June 23, 1932, in said civil case No. 2525, Toribia Uson
obtained judgment against the defendant Diosomito for the sum of P2,300
with interest and costs. To satisfy said judgment, the sheriff sold said shares
at public auction in accordance with law on March 20, 1933. The plaintiff
Toribia Uson was the highest bidder and said shares were adjudicated to her.
(See Exhibit K.) In the present action, H.P.L. Jollye claims to be the owner of
said 75 shares of the North Electric Co., Inc., and presents a certificate of
stock issued to him by the company on February 13, 1933.
There is no dispute that the defendant Vicente Diosomito was the original
owner of said shares of stock, having a par value of P7,500, and that on
February 3, 1931, he sold said shares to Emeterio Barcelon and delivered to
the latter the corresponding certificates Nos. 2 and 19. But Barcelon did not
present these certificates to the corporation for registration until the 16th of
September, 1932, when they were cancelled and a new certificate, No. 29,
was issued in favor of Barcelon, who transferred the same of the defendant
H.P.L. Jollye to whom a new certificate No. 25 was issued on February 13,
1933.
It will be seen, therefore, that the transfer of said shares by Vicente
Diosomito, the judgment debtor in suit No. 2525, to Barcelon was not
registered and noted on the books of the corporation until September 16,
1932, which was some nine months after the attachment had been levied on
said shares in civil case No. 2525 as above stated.
Thus arises in this case one of the most vexing questions in the law of
corporations, namely, whether a bona fidetransfer of the shares of a
corporation, not registered or noted on the books of the corporation, is valid
as against a subsequent lawful attachment of said shares, regardless of
whether the attaching creditor had actual notice of said transfer or not. This is
the first case in which this question has been squarely presented to us for
decision. The case of Uy Piaco vs. McMicking (10 Phil., 286), decided in
1908, arose before the Philippine Corporation Law, Act No. 1459, took effect
(April 1, 1906). The cases of Fua Cun vs. Summer and China Banking
Corporation, 44 Phil., 705 [1923] and Fleischer vs. Botica Nolasco Co., 47
Phil., 583 [1925] are not in point.
Section 35 of the Corporation Law is as follows:
SEC. 35. The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or the vice-
president, countersigned by the secretary or clerk and sealed with
the by-laws. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate indorsed by the
owner or his attorney in fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the
books of the corporation so as to show the names of the parties to
the transaction, the date of the transfer, the number of the certificate,
and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid
claim shall be transferable on the books of the corporation.
720
The sentence of the foregoing section immediately applicable in the present
case is as follows:
No transfer, however, shall be valid, except as between the parties,
until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate,
and the number of shares transferred.
The appellants cites decision from a number of states of the American Union
which hold that an unregistered transfer is valid as against the lien of a
subsequent attachment sued out by a creditor of the assignor, whether such
creditor has notice of the transfer or not. These decisions are founded upon
the theory that the attachment reaches only such title or interest as the
defendant may have in the property at the time of the levy; and if all title and
interest had previously passed by assignment from the debtor to a third
person, the attaching creditor obtains nothing by the levy; that the owner of
shares of stock has the common law right to dispose of the same as personal
property. But with the exception of California, to which reference will be made
later, none of the decisions cited by the appellants construed statues
identical with ours. Much of the confusion which is to be found in the decision
has arisen because the courts have failed to note the difference in the
various statutes of the American Union on the question considered here. For
an illuminating discussion of this confusion the following authorities may be
consulted:
Fletcher, Cyclopedia of the Law of Private Corporations (1932), vol.
12, pages 358-389.
American and English Annotated Cases, vol. 21, pages 1391-1407.
American Law Review, vol. 35, pages 238-251. 55 Cent. L. J., 243-
251.
The statutes on this point may be put roughly in three groups: First, those
that provide, in substance, that no transfer of shares is valid for any purpose
unless registered on the books of the corporation. This rule apparently once
prevailed in Colorado and the District of Columbia both of which have since
amended it by statute. Second, that group which, like our own Act No. 1459,
holds to the rule that no transfer shall be valid except as between the parties
until the transfer is duly registered. This group, according to the best
information available here, includes or has included the State of Arizona,
California, the Territory of Hawaii, Idaho, Iowa, Nevada, New Mexico, North
Dakota, Oklahoma, South Dakota, Washington, Wisconsin. The thirds group
which includes the remaining jurisdictions follows the rule and the doctrine
invoked by the appellant in this case, which, by amendment of the statutes, is
becoming the prevailing rule in the United States.
The decision of the Supreme Court of California in the case of National Bank
of the Pacific vs. Western Pacific Railway Company (157 Cal., 573 [1910];
108 Pac., 676), sitting in division of three, construed section 324 of the Civil
Code of California which is identical with section 35, supra, of the Philippine
Corporation Law. The court stressed the provision that the shares of stock in
a corporation are personal property and may be transferred by endorsement
and delivery of the certificate. The opinion also endeavors to distinguish the
prior decisions of Weston vs. Bear River and Auburn Water and Mining Co.
(5 Cal., 186); Strout vs. Natoma Water and Mining Company (9 Cal., 78), and
Naglee vs. Pacific Wharf Company (20 Cal., 529), which are frequently cited
in other jurisdictions as sustaining the theory of the superiority of the
attachment lien over the unregistered stock transfer. (See Lyndonville
National Bank vs. Folsom, 7 N.M., 611 [1894]; 38 Pac., 253.) The California
decision leaves us unconvinced that the statutes which fall in the second
group above mentioned should be given the same effect as the statute in the
third group without any necessity for legislative amendment.
We prefer to adopt the line followed by the Supreme Courts of
Massachusetts and of Wisconsin. (See Clews vs. Friedman, 182 Mass., 555;
66 N.E. 201, and In re Murphy, 51 Wis., 519; 8 N.W., 419.)
In the latter case the court had under consideration a statute identical with
our own section 35, supra, and the court said:
We think the true meaning of the language is, and the obvious
intention of the legislature in using it was, that all transfers of shares
721
 should be entered, as here required, on the books of the corporation.
And it is equally clear to us that all transfers of shares not so entered
are invalid as to attaching or execution creditors of the assignors, as
well as to the corporation and to subsequent purchasers in good
faith, and indeed, as to all persons interested, except the parties to
such transfers. All transfers not so entered on the books of the
corporation are absolutely void; not because they are without notice
or fraudulent in law or fact, but because they are made so void by
statute.

Some of the states, including Wisconsin, which has held to the rather, strict
but judicial interpretation of the statutory language here in question have
amended the statute so as to fall in line with the more liberal and rational
doctrine of the third group referred to above. This court still adheres to the
principle that its function is jus dicere non jus dare. To us the language of the
legislature is plain to the effect that the right of the owner of the shares of
stock of a Philippine corporation to transfer the same by delivery of the
certificate, whether it be regarded as statutory on common law right, is
limited and restricted by the express provision that "no transfer, however,
shall be valid, except as between the parties, until the transfer is entered and
noted upon the books of the corporation." Therefore, the transfer of the 75
shares in the North Electric Company, Inc., made by the defendant Diosomito
to the defendant Barcelon was not valid as to the plaintiff-appellee, Toribia
Uson, on January 18, 1932, the date on which she obtained her attachment
lien on said shares of stock which still stood in the name of Diosomito on the
books of the corporation.

We have considered the remaining assignments of error of the appellants

and finding no merit in them in results that the judgment must be affirmed
with costs against the appellants.

Malcolm and Diaz, JJ., concur.

Goddard, J., I agree with Justice Hull.

722

G.R. No. L-49003 July 28, 1944
ANTONIO ESCAO, plaintiff-appellee,
vs.
FILIPINAS MINING CORPORATION, ET Al., defendants.
STANDARD INVESTMENT OF THE PHILIPPINES, appellant.
Jose P. Bengzon for appellant.
Matias E. Vergara and Jose Ma. Reyes for appellee.
OZAETA, J.:
This case was submitted to and decided by the Court of First Instance of
Manila upon an agreed statement of facts which may be restated as follows:
On March 8, 1937, the plaintiff-appellee obtained judgment in the Court of
First Instance of Manila against Silverio Salvosa whereby the latter was
ordered to transfer and deliver to the former 116 active shares and an
undetermined number of shares in escrow of the Filipinas Mining Corporation
and to pay the sum of P500 as damages, with the proviso that the escrow
shares shall be transferred and delivered to the plaintiff only after they shall
have been released by the company. On June 25, 1937, a writ of
garnishment was served by the sheriff of Manila upon the Filipinas Mining
Corporation to satisfy the said judgment; and on July 29, 1937, the Filipinas
Mining Corporation advised the sheriff of Manila that according to its books
the judgment debtor Silverio Salvosa was the registered owner of 1,000
active shares and about 21,339 unissued shares held in escrow by the said
corporation. The sheriff sold the 1,000 active shares at public auction,
realizing therefrom only the sum of P10, which was applied in partial
satisfaction of the judgment for damages in the sum of P500.
The present case, which was instituted by Antonio Escao against the
Filipinas Mining Corporational and the Standard Investment of the
Philippines, relates to the escrow shares involved in the garnishment
proceeding above mentioned. It appears that after the complaint in the
original case of Escao vs. Salvosa was filed but before judgment we as
rendered therein, that lis to say, on November 21, 1936, Silverio Salvosa sold
to Jose P. Bengzon all his right, title, and interest in and to 18,580 shares of
stock of the Filipinas Mining Corporation held in escrow which the said
Salvosa was entitled to receive, and which Bengzon in turn subsequently
sold and transferred to the present defendant-appellant, Standard Investment
of the Philippines. Neither Salvosa's sale to Bengzon nor Bengzon's sale to
the Standard Investment of the Philippines was notified to and recorded in
the books of the Filipinas Mining Corporation until December 7, 1940, that is
to say, more than three years after the escrow shares in question were
attached by garnishment served on the Filipinas Mining Corporation as
hereinbefore set forth. On January 24, 1941, the defendant Filipinas Mining
Corporation issued in favor of the defendant Standard Investment of the
Philippines certificate of stock for the 18,580 shares formerly held in escrow
by Silverio Salvosa and which had been adversely by the present plaintiff-
appellee on the one hand and the Standard Investment of the Philippines on
the other, the first by virtue of garnishment proceedings and the second by
virtue of the sale made to it by Jose P. Bengzon as aforesaid.
The question to determine is whether the issuance by the Filipinas Mining
Corporation of the said 18,580 shares of its stock to the Standard Investment
of the Philippines was valid as against the attaching judgment creditor of the
original owner, Silverio Salvosa, namely, the present plaintiff-appellee
Antonio Escao.
In addition to the above stipulated facts, the trial court found from the
supplementary oral evidence adduced by the plaintiff "that several promises
were made by the secretary of the defendant Filipinas Mining Corporation
that as soon as the escrow shares pertaining to Silverio Salvosa were
released he (the secretary) would notify the plaintiff so that the latter might
take the proper action for the execution of the judgment rendered in the said
case entitled "Antonio Escao vs. Silverio Salvosa," civil case No. 50575 of
the Court of First Instance of Manila. But the secretary, instead of complying
723
with his promises, issued the escrow shares to the defendant Standard
Investment of the Philippines . . ."
The trial court held that the transfer of the escrow shares in question from
Salvosa to Bengzon and from Bengzon to the Standard Investment of the
Philippines, not having been recorded in the books of the corporation as
required by section 35 of the Corporation Law, could not prevail over the
garnishment previously made by the plaintiff of the said shares, and rendered
judgment "ordering the defendants Filipinas Mining Corporation and the
Standard Investment of the Philippines to issue to the plaintiff out of the
escrow shares which formerly belonged to Silverio Salvosa, 4,152 shares of
the Filipinas Mining Corporation and to pay to him the dividends which have
been and may be declared on said shares until the delivery thereof to the
plaintiff; and ordering the sheriff to levy execution on the remaining shares
which formerly belonged to Silverio Salvosa in order to satisfy the balance of
the judgment rendered in the civil case entitled "Antonio Escao vs. Silverio
Salvosa," civil case No. 50575 of the Court of First Instance of Manila, with
costs against the defendants." From that judgment the Standard Investment
of the Philippines has appealed to this Court and makes the following
assignment of errors:
1. The trial court erred in holding that section 35 of Act 14599 and
the doctrine laid down in the case of Uson vs. Diosomito, 61 Phil.,
535, are applicable to the case at bar.
2. The trial court erred in "ordering the sheriff to levy execution on
the remaining shares of the 18,580 shares to satisfy the balance of
the judgment rendered in civil case No. 50575 of the Court of First
Instance of Manila"; and in not holding that because of the delay or
neglect for an unreasonable length of time by the plaintiff to enforce
his execution, the 18,580 shares affected in this litigation has been
discharged thru his waiver or abandonment.
1. Sections 431 and 432 of the Code of Civil Procedure (now sections 7 and
8 of Rule 59), which were in force at the time the garnishment in question
was served on the defendant Filipinas Mining Corporation, provide as
follows:
Sec. 431. Executing Order of Attachment as to debts and Credits.
Debts and credits, and other personal property not capable of
manual delivery, shall be attached by leaving with the person owing
such debts or having in his possession or under his control, such
credits and other personal property, a copy of the order of
attachment and a notice that the debts owing by him to the
defendant, or the credits and other personal property in his
possession or under his control, belonging to the defendant, are
attached in pursuance of such order.
Sec. 432. Effect of Attachment of Debts and Credits. All persons
having in their possession or under their control any credits or other
personal property belonging to the defendant, or owing any debts to
the defendant at the time of service upon them of a copy of the order
of attachment and notice as provided in the last section, shall be,
unless such property be delivered up or transferred, or such debts be
paid to the clerk of the court in which the action is pending, liable to
the plaintiff for the amount of such credits, property, or debts, until
the attachment be discharged, or any judgment recovered by him be
satisfied."
Under the section last above quoted, the Filipinas Mining Corporation
became liable to the plaintiff for the shares of stock mentioned in its return to
the sheriff of July 29, 1937, wherein it informed the latter in response to the
notice of garnishment "that according to its books said Silverio Salvosa was
the registered owner of 1,000 active shares evidence by certificate of stock
No. 235 and about 21,338 unissued shares held in escrow by the defendant
Filipinas Mining Corporation."
Counsel for the appellant Standard Investment of the Philippines contends
that a distinction should be drawn between issued shares evidenced by
724
certificates of stock and unissued shares held in escrow, in that while the
transfer of the former is subject to the restriction contained in section 35 of
the Corporation Law, that of the latter is not. The said section, insofar as
pertinent here, reads as follows:
. . . Shares of stock so issued are personal property and may be
transferred by delivery of the certificate indorsed by the owner or his
attorney in fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate,
and the number of shares transferred.
It is admitted that under this legal provision and the decision of this Court
in Uson vs. Diosomito, 61 Phil. 535, the transfer of duly issued shares of
stock is not valid as against third parties and the corporation until it is noted
upon the books of the corporation; but it is contended that the transfer of
unissued shares of stock held in escrow is valid against the whole world
although not notified to the corporation and not noted upon its books. Since
the sale, transfer, or assignment of unissued shares of stock held in escrow
is not specifically provided for by law, the question has to be resolved by
resorting to analogy. What is the reason of the law for requiring the recording
upon the books of the corporation of transfers of shares of stock as a
condition precedent to their validity against the corporation, and third parties?
We imagine that it is (1) to enable the corporation to know at all times who its
actual stockholders are, because mutual rights and obligations exist between
the corporation and its stockholders; (2) to afford to the corporation an
opportunity to object or refuse its consent to the transfer in case it has any
claim against the stock sought to be transferred, or for any other valid
reason; and (3) to avoid fictitious or fraudulent transfers. Do these reasons
hold as to the transfer of unissued shares held in escrow? To sustain
appellant's contention is to declare that they do not. But we see no valid
reason for treating unissued shares held in escrow differently from issued
shares insofar as their sale and transfer is concerned. In both cases the
corporation is entitled to know who the actual owners of the shares are, and
to object to the transfer upon any valid ground. Likewise, in both cases the
possibility of fictitious or fraudulent transfers exists. The only reason
advanced by the appellant for exempting the transfer of unissued shares
from recording is that in case of unissued shares there is no certificate
number to be recorded. But that is a mere detail which does not affect the
reasons behind the rule. The lack of such detail does not make it impossible
to record the transfer upon the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, and the
number of shares transferred, which are the most essential data. As a matter
of fact, the defendant Filipinas Mining Corporation was able to take not of the
transfer of the escrow shares in question to the Standard Investment of the
Philippines on December 7, 1940, without knowing the certificate number
that would correspond to said shares.
Moreover, it seems illogical and unreasonable to hold that inactive or
unissued shares still held by the corporation in escrow pending receipt of
authorization from the Government to issue them, may be negotiated or
transferred unrestrictedly and more freely than active or issued shares
evidenced by certificates of stock.
We are, therefore, of the opinion and so hold that section 35 of the
Corporation Law, which requires the registration of transfers of shares stock
upon the books of the corporation as a condition precedent to their validity
against the corporation and third parties, is also applicable to unissued
shares held by the corporation in escrow.
2. Under its second assignment of error appellant contends that appellee has
been guilty of laches in neglecting for an unreasonable length of time to
enforce its levy on the 18,580 shares of stock in question by having them
sold at public auction, and that, consequently, said levy should be considered
discharged through waiver or abandonment. We find no factual basis for the
alleged laches and abandonment. The trial court found that the secretary of
the defendant Filipinas Mining Corporation had repeatedly promised the
plaintiff that he would notify the latter as soon as the escrow shares
pertaining to Silverio Salvosa were released so that he ((plaintiff) might take
the proper action for the execution of his judgment. The Filipinas Mining
Corporation having advised the sheriff that it was holding the escrow shares
of the judgment debtor Silverio Salvosa, the plaintiff as execution creditor
725
had the right to wait for the release or issuance of said shares before having
the same sold at public auction, so long as the period of five years within
which to execution his judgment had not yet lapsed. Moreover, the judgment
itself provided "that the escrow shares shall be transferred and delivered to
the plaintiff only after they have been released by the company." It is stated
in the stipulation of facts that it was only after shares in favor of the Standard
Investment of the Philippines that the plaintiff Antonio Escao came to know
that Jose P. Bengzon and the Standard Investment of the Philippines had
acquired Silverio Salvosa's rights to the shares in question. Upon these facts,
together with the consideration that the delay had not in any way misled the
appellant to its prejudice, we find appellant's second assignment of error
untenable.
The judgment appealed from is affirmed, with costs.
Yulo, C.J., Moran, Horrilleno, and Bacobo, JJ., concur.
Paras, J., I concurs in the result.
[G.R. NO. 139802. December 10, 2002]
VICENTE C. PONCE, petitioner, vs. ALSONS CEMENT CORPORATION,
and FRANCISCO M. GIRON, JR., respondents.
DECISION
QUISUMBING, J.:
This petition for review seeks to annul the decision [1] of the Court of
Appeals, in CA-G.R. SP No. 46692, which set aside the decision [2] of the
Securities and Exchange Commission (SEC) En Banc in SEC-AC No. 545
and reinstated the order[3] of the Hearing Officer dismissing herein petitioners
complaint. Also assailed is the CAs resolution [4] of August 10, 1999, denying
petitioners motion for reconsideration.
On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed a
complaint[5] with the SEC for mandamus and damages against defendants
(now respondents) Alsons Cement Corporation and its corporate secretary
Francisco M. Giron, Jr. In his complaint, petitioner alleged, among others,
that:
xxx
5. The late Fausto G. Gaid was an incorporator of Victory Cement
Corporation (VCC), having subscribed to and fully paid 239,500 shares of
said corporation.
6. On February 8, 1968, plaintiff and Fausto Gaid executed a Deed of
Undertaking and Indorsement whereby the latter acknowledges that the
former is the owner of said shares and he was therefore assigning/endorsing
the same to the plaintiff. A copy of the said deed/indorsement is attached as
Annex A.
7. On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for
brevity).
8. On October 22, 1990, FCC was renamed Alsons Cement Corporation
(ACC for brevity) as shown by the Amended Articles of Incorporation of ACC,
a copy of which is attached as Annex B.
9. From the time of incorporation of VCC up to the present, no certificates of
stock corresponding to the 239,500 subscribed and fully paid shares of Gaid
were issued in the name of Fausto G. Gaid and/or the plaintiff.
10. Despite repeated demands, the defendants refused and continue to
refuse without any justifiable reason to issue to plaintiff the certificates of
726
stocks corresponding to the 239,500 shares of Gaid, in violation of plaintiffs
right to secure the corresponding certificate of stock in his name. [6]
Attached to the complaint was the Deed of Undertaking and
Indorsement[7] upon which petitioner based his petition for mandamus. Said
deed and indorsement read as follows:
DEED OF UNDERTAKING
KNOW ALL MEN BY THESE PRESENTS:
I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid
with Victory Cement Corporation in the total amount of TWO HUNDRED
THIRTY NINE THOUSAND FIVE HUNDRED (P239,500.00) PESOS and that
Fausto Gaid does not have any liability whatsoever on the subscription
agreement in favor of Victory Cement Corporation.
(SGD.) VICENTE C. PONCE
February 8, 1968
CONFORME:
(SGD.) FAUSTO GAID
INDORSEMENT
I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY
NINE THOUSAND FIVE HUNDRED (239,500.00) stocks of Victory Cement
Corporation to VICENTE C. PONCE.
(SGD.) FAUSTO GAID
With these allegations, petitioner prayed that judgment be rendered
ordering respondents (a) to issue in his name certificates of stocks covering
the 239,500 shares of stocks and its legal increments and (b) to pay him
damages.[8]
Instead of filing an answer, respondents moved to dismiss the complaint
on the grounds that: (a) the complaint states no cause of action; mandamus
is improper and not available to petitioner; (b) the petitioner is not the real
party in interest; (c) the cause of action is barred by the statute of limitations;
and (d) in any case, the petitioners cause of action is barred by laches.
[9]
They argued, inter alia, that there being no allegation that the alleged
INDORSEMENT was recorded in the books of the corporation, said
indorsement by Gaid to the plaintiff of the shares of stock in
questionassuming that the indorsement was in fact a transfer of stockswas
not valid against third persons such as ALSONS under Section 63 of the
Corporation Code.[10] There was, therefore, no specific legal duty on the part
of the respondents to issue the corresponding certificates of stock, and
mandamus will not lie.[11]
Petitioner filed his opposition to the motion to dismiss on February 19,
1996 contending that: (1) mandamus is the proper remedy when a
corporation and its corporate secretary wrongfully refuse to record a transfer
of shares and issue the corresponding certificates of stocks; (2) he is the
proper party in interest since he stands to be benefited or injured by a
judgment in the case; (3) the statute of limitations did not begin to run until
defendant refused to issue the certificates of stock in favor of the plaintiff on
April 13, 1992.
After respondents filed their reply, SEC Hearing Officer Enrique L.
Flores, Jr. granted the motion to dismiss in an Order dated February 29,
1996, which held that:
xxx
Insofar as the issuance of certificates of stock is concerned, the real party in
interest is Fausto G. Gaid, or his estate or his heirs. Gaid was an
incorporator and an original stockholder of the defendant corporation who
subscribed and fully paid for 239,500 shares of stock (Annex "B"). In
727
accordance with Section 37 of the old Corporation Law (Act No. 1459)
obtaining in 1968 when the defendant corporation was incorporated, as well
as Section 64 of the present Corporation Code (Batas Pambansa Blg. 68), a
stockholder who has fully paid for his subscription together with interest and
expenses in case of delinquent shares, is entitled to the issuance of a
certificate of stock for his shares. According to paragraph 9 of the Complaint,
no stock certificate was issued to Gaid.
Comes now the plaintiff who seeks to step into the shoes of Gaid and
thereby become a stockholder of the defendant corporation by demanding
issuance of the certificates of stock in his name. This he cannot do, for two
reasons: there is no record of any assignment or transfer in the books of the
defendant corporation, and there is no instruction or authority from the
transferor (Gaid) for such assignment or transfer. Indeed, nothing is alleged
in the complaint on these two points.
xxx
In the present case, there is not even any indorsement of any stock
certificate to speak of. What the plaintiff possesses is a document by which
Gaid supposedly transferred the shares to him. Assuming the document has
this effect, nevertheless there is neither any allegation nor any showing that it
is recorded in the books of the defendant corporation, such recording being a
prerequisite to the issuance of a stock certificate in favor of the transferee. [12]
Petitioner appealed the Order of dismissal. On January 6, 1997, the
Commission En Banc reversed the appealed Order and directed the Hearing
Officer to proceed with the case. In ruling that a transfer or assignment of
stocks need not be registered first before it can take cognizance of the case
to enforce the petitioners rights as a stockholder, the Commission En Banc
cited our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987) to the effect
that:
xxx As the SEC maintains, There is no requirement that a stockholder of a
corporation must be a registered one in order that the Securities and
Exchange Commission may take cognizance of a suit seeking to enforce his
rights as such stockholder. This is because the SEC by express mandate has
absolute jurisdiction, supervision and control over all corporations and is
called upon to enforce the provisions of the Corporation Code, among which
is the stock purchasers right to secure the corresponding certificate in his
name under the provisions of Section 63 of the Code. Needless to say, any
problem encountered in securing the certificates of stock representing the
investment made by the buyer must be expeditiously dealt with through
administrative mandamus proceedings with the SEC, rather than through the
usual tedious regular court procedure. xxx
Applying this principle in the case on hand, a transfer or assignment of
stocks need not be registered first before the Commission can take
cognizance of the case to enforce his rights as a stockholder. Also, the
problem encountered in securing the certificates of stock made by the buyer
must be expeditiously taken up through the so-called administrative
mandamus proceedings with the SEC than in the regular courts. [13]
The Commission En Banc also found that the Hearing Officer erred in
holding that petitioner is not the real party in interest.
xxx
As appearing in the allegations of the complaint, plaintiff-appellant is the
transferee of the shares of stock of Gaid and is therefore entitled to avail of
the suit to obtain the proper remedy to make him the rightful owner and
holder of a stock certificate to be issued in his name. Moreover, defendant-
appellees failed to show that the transferor nor his heirs have refuted the
ownership of the transferee. Assuming these allegations to be true, the
corporation has a mere ministerial duty to register in its stock and transfer
book the shares of stock in the name of the plaintiff-appellant subject to the
determination of the validity of the deed of assignment in the proper
tribunal. [14]
Their motion for reconsideration having been denied, herein
respondents appealed the decision [15] of the SEC En Banc and the
resolution[16] denying their motion for reconsideration to the Court of Appeals.
728
 In its decision, the Court of Appeals held that in the absence of any
allegation that the transfer of the shares between Fausto Gaid and Vicente
C. Ponce was registered in the stock and transfer book of ALSONS, Ponce
failed to state a cause of action. Thus, said the CA, the complaint for
mandamus should be dismissed for failure to state a cause of action.
[17]
petitioners motion for reconsideration was likewise denied in a
resolution[18] dated August 10, 1999.
Hence, the instant petition for review on certiorari alleging that:
I. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK FILED
BY PETITIONER FAILED TO STATE A CAUSE OF ACTION BECAUSE IT
DID NOT ALLEGE THAT THE TRANSFER OF THE SHARES (SUBJECT
MATTER OF THE COMPLAINT) WAS REGISTERED IN THE STOCK AND
TRANSFER BOOK OF THE CORPORATION, CITING SECTION 63 OF THE
CORPORATION CODE.
II. THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING
THE CASES OF ABEJO VS. DE LA CRUZ, 149 SCRA 654 AND RURAL
BANK OF SALINAS, INC., ET AL VS. COURT OF APPEALS, ET AL., G.R.
NO. 96674, JUNE 26, 1992.
III. THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A 1911
CASE, HAGER VS. BRYAN, 19 PHIL. 138, TO DISMISS THE COMPLAINT
FOR ISSUANCE OF A CERTIFICATE OF STOCK.[19]
At issue is whether the Court of Appeals erred in holding that herein
petitioner has no cause of action for a writ of mandamus.
Petitioner first contends that the act of recording the transfer of shares in
the stock and transfer book and that of issuing a certificate of stock for the
transferred shares involves only one continuous process. Thus, when a
corporate secretary is presented with a document of transfer of fully paid
shares, it is his duty to record the transfer in the stock and transfer book of
the corporation, issue a new stock certificate in the name of the transferee,
and cancel the old one. A transferee who requests for the issuance of a stock
certificate need not spell out each and every act that needs to be done by the
corporate secretary, as a request for issuance of stock certificates
necessarily includes a request for the recording of the transfer. Ergo, the
failure to record the transfer does not mean that the transferee cannot ask for
the issuance of stock certificates.
Secondly, according to petitioner, there is no law, rule or regulation
requiring a transferor of shares of stock to first issue express instructions or
execute a power of attorney for the transfer of said shares before a certificate
of stock is issued in the name of the transferee and the transfer registered in
the books of the corporation. He contends that Hager vs. Bryan, 19 Phil. 138
(1911), and Rivera vs. Florendo, 144 SCRA 643 (1986), cited by
respondents, do not apply to this case. These cases contemplate a situation
where a certificate of stock has been issued by the company whereas in this
case at bar, no stock certificates have been issued even in the name of the
original stockholder, Fausto Gaid.
Finally, petitioner maintains that since he is under no compulsion to
register the transfer or to secure stock certificates in his name, his cause of
action is deemed not to have accrued until respondent ALSONS denied his
request.
Respondents, in their comment, maintain that the transfer of shares of
stock not recorded in the stock and transfer book of the corporation is non-
existent insofar as the corporation is concerned and no certificate of stock
can be issued in the name of the transferee. Until the recording is made, the
transfer cannot be the basis of issuance of a certificate of stock. They add
that petitioner is not the real party in interest, the real party in interest being
Fausto Gaid since it is his name that appears in the records of the
corporation. They conclude that petitioners cause of action is barred by
prescription and laches since 24 years elapsed before he made any demand
upon ALSONS.
729
 We find the instant petition without merit. The Court of Appeals did not
err in ruling that petitioner had no cause of action, and that his petition for
mandamus was properly dismissed.
There is no question that Fausto Gaid was an original subscriber of
respondent corporations 239,500 shares. This is clear from the numerous
pleadings filed by either party. It is also clear from the Amended Articles of
Incorporation[20] approved on August 9, 1995[21] that each share had a par
value of P1.00 per share. And, it is undisputed that petitioner had not made a
previous request upon the corporate secretary of ALSONS, respondent
Francisco M. Giron Jr., to record the alleged transfer of stocks.
The Corporation Code states that:
SEC. 63. Certificate of stock and transfer of shares.The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice-president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall be valid, except
as between the parties, until the transfer is recorded in the books of the
corporation so as to show 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.
No shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation.
Pursuant to the foregoing provision, a transfer of shares of stock not
recorded in the stock and transfer book of the corporation is non-existent as
far as the corporation is concerned.[22]As between the corporation on the one
hand, and its shareholders and third persons on the other, the corporation
looks only to its books for the purpose of determining who its shareholders
are.[23] It is only when the transfer has been recorded in the stock and
transfer book that a corporation may rightfully regard the transferee as one of
its stockholders. From this time, the consequent obligation on the part of the
corporation to recognize such rights as it is mandated by law to recognize
arises.
Hence, without such recording, the transferee may not be regarded by
the corporation as one among its stockholders and the corporation may
legally refuse the issuance of stock certificates in the name of the transferee
even when there has been compliance with the requirements of Section
64[24] of the Corporation Code. This is the import of Section 63 which states
that No transfer, however, shall be valid, except 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. The situation
would be different if the petitioner was himself the registered owner of the
stock which he sought to transfer to a third party, for then he would be
entitled to the remedy of mandamus.[25]
From the corporations point of view, the transfer is not effective until it is
recorded. Unless and until such recording is made the demand for the
issuance of stock certificates to the alleged transferee has no legal basis. As
between the corporation on the one hand, and its shareholders and third
persons on the other, the corporation looks only to its books for the purpose
of determining who its shareholders are. [26] In other words, the stock and
transfer book is the basis for ascertaining the persons entitled to the rights
and subject to the liabilities of a stockholder. Where a transferee is not yet
recognized as a stockholder, the corporation is under no specific legal duty to
issue stock certificates in the transferees name.
It follows that, as held by the Court of Appeals:
x x x until registration is accomplished, the transfer, though valid between the
parties, cannot be effective as against the corporation. Thus, in the absence
of any allegation that the transfer of the shares between Gaid and the private
respondent [herein petitioner] was registered in the stock and transfer book
730
of the petitioner corporation, the private respondent has failed to state a
cause of action.[27]
Petitioner insists that it is precisely the duty of the corporate secretary,
when presented with the document of fully paid shares, to effect the transfer
by recording the transfer in the stock and transfer book of the corporation
and to issue stock certificates in the name of the transferee. On this point,
the SEC En Banc cited Rural Bank of Salinas, Inc. vs. Court of
Appeals, [28] where we held that:
For the petitioner Rural Bank of Salinas to refuse registration of the
transferred shares in its stock and transfer book, which duty is ministerial on
its part, is to render nugatory and ineffectual the spirit and intent of Section
63 of the Corporation Code. Thus, respondent Court of Appeals did not err in
upholding the decision of respondent SEC affirming the Decision of its
Hearing Officer directing the registration of the 473 shares in the stock and
transfer book in the names of private respondents. At all events, the
registration is without prejudice to the proceedings in court to determine the
validity of the Deeds of Assignment of the shares of stock in question.
In Rural Bank of Salinas, Inc., however, private respondent Melania
Guerrero had a Special Power of Attorney executed in her favor by Clemente
Guerrero, the registered stockholder.It gave Guerrero full authority to sell or
otherwise dispose of the 473 shares of stock registered in Clementes name
and to execute the proper documents therefor. Pursuant to the authority so
given, Melania assigned the 473 shares of stock owned by Guerrero and
presented to the Rural Bank of Salinas the deeds of assignment covering the
assigned shares. Melania Guerrero prayed for the transfer of the stocks in
the stock and transfer book and the issuance of stock certificates in the name
of the new owners thereof. Based on those circumstances, there was a clear
duty on the part of the corporate secretary to register the 473 shares in favor
of the new owners, since the person who sought the transfer of shares had
express instructions from and specific authority given by the registered
stockholder to cause the disposition of stocks registered in his name.
That cannot be said of this case. The deed of undertaking with
indorsement presented by petitioner does not establish, on its face, his right
to demand for the registration of the transfer and the issuance of certificates
of stocks. In Hager vs. Bryan, 19 Phil. 138 (1911), this Court held that a
petition for mandamus fails to state a cause of action where it appears that
the petitioner is not the registered stockholder and there is no allegation that
he holds any power of attorney from the registered stockholder, from whom
he obtained the stocks, to make the transfer, thus:
It appears, however, from the original as well as the amended petition, that
this petitioner is not the registered owner of the stock which he seeks to have
transferred, and except in so far as he alleges that he is the owner of the
stock and that it was "indorsed" to him on February 5 by the Bryan-Landon
Company, in whose name it is registered on the books of the Visayan Electric
Company, there is no allegation that the petitioner holds any power of
attorney from the Bryan-Landon Company authorizing him to make demand
on the secretary of the Visayan Electric Company to make the transfer which
petitioner seeks to have made through the medium of the mandamus of this
court.
Without discussing or deciding the respective rights of the parties which
might be properly asserted in an ordinary action or an action in the nature of
an equitable suit, we are all agreed that in a case such as that at bar, a
mandamus should not issue to compel the secretary of a corporation
to make a transfer of the stock on the books of the company, unless it
affirmatively appears that he has failed or refused so to do, upon the
demand either of the person in whose name the stock is registered, or
of some person holding a power of attorney for that purpose from the
registered owner of the stock.There is no allegation in the petition that the
petitioner or anyone else holds a power of attorney from the Bryan-Landon
Company authorizing a demand for the transfer of the stock, or that the
Bryan-Landon Company has ever itself made such demand upon the
Visayan Electric Company, and in the absence of such allegation we are not
able to say that there was such a clear indisputable duty, such a clear legal
obligation upon the respondent, as to justify the issuance of the writ to
compel him to perform it.
731
Under the provisions of our statute touching the transfer of stock (secs. 35
and 36 of Act No. 1459),[29] the mere indorsement of stock certificates does
not in itself give to the indorsee such a right to have a transfer of the shares
of stock on the books of the company as will entitle him to the writ of
mandamus to compel the company and its officers to make such transfer at
his demand, because, under such circumstances the duty, the legal
obligation, is not so clear and indisputable as to justify the issuance of the
writ. As a general rule and especially under the above-cited statute, as
between the corporation on the one hand, and its shareholders and third
persons on the other, the corporation looks only to its books for the purpose
of determining who its shareholders are, so that a mere indorsee of a stock
certificate, claiming to be the owner, will not necessarily be recognized as
such by the corporation and its officers, in the absence of express
instructions of the registered owner to make such transfer to the indorsee, or
a power of attorney authorizing such transfer.[30]
In Rivera vs. Florendo, 144 SCRA 643, 657 (1986), we reiterated that a
mere indorsement by the supposed owners of the stock, in the absence of
express instructions from them, cannot be the basis of an action for
mandamus and that the rights of the parties have to be threshed out in an
ordinary action. That Hager and Rivera involved petitions for mandamus to
compel the registration of the transfer, while this case is one for issuance of
stock, is of no moment. It has been made clear, thus far, that before a
transferee may ask for the issuance of stock certificates, he must first cause
the registration of the transfer and thereby enjoy the status of a stockholder
insofar as the corporation is concerned. A corporate secretary may not be
compelled to register transfers of shares on the basis merely of an
indorsement of stock certificates. With more reason, in our view, a corporate
secretary may not be compelled to issue stock certificates without such
registration.[31]
Petitioners reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654
(1987), that notice given to the corporation of the sale of the shares and
presentation of the certificates for transfer is equivalent to registration is
misplaced. In this case there is no allegation in the complaint that petitioner
ever gave notice to respondents of the alleged transfer in his favor.Moreover,
that case arose between and among the principal stockholders of the
corporation, Pocket Bell, due to the refusal of the corporate secretary to
record the transfers in favor of Telectronics of the corporations controlling
56% shares of stock which were covered by duly endorsed stock
certificates. As aforesaid, the request for the recording of a transfer is
different from the request for the issuance of stock certificates in the
transferees name. Finally, in Abejo we did not say that transfer of shares
need not be recorded in the books of the corporation before the transferee
may ask for the issuance of stock certificates. The Courts statement, that
there is no requirement that a stockholder of a corporation must be a
registered one in order that the Securities and Exchange Commission may
take cognizance of a suit seeking to enforce his rights as such stockholder
among which is the stock purchasers right to secure the corresponding
certificate in his name,[32] was addressed to the issue of jurisdiction, which is
not pertinent to the issue at hand.
Absent an allegation that the transfer of shares is recorded in the stock
and transfer book of respondent ALSONS, there appears no basis for a clear
and indisputable duty or clear legal obligation that can be imposed upon the
respondent corporate secretary, so as to justify the issuance of the writ of
mandamus to compel him to perform the transfer of the shares to
petitioner. The test of sufficiency of the facts alleged in a petition is whether
or not, admitting the facts alleged, the court could render a valid judgment
thereon in accordance with the prayer of the petition. [33] This test would not
be satisfied if, as in this case, not all the elements of a cause of action are
alleged in the complaint.[34] Where the corporate secretary is under no clear
legal duty to issue stock certificates because of the petitioners failure to
record earlier the transfer of shares, one of the elements of the cause of
action for mandamus is clearly missing.
That petitioner was under no obligation to request for the registration of
the transfer is not in issue. It has no pertinence in this controversy. One may
own shares of corporate stock without possessing a stock certificate. In Tan
vs. SEC, 206 SCRA 740 (1992), we had occasion to declare that a certificate
of stock is not necessary to render one a stockholder in a corporation. But a
certificate of stock is the tangible evidence of the stock itself and of the
various interests therein. The certificate is the evidence of the holders
interest and status in the corporation, his ownership of the share represented
732
thereby. The certificate is in law, so to speak, an equivalent of such
ownership. It expresses the contract between the corporation and the
stockholder, but it is not essential to the existence of a share in stock or the
creation of the relation of shareholder to the corporation. [35] In fact, it rests on
the will of the stockholder whether he wants to be issued stock certificates,
and a stockholder may opt not to be issued a certificate. In Won vs. Wack
Wack Golf and Country Club, Inc., 104 Phil. 466 (1958), we held that
considering that the law does not prescribe a period within which the
registration should be effected, the action to enforce the right does not
accrue until there has been a demand and a refusal concerning the
transfer. In the present case, petitioners complaint for mandamus must fail,
not because of laches or estoppel, but because he had alleged no cause of
action sufficient for the issuance of the writ.

WHEREFORE, the petition is DENIED for lack of merit. The decision of

the Court of Appeals, in CA-G.R. SP No. 46692, which set aside that of the
Securities and Exchange Commission En Banc in SEC-AC No. 545 and
reinstated the order of the Hearing Officer, is hereby AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Austria-Martinez, and Callejo, Sr.,

JJ., concur.

733
 1. Confirming the validity of the resolution of the board of
directors of the Visayan Educational Supply Corporation so
far as it cancelled Stock Certificate No. 2 and split the same
into Stock Certificates No. 6 (for Angel S. Tan) and No. 8 (for
Alfonso S. Tan);

2. Invalidating the sale of shares represented under Stock

Certificate No. 8 between Alfonso S. Tan and the respondent
corporation which converted the said stocks into treasury
shares, as well as those transactions involved in the
withdrawal of the stockholders from the respondent
corporation for being contrary to law, but ordering the neither
party may recover pursuant to Article 1412 (1) Civil Code of
G.R. No. 95696 March 3, 1992 the Philippines; and

ALFONSO S. TAN, Petitioner, 3. Revoking the Order of Hearing Officer Felix Chan to
vs. reinstate complainant's original 400 shares of stock in the
SECURITIES AND EXCHANGE COMMISSION, VISAYAN EDUCATIONAL books of the corporation in view of the validity of the sale of
SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL S. TAN and 50 shares represented under stock certificate No. 6; and the
PATRICIA AGUILAR, Respondents. nullity of the sale 350 shares represented under stock
certificate No. 8, pursuant to the "in pari delicto" doctrine
aforecited. (Rollo, p. 4)

PARAS, J.: The antecedent facts of the case are as follows:

Petitioner filed a petition for certiorari against the public respondent
Securities and Exchange Commission and its co-respondents, after the
former in an en banc Order, overturned with modification, the decision of its
Cebu SEC Extension hearing officer, Felix Chan, in SEC Case No. C-0096,
dated May 23, 1989, on October 10, 1990, under SEC-AC No. 263.
(Rollo, pp. 3 and 4)
Respondent corporation was registered on October 1, 1979. As incorporator,
petitioner had four hundred (400) shares of the capital stock standing in his
name at the par value of P100.00 per share, evidenced by Certificate of
Stock No. 2. He was elected as President and subsequently reelected,
holding the position as such until 1982 but remained in the Board of Directors
until April 19, 1983 as director. (Rollo, p. 5)

Sought to be reversed by petitioner, is the ruling of the Commission, On January 31, 1981, while petitioner was still the president of the
specifically declaring that: respondent corporation, two other incorporators, namely, Antonia Y. Young
and Teresita Y. Ong, assigned to the corporation their shares, represented by

734
certificate of stock No. 4 and 5 after which, they were paid the corresponding
40% corporate stock-in-trade. (Rollo, p. 43)
Petitioner's certificate of stock No. 2 was cancelled by the corporate
secretary and respondent Patricia Aguilar by virtue of Resolution No. 1981
(b), which was passed and approved while petitioner was still a member of
the Board of Directors of the respondent corporation. (Rollo, p. 6)
Due to the withdrawal of the aforesaid incorporators and in order to complete
the membership of the five (5) directors of the board, petitioner sold fifty (50)
shares out of his 400 shares of capital stock to his brother Angel S. Tan.
Another incorporator, Alfredo B. Uy, also sold fifty (50) of his 400 shares of
capital stock to Teodora S. Tan and both new stockholders attended the
special meeting, Angel Tan was elected director and on March 27, 1981, the
minutes of said meeting was filed with the SEC. These facts stand
unchallenged. (Rollo, p. 43)
Accordingly, as a result of the sale by petitioner of his fifty (50) shares of
stock to Angel S. Tan on April 16, 1981, Certificate of Stock No. 2 was
cancelled and the corresponding Certificates Nos. 6 and 8 were issued,
signed by the newly elected fifth member of the Board, Angel S. Tan as Vice-
president, upon instruction of Alfonso S. Tan who was then the president of
the Corporation.(Memorandum of the Private Respondent, p. 15)
With the cancellation of Certificate of stock No. 2 and the subsequent
issuance of Stock Certificate No. 6 in the name of Angel S. Tan and for the
remaining 350 shares, Stock Certificate No. 8 was issued in the name of
petitioner Alfonso S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29), alleging
that:
9. That in view of his having taken 33 1/3 interest, I was
personally requested by Mr. Tan Su Ching to request Mr.
Alfonso Tan to make proper endorsement in the cancelled
Certificate of Stock No. 2 and Certificate No. 8, but he did
not endorse, instead he kept the cancelled (1981) Certificate
of Stock No. 2 and returned only to me Certificate of Stock
No. 8, which I delivered to Tan Su Ching.
10. That the cancellation of his stock (Stock No. 2) was
known by him in 1981; that it was Stock No. 8, that was
delivered in March 1983 for his endorsement and
cancellation. (Ibid, p. 18)
From the same Affidavit, it was alleged that Atty. Ramirez prepared a
Memorandum of Agreement with respect to the transaction of the fifty (50)
shares of stock part of the Stock Certificate No. 2 of petitioner, which was
submitted to its former owner, Alfonso Tan, but which the purposely did not
return. (Ibid., p. 18)
On January 29, 1983, during the annual meeting of the corporation,
respondent Tan Su Ching was elected as President while petitioner was
elected as Vice-president. He, however, did not sign the minutes of said
meeting which was submitted to the SEC on March 30, 1983. (Rollo, p. 43)
When petitioner was dislodged from his position as president, he withdrew
from the corporation on February 27, 1983, on condition that he be paid with
stocks-in-trade equivalent to 33.3% in lieu of the stock value of his shares in
the amount of P35,000.00. After the withdrawal of the stocks, the board of
the respondent corporation held a meeting on April 19, 1983, effecting the
cancellation of Stock Certificate Nos. 2 and 8 (Exh. 278-C) in the corporate
stock and transfer book 1 (Exh. 1-1-A) and submitted the minutes thereof to
the SEC on May 18, 1983. (Rollo, p. 44)
Five (5) years and nine (9) months after the transfer of 50 shares to Angel S.
Tan, brother of petitioner Alfonso S. Tan, and three (3) years and seven (7)
months after effecting the transfer of Stock Certificate Nos. 2 and 8 from the
original owner (Alfonso S. Tan) in the stock and transfer book of the
corporation, the latter filed the case before the Cebu SEC Extension Office
under SEC Case No. C-0096, more specifically on December 3, 1983,
questioning for the first time, the cancellation of his aforesaid Stock
Certificates Nos. 2 and 8. (Rollo, p. 44)
735
The bone of centention raised by the petitioner is that the deprivation of his
shares despite the non-endorsement or surrender of his Stock Certificate
Nos. 2 and 8, was without the process contrary to the provision of Section 63
of the Corporation Code (Batas Pambansa Blg. 68), which requires that:
. . . No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded to the books of the
corporation so as to show 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.
After hearing, the Cebu SEC Extension Office Hearing Officer, Felix Chan
ruled, that:
a) The cancellation of the complainant's shares of stock with
the Visayan Educational Supply Corporation is null and void;
b) The earlier cancellation of stock certificate No. 2 and the
subsequent issuance of stock certificate No. 8 is also hereby
declared null and void;
c) The Secretary of the Corporation is hereby ordered to
make the necessary corrections in the books of the
corporation reinstating thereto complainant's original 400
shares of stock. (Rollo, pp. 39-40)
Private respondent in the original complaint went to the Securities and
Exchange and Commission on appeal, and on October 10, 1990, the
commission en banc unanimously overturned the Decision of the Hearing
Officer under SEC-AC No. 263. (Order, Rollo, pp. 42-49)
The petition for certiorari centered on three major issues, with other issues
considered as subordinate to them, to wit:
1. The meaning of shares of stock are personal property and may be
transferred by delivery of the certificate or certificates indorsed by the owner
or his attorney-in-fact or other person legally authorized to make the transfer.
(Rollo, p. 10)
The case of Nava vs. peers Marketing corporation (74 SCRA 65) was cited
by petitioner making the reference to commentaries taken from 18 C.J.S.
928-930, that the transfer by delivery to the transferee of the certificate
should be properly indorsed, and that "There should be compliance with the
mode of transfer prescribed by law." Using Section 35, now Section 63 of the
Corporation Code, the provision of the law, reads:
SEC. 63. Certificate of stock and transfer of shares. The
capital stock and stock and corporations shall be divided into
shares for which certificates signed by the president and vice
president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall
be issued in accordance with the by-laws. Shares of stocks
so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer is
recorded in the books of the corporation so as to show 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.
No shares of stocks against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporations.
There is no doubt that there was delivery of Stock Certificate No. 2 made by
the petitioner to the Corporation before its replacement with the Stock
Certificate No. 6 for fifty (50) shares to Angel S. Tan and Stock Certificate No.
8 for 350 shares to the petitioner, on March 16, 1981. The problem arose
736
when petitioner was given back Stock Certificate No. 2 for him to endorse
and he deliberately witheld it for reasons of his own. That the Stock
Certificate in question was returned to him for his purpose was attested to by
Mr. Buzon in his Affidavit, the pertinent portion of which has been earlier
quoted.
The proof that Stock Certificate No. 2 was split into two (2) consisting of
Stock Certificate No. 6 for fifty (50) shares and Stock Certificate No. 8 for 350
shares, is the fact that petitioner surrendered the latter stock (No. 8) in lieu of
P2 million pesos 1 worth of stocks, which the board passed in a resolution in
its meeting on April 19, 1983. Thus, on February 27, 1983, petitioner
indicated he was withdrawing from the corporation on condition that he be
paid with stock-in-trade corresponding to 33.3% (Exh. 294), which had only a
par value of P35,000.00. In this same meeting, the transfer of Stock
Certificate Nos. 2 and 8 from the original owner, Alfonso S. Tan was ordered
to be recorded in the corporate stock and transfer book (Exh. "I-1-A")
thereafter submitting the minutes of said meeting to the SEC on May 18,
1983 (Exhs. 12 and I). (Order, Rollo, p. 44)
It is also doubtless that Stock Certificate No. 8 was exchanged by petitioner
for stocks-in-trade since he was operating his own enterprise engaged in the
same business, otherwise, why would a businessman be interested in
acquiring P2,000,000.00 worth of goods which could possibly at that time, fill
up warehouse? In fact, he even padlocked the warehouse of the respondent
corporation, after withdrawing the thirty-three and one-third (33 1/3%)
percent stocks. Accordingly, the Memorandum of Agreement prepared by the
respondents' counsel, Atty. Ramirez evidencing the transaction, was also
presented to petitioner for his signature, however, this document was never
returned by him to the corporate officer for the signature of the other officers
concerned. (Rollo, p. 28)
At the time the warehouse was padlocked by the petitioner, the remaining
stock inventory was valued at P7,454,189.05 of which 66 2/3 percent thereof
belonged to the private respondents. (Ibid., p. 28)
It was very obvious that petitioner devised the scheme of not returning the
cancelled Stock Certificate No. 2 which was returned to him for his
endorsement, to skim off the largesse of the corporation as shown by the
trading of his Stock Certificate No. 8 for goods of the corporation valued at
P2 million when the par value of the same was only worth P35,000.00. (Ibid.,
p. 470) He also used this scheme to renege on his indebtedness to
respondent Tan Su Ching in the amount of P1 million. (Decision, p. 6)
It is not remote that if petitioner could have cashed in on Stock Certificate No.
2 with the remainder of the goods that he padlocked, he would have done so,
until the respondent corporation was bled entirely.
Along this line, petitioner put up the argument that he was responsible for the
growth of the corporation by the alleging that during his incumbency, the
corporation grew, prospered and flourished in the court of business as
evidenced by its audited financial statements, and grossed the following
incomes from: 1980 P8,658,414.10, 1981 P8,039,816.67, 1982
P7,306,168.67, 1983 P5,874,453.55, 1984 P3,911,667.76. (Ibid., Rollo,
p. 24)
Moreover, petitioner asserted that he was ousted from the corporation by
reason of his efforts to establish fiscal controls and to demand an accounting
of corporate funds which were accordingly being transferred and diverted to
certain of private respondents' personal accounts which were allegedly
misapplied, misappropriated and converted to their own personal use and
benefit. (Ibid., p. 125)
2. Petitioner further claims that "(T)he cancellation and transfer of petitioner's
shares and Certificate of Stock No. 2 (Exh. A) as well as the issuance and
cancellation of Certificate of Stock No. 8 (Exh. M) was patently and palpably
unlawful, null and void, invalid and fraudulent." (Rollo, p. 9) And, that Section
63 of the Corporation Code of the Philippines is "mandatory in nature",
meaning that without the actual delivery and endorsement of the certificate in
question, there can be no transfer, or that such transfer is null and void.
(Rollo, p. 10)
737
These arguments are all motivated by self-interest, using foreign authorities
that are slanted in his favor and even misquoting local authorities to prop up
his erroneous posture and all these attempts are intended to stifle justice,
truth and equity.
Contrary to the understanding of the petitioner with respect to the use of the
word "may", in the case of Shauf v. Court of Appeals, (191 SCRA 713, 27
November 1990), this Court held, that "Remedial law statues are to be
construed liberally." The term 'may' as used in adjective rules, is only
permissive and not mandatory. In several earlier cases, the usage of the
word "may" was described as follows:
The word "may"is an auxilliary verb showing among others,
opportunity or possibility. Under ordinary circumstances, the
phrase "may be" implies the possible existence of
something. In this case, the "something" is a law governing
sectoral representation. The phrase in question should,
therefore, be understood to mean as prescribed by such law
that governs the matter at the time . . . The phrase does not
and cannot, by its very wording, restrict itself to the
uncertainly of future legislation. (Legaspi v. Estrella, 189
SCRA 58, 24 Aug. 1990, En Banc)
Years before the above rulings concerning the interpretation of the word
"may", this Court held in Chua v. Samahang Magsasaka, that "the word
"may" indicates that the transfer may be effected in a manner different from
that provided for in the law." (62 Phil. 472)
Moreover, it is safe to infer from the facts deduced in the instant case that,
there was already delivery of the unendorsed Stock Certificate No. 2, which
is essential to the issuance of Stock Certificate Nos. 6 and 8 to angel S. Tan
and petitioner Alfonso S. Tan, respectively. What led to the problem was the
return of the cancelled certificate (No. 2) to Alfonso S. Tan for his
endorsement and his deliberate non-endorsement.
For all intents and purposes, however, since this was already cancelled
which cancellation was also reported to the respondent Commission, there
was no necessity for the same certificate to be endorsed by the petitioner. All
the acts required for the transferee to exercise its rights over the acquired
stocks were attendant and even the corporation was protected from other
parties, considering that said transfer was earlier recorded or registered in
the corporate stock and transfer book.
Following the doctrine enunciated in the case of Tuazon v. La Provisora
Filipina, where this Court held, that:
But delivery is not essential where it appears that the
persons sought to be held as stockholders are officers of the
corporation, and have the custody of the stock book . . . (67
Phi. 36).
Furthermore, there is a necessity to delineate the function of the stock itself
from the actual delivery or endorsement of the certificate of stock itself as is
the question in the instant case. A certificate of stock is not necessary to
render one a stockholder in corporation.
Nevertheless, a certificate of stock is the paper representative or tangible
evidence of the stock itself and of the various interests therein. The certificate
is not stock in the corporation but is merely evidence of the holder's interest
and status in the corporation, his ownership of the share represented
thereby, but is not in law the equivalent of such ownership. It expresses the
contract between the corporation and the stockholder, but is not essential to
the existence of a share in stock or the nation of the relation of shareholder
to the corporation. (13 Am. Jur. 2d, 769)
Under the instant case, the fact of the matter is, the new holder, Angel S. Tan
has already exercised his rights and prerogatives as stockholder and was
even elected as member of the board of directors in the respondent
corporation with the full knowledge and acquiescence of petitioner. Due to
the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and
738
responsibilities in the board of the respondent corporation when he was
elected as officer thereof.
Besides, in Philippine jurisprudence, a certificate of stock is not a negotiable
instrument. "Although it is sometime regarded as quasi-negotiable, in the
sense that it may be transferred by endorsement, coupled with delivery, it is
well-settled that it is non-negotiable, because the holder thereof takes it
without prejudice to such rights or defenses as the registered owner/s or
transferror's creditor may have under the law, except insofar as such rights or
defenses are subject to the limitations imposed by the principles governing
estoppel." (De los Santos vs. McGrath, 96 Phil. 577)
To follow the argument put up by petitioner which was upheld by the Cebu
SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of
Stock Certificate Nos. 2 and 8 was null and void for lack of delivery of the
cancelled "mother" Certificate No. 2 whose endorsement was deliberately
withheld by petitioner, is to prescribe certain restrictions on the transfer of
stock in violation of the corporation law itself as the only law governing
transfer of stocks. While Section 47(s) grants a stock corporations the
authority to determine in the by-laws "the manner of issuing certificates" of
shares of stock, however, the power to regulate is not the power to prohibit,
or to impose unreasonable restrictions of the right of stockholders to transfer
their shares. (Emphasis supplied)
In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law which
prohibits a transfer of stock without the consent or approval of all the
stockholders or of the president or board of directors is illegal as constituting
undue limitation on the right of ownership and in restraint of trade. (47 Phil.
583)
3. Attempt to mislead Petitioner should be held guilty of manipulating the
provision of Section 63 of the Corporation Law for contumaciously
withholding the endorsement of Stock Certificate No. 2 which was returned to
him for the purpose, wasting time and resources of the Court, even after he
had received the stocks-in-trade equivalent to P2,000,000.00 in lieu of his
350 shares of stock with a par value of P35,000.00 only, and thereafter
withdrawing from the respondent corporation.
Not content with the fantastic return of his investment in the corporation and
bent on sucking out the corporate resources by filing the instant case for
damages and seeking the nullity of the cancellation of his Certificate of Stock
Nos. 2 and 8, petitioner even attempted to mislead the Court by erroneously
quoting the ruling of the Court in C. N. Hodges v. Lezama, which has some
parallelism with the instant case was the parties involved therein were also
close relatives as in this case.
The quoted portion appearing on p. 11 of the petition, was cut short in such a
way that relevant portions thereof were purposely left out in order to impress
upon the Court that the unendorsed and uncancelled stock certificate No. 17,
was unconditionally declared null and void, flagrantly omitting the justifying
circumstances regarding its acquisition and the reason given by the Court
why it was declared so. The history of certificate No. 17 is quoted below,
showing the reason why the certificate in question was considered null and
void, as follows:
(P)etitioner Hodges did not cause to be entered in the books
of the corporation as he had his stock certificate No. 17
which, therefore had not been endorsed by him to anybody
or cancelled and which he considered still subsisting. On
September 18, 1958, petitioner Hodges again sold his
aforesaid 2,230 shares of stock covered by his stock
certificate No. 17 on installment basis to his co-petitioner
Ricardo Gurrea, but continued keeping the stock certificate
in his possession without endorsing it to Gurrea or causing
the sale to be entered in the books of the corporation,
believing that said shares of stock were his until fully paid
for. Up to the present, petitioner Hodges has in his
possession and under his control his aforesaid stock
certificate No. 17, unendorsed and uncancelled (Exhs. A &
A-1), a fact known to the respondents. (14 SCRA p. 1032)
739
The pertinent misquoted portion follows:
Before the stockholders' meeting of the La Paz ice Plant &
Cold Storage Co., Inc., hereinafter referred to as the
Corporation - which was scheduled to be held on August 6,
1959, petitioners C.N. Hodges and Ricardo Gurrea filed with
the CFI of Iloilo, a petition docketed as Civil Case No.
5261 of said court for a writ of prohibition with preliminary
injunction, to restrain respondents Jose Manuel Lezama, as
president and secretary, respectively, of said Corporation
from allowing their brother-in-law and brother, respectively,
respondent Benjamin L. Borja, to vote in said meeting on the
aforementioned 2,230 shares of stock. Upon the filing of said
petition and of a bond in the sum of P1,000, the writ of
preliminary injunction prayed for was issued. After due trial,
or on March 28, 1960, (start of petitioner's quotation) "The
court of origin rendered a decision holding that, in view of the
provision in stock certificate no. 17, in the name of Hodges,
to the effect that he
. . . is the owner of Two Thousand Two
Hundred Thirty shares of the capital stock of
La Paz Ice Plant & Cold Storage Co., Inc.,
transferrable only on the books of the
corporation by the holder hereof in person or
by attorney upon surrender of this certificate
properly endorsed.
stock certificate no. 18, issued in favor of Borja and the entry
thereof at his instance in the books of the corporation without
stock certificate no. 17 being first properly endorsed,
surrendered and cancelled, is null and void. . . . " (end of
quotation by petitioner, but the ruling, continues without the
period after the word void.) "and that it would be
unconscionable and for Borja to vote on said shares of
stock, knowing that he had ceased to have actual interest
therein since September 17, 1958, when Hodges bought
such interest at the public auction held in the proceedings for
the foreclosure of his chattel was rendered making said
preliminary injunction permanent and declaring Hodges as
the one entitled to vote on the shares of stock in question.
Petitioner ought to have even included the following which was the reason for
declaring the following which was the reason for declaring the unedorsed,
unsurrendered and uncancelled stock certificate, null and void:
. . . It is, moreover, obvious that Hodges retained it (stock
certificate no. 17) with Borja's consent. It was evidently part
of their agreement, or implied therein, that Hodges would
keep the stock certificate and thus remain in the records of
the Corporation as owner of the shares, despite the
aforementioned sale thereof and the chattel mortgage
thereon. In other words, the parties thereto intended Hodges
to continue, for all intents and purposes, as owner of said
share, until Borja shall have fully paid its stipulated price.
(Ibid, pp. 1033-1034)
Other issues raised by the petitioner, subordinate to the principal issues
above, (except the ruling by the respondent Commission with respect to the
"pari delicto" doctrine which is not acceptable to this Court) are of no
moment.
Considering the circumstances of the case, it appearing that petitioner is
guilty of manipulation, and high-handedness, circumventing the clear
provisions of law in shielding himself from his wrongdoing contrary to the
protective mantle that the law intended for innocent parties, the Court finds
the excuses of the petitioner as unworthy of belief.
WHEREFORE, in view of the foregoing, the Order of the Commission under
SEC-AC No. 263 dated October 10, 1990 is hereby AFFIRMED but modified
with respect to the "nullity of the sale of 350 shares represented under stock
certification No. 8, pursuant to the "in pari delicto" doctrine. The court holds
that the conversion of the 350 shares with a par value of only P35,000.00 at
740
P100.00 per share into treasury stocks after petitioner exchanged them with
P2,000,000.00 worth of stocks-in-trade of the corporation, is valid and lawful.
With regard to the damages being claimed by the petitioner, the respondent
Commission is not empowered to award such, other than the imposition of
fine and imprisonment under Section 56 of the Corporation Code of the
Philippines, as amended.

SO ORDERED.

Melencio-Herrera, Padilla, Regalado and Nocon, JJ., concur.

G.R. No. L-6230 January 18, 1911

A. R. HAGER, petitioner,
vs.
ABERT J. BRYAN, respondent.

741
Wolfson & Wolfson for petitioner.
Haussermann, Cohn & Fisher for respondent.
JOHNSON, J.:
This was an original action commenced in the Supreme Court to secure a
writ of mandamus against the defendant to compel him, as secretary of the
Visayan Electric Company, to transfer upon the books of said company
certain shares mentioned in the petition. The petition alleges:
That your petitioner is a resident of the city of Manila, Philippine
Islands, but temporarily residing in the city of Shanghai, China, and
that the respondent is a resident of and domiciled in the city of Cebu,
Philippine Islands.
That on January first, 1910, the respondent qualified as the secretary
of the Visayan Electric Company, after having been duly elected, and
that defendant was on January 1, 1910, ever since has been and
now is the secretary of the Visayan Electric Company, a corporation
duly organized and existing under and by virtue of the laws of the
Philippines Islands.
That prior to February 5, 1910, your petitioner was the sole owner of
one hundred shares of capital stock of the said Visayan Electric
Company and among which shares were:
Certificate No. 55 representing 5 shares;
Certificate No. 62 representing 10 shares;
Certificate No. 63 representing 10 shares.
These certificates were issued in the name of Bryan-London & Co. and by
them indorsed to your petitioner.
That on February 5, 1910, your petitioner entered into an agreement
with one Martin M. Levering for the purchase and sale from your
petitioner to the said Levering of your petitioner's interest in the said
Visayan Electric Company, being the one hundred shares
hereinbefore mentioned and including the 25 shares hereinbefore
particularly mentioned. That this agreement was finally signed on
February 25, 1910.
That the aforementioned agreement between your petitioner and the
said Levering grew out of the fact that certain parties among whom
were Bryan-London & Co., of which the respondent was and is
member, were at that time trying by various means and
manipulations to get control of the said Visayan Electric Company,
and the said Levering and your petitioner were desirous of
preventing their thus securing control.
That in the aforesaid agreement between your petitioner and the said
Levering it was understood and agreed that delivery of all the stock
should be made free from all incumbrances and the necessary
transfers made on the books of the company.
That the respondent does not question the title of your petitioner to
the aforementioned shares of the said Visayan Electric Company,
and that he has no reason to question such title.
That the shares of the said Visayan Electric Company are
transferable only on the books of the company and therefore your
petitioner has repeatedly demanded and requested the respondent,
as secretary of the said Visayan Electric Company to transfer on the
books of the company the aforesaid shares, viz:
Certificate No. 55 representing 5 shares;
Certificate No. 62 representing 10 shares;
Certificate No. 63 representing 10 shares;
to the name of A. R. Hager, who was the true owner of same of A. R. Hager,
your petitioner, may fully and faithfully carry out his agreement with the said
Levering hereinbefore mentioned.
742
That the said Albert J. Bryan, the respondent, individually, as a
member of the firm of Bryan-London & Company, and as secretary of
the said Visayan Electric Company has refused and neglects to
transfer or permit the transfer of the said aforementioned shares on
the books of the company in the name of your petitioner. That this
refusal on the part of the respondent is arbitrary, malicious, and
contrary to law.
That the respondent as secretary of the said Visayan Electric
Company is the only person whose duty it is to transfer shares on
the books of the said company.
That your petitioner has no plain, speedy, adequate, and complete
remedy at law, as a suit in damages for the value of the shares
would not be speedy, adequate, nor complete, because then other
parties than your petitioner and Martin M. Levering might become the
owners of the said shares, this being the apparent desire of the
respondent and being the express condition that your petitioner
desires to prevent, and being the foundation of the agreement
entered into by your petitioner and the said Martin M. Levering.
Wherefore your petitioner respectfully prays that this honorable court
issue a writ of mandamus addressed to Albert J. Bryan, as secretary
of the Visayan Electric Company ordering the said Albert J. Bryan to
forthwith transfer on the books of the company to the name to your
petitioner the following shares in the said Visayan Electric
Company viz:
Certificate No. 55 representing 5 shares;
Certificate No. 62 representing 10 shares;
Certificate No. 63 representing 10 shares.
An order addressed to Albert J. Bryan, individually, as a member of
the firm of Bryan-London & Company, restraining the said Albert J.
Bryan from in any way interfering with the transfer of the
aforementioned shares on the books of the said Visayan Electric
Company, for the costs of this action, together with such further and
other relief as this honorable court may deem meet and proper and
that these proceedings be expedited under section 518, Code of Civil
Procedure.
To this petition the defendants presented the following demurrer:
Now comes the defendant in the case named above and demurs to
the complaint on the ground that acts constituting cause of action are
not therein alleged.
The question presented is, Will the courts of the Philippine Islands, under the
provisions of the Code of Procedure in Civil Actions (secs. 222-225, 515)
issue the writ of mandamus, under the facts alleged in the complaint, for the
purpose of compelling the secretary of a private corporation to transfer stock
upon the books of the corporation?
The Honorable Arthur L. Sanborn, judge of the United States district court for
the western district of Wisconsin, in his article entitled "Mandamus" (26 Cy. of
Law and Procedure (Cyc), at p. 347), said:
By the weight of authority mandamus will not lie in ordinary cases to
compel a corporation of its officers to transfer stock on its books and
issue new certificates to the transferee, since the writ (in such a
case) is a purely private one, and there is generally an adequate
remedy by an action against the corporation for damages.
In support of this conclusion Judge Sanborn cites cases from the States as
follows:
California. (Kimball vs. The Union Water Company, 44 Cal., 173; 13
American Reports, 157);
Connecticut. (Tobey vs. Hakes, 54 Conn., 274; 1 American State Reports,
114);
743
Georgio. (Terrel vs. Georgia Ry. Co., 115 Ga., 104);
Massachusetts. (Stockpole vs. Seymour, 127 Mass., 104);
Michigan. (Clark vs. Hill, 132 Mich., 434);
Minnesota. (Berker vs. Marshall, 15 Minn., [136] 177);
Missouri. (State vs. Rombauer, 46 Mo., 155);
Montana. (Durfee vs. Harper, 22 Mon., 354);
New Jersy. (Galbraith vs. People's Building Associations etc., 43 N. J.
Law, 389);
New York. (People vs. Miller, 114 N. Y., 636);
Ohio. (Freon vs. Carriage Company, 42 Ohio St., 30; 51 Am. Reps., 794);
Oregon. (Slemmons vs. Thompson, 23 Oregon, 215);
Pennsylvania. (Burmingham Fire Ins. Co. vs. Commonwealth, 92 Pa. St.,
72);
Rhode Island. (Wilkinson vs. Providence Bank, 3 R. I., 22.)
The above doctrine is the general rule in England, as well as in Canada.
(Rex vs. London Assurance Company, 5 B. and Ald., 899).
Section 35, Act No. 1459, provides among other things, that:
No share of stock against which the corporation holds any unpaid
claim, shall be transferable on the books of the corporation.
To permit the writ of mandamus to issue for the purpose of compelling the
officers of a corporation, in cases like the present one, to transfer stock upon
the books of the corporation, might, under certain circumstances, require
such officers to transfer stock against which the corporation holds unpaid
claims. These claims might easily arise between the time of the issuance of
the writ and the service of the same upon such officers. If the court should
issue the writ, it might require an officer to transfer stock under conditions
where the law expressly prohibited such transfer. The writ of mandamus will
never issue to compel a person to violate an express provision of the law.
The act required to be performed must be one which the law specially enjoin
as a duty resulting from an office, trust, or station or unlawfully excludes the
plaintiff from the used and enjoyment of a right or office to which he is entitled
and from which he is unlawfully precluded. (Sec. 222 of Act No. 190.)
No law has been called to our attention which specially requires the
performance of the act of transferring the stock, while there is a law
expressly prohibiting its transfer, except under certain conditions. (Sec. 35,
Act No. 1459.)
In the case of Tobey vs. Hakes (54 Conn., 274) Justice Carpenter, in
discussing the question whether mandamus would issue or not, in an
application for such writ to compel the secretary of a private corporation to
transfer stock on the books of the corporation, to a purchaser, and to issue a
certificate thereof, said:
"This suit is against a private corporation, and its object is to enforce a mere
private right. It is in no sense a proceeding to enforce the performance of a
public duty. We have no precedent in this State for allowing this writ to
compel the transfer of stock in a private corporation, and the authorities
elsewhere are against it," citing in support of his conclusions cases:
Cushman vs. Thayer Manufacturing Co., (76 N. Y., 365), Town vs. Nichols,
(73 Me., 515), States vs. Peoples' Building Association (43 N. J. Law, 389),
Bank vs. Harrison (66 Ga., 696).
Justice Carpenter continues by saying:
744
 There is another ground on which the writ was properly refused. It is For the reasons above stated the demurrer is hereby sustained and the
familiar law that the writ will not ordinarily issue if the plaintiff has petition is hereby dismissed with costs, without prejudice to the right of the
other remedies. If the corporation improperly refuses to transfer the plaintiff to commence an ordinary action in the Court of First Instance to
stock it is clearly liable for the damages in an action at law. secure an order directing the defendant to transfer the stock in question upon
the books of the company, after it is alleged and proved that the corporation
In the case of Kimball vs. Union Water Company (44 Cal., 173) the supreme holds no unpaid claims against it.
court of California said:
Arellano, C.J., and Torres, J., concur.
It has been so frequently decided that a party entitled to stock in a Mapa, J., concurs in the result.
private corporation has an action for damages against the
corporation for the refusal of its officers to transfer the stock to him
upon the company's books, that it must be considered as a settled
principle of law. (King vs. Bank of England, 2 Douglass, 526; Shipley
vs. Mechanics' Bank, 10 Johnson, 484; Wilkinson vs. Providence
Bank, 3 R. I., 22; Ex parte Fireman's Ins. Co., 6th Hill (N. Y.), 243;
American Asylum, etc., vs. Phoenix Bank, 4 Conn., 172; Sargeant
vs. Franklin Ins. Co., 8 Pickering (Mass.), 90.)

In the case of Shipley vs. Mechanics' Bank (10 Johnson, N. Y., 484) an
application was made for mandamus to compel a corporation to transfer to
the petitioners certain stock owned by them, and in deciding the question, the
court said:

The applicants have an adequate remedy, by special action on the

case, to recover the value of the stock, if the bank have unduly
refused to transfer it. There is no need of the extraordinary remedy
by mandamus in so ordinary a case. It might as well be required in
every case in which an ordinary action would lie.

This court has frequently decided that mandamus, being an extraordinary

remedy, will not issue when another adequate remedy exists under the
ordinary procedure. (Hoey vs. Baldwin, 1 Phi. Rep., 551 Manotoc vs.
McMicking, 10 Phil. Rep., 119; Peterson vs. Peterson, Case No. 2360; 1 Cruz
Herrera vs. McMicking, 14 Phil. Rep., 641; Tabigue et al. vs. Duval, 16 Phil.
Rep., 324.)

745
 WHEREFORE, the Court renders judgment enjoining the
defendants to effect the transfer of the shares covered by
Stock Certificate No. 16807 to and in the name of plaintiff
INCORPORATED Mining Corporation, and the writ of
preliminary mandatory injunction issued on March 16, 1970
is hereby declared permanent.

SO ORDERED.

Upon the other hand, the decretal portion of the CA decision states:
G.R. No. L-45048 January 7, 1987
WHEREFORE, the judgment appealed from is hereby
modified by adding the following to the dispositive portion
BATONG BUHAY GOLD MINES, INC., petitioner,
thereof:
vs.
THE COURT OF APPEALS and INC. MINING
CORPORATION, respondents. Ordering defendant Batong Buhay Gold Mines, Inc. to pay to
the plaintiff the sum of P5,625.55, with interest at the legal
rate from March 5, 1970 until full payment; and dismissing
Taada, Sanchez, Taada & Taada Law Office for petitioner.
the complaint with respect to defendant Del Rosario and
Company. Defendant Batong Buhay shall pay the costs.
Quisumbing, Caparas, Ilagan Alcantara & Mosqueda Law Office for private
respondent.
IT IS SO ORDERED.

(pp. 67-68, Rollo)

PARAS, J.:
The antecedent facts, as found by the Court of Appeals, are as follows:

This is a petition to review the decision dated August 27, 1976 of the Court of
The defendant Batong Buhay Gold Mines, Inc. issued Stock
Appeals (CA) in CA-G.R. No. 51313-R which modified the decision of the
Certificate No. 16807 covering 62,495 shares with a par
then Court of First Instance (CFI) of Manila, Branch 11 in Civil Case No.
value of P0.01 per share to Francisco Aguac who was then
79183 Also sought for review are the resolutions of the aforenamed court
legally married to Paula G. Aguac, but the said spouses had
dated October 21, 1976 and November 12, 1976 which denied petitioner's
lived separately for more than fourteen (14) years prior to the
motion for reconsideration of the subject decision and petition and/or motion
said date. On December 16, 1969, Francisco Aguac sold his
for new trial, respectively.
62,495 shares covered by Stock Certificate No. 16807 for
the sum of P9,374.70 in favor of the plaintiff, the said
The dispositive portion of the CFI judgment reads: transaction being evidenced by a deed of sale (Exhibit D).

746
The said sale was made by Francisco Aguac without the
knowledge or consent of his wife Paula G. Aguac.
On the same date of the sale, December 16, 1969, Paula G.
Aguac wrote a letter to the president of defendant Batong
Buhay Gold Mines, Inc. asking that the transfer of the shares
sold by her husband be withheld, inasmuch as the same
constituted conjugal property and her share of proceeds of
the sale was not given to her (Exhibit 1).
On January 5, 1970, under a covering letter dated December
26, 1969, plaintiff's counsel presented Stock Certificate No.
16807 duly endorsed by Francisco Aguac for registration and
transfer of the said stock certificate in the name of the
plaintiff (Exhibit F). The said letter was addressed to
defendant Del Rosario and Company which was the transfer
agent of Batong Buhay at that time. In a letter dated
February 24, 1970 also addressed to Del Rosario and
Company, plaintiff's counsel requested information as to the
action taken on the transfer of Stock Certificate No. 16807 in
favor of the plaintiff, nothing about which having heard
despite the lapse of over a month (Exhibit H). In a reply letter
dated February 28, 1970, Del Rosario and Company
informed plaintiff's counsel that Batong Buhay has referred
the matter to their attorneys, inasmuch as there was a
"technical problem that has developed in the transfer of
stock," and further advised that the plaintiff communicate
directly with Batong Buhay for further details (Exhibit
1).lwphl@it
It developed that when Batong Buhay was about to effect the
cancellation of Stock Certificate No. 16807 and transfer the
62,495 shares covered thereby to the plaintiff and had, in
fact, prepared new Stock Certificate No. 27650 dated
January 5, 1970, it received the letter of Paula G. Aguac
advising it to withhold the transfer of the subject shares of
stock on the ground that the same are conjugal property.
On March 2, 1970 Francisco Aguac was charged in a
criminal complaint Pasil Kalinga-Apayao, docketed as
Criminal Case No. 10, entitled "People vs. Francisco Aguac,
et al."
The defendants justify their refusal to transfer the shares of
stock of Francisco Aguac in the name of the plaintiff in view
of their apprehension that they might he held liable for
damages under Article 173 of the Civil Code and the ruling of
the Supreme Court in Bucoy vs. Paulino, 23 SCRA 248.
On March 5, 1970, in view of the defendant's inaction on the
request for the transfer of the stock certificate in its name,
the plaintiff commenced this action before the Court of First
Instance of Manila, praying that the defendants be ordered
to issue and release the transfer stock certificate covering
62,495 shares of defendant Batong Buhay, formerly
registered in the name of Francisco Aguac, in favor of the
plaintiff, and for the recovery of compensatory, exemplary
and corrective damages and attorney's fees. A writ of
preliminary mandatory injunction was prayed for to order the
defendants to issue immediately the transfer certificate
covering the aforesaid shares of stock of defendant Batong
Buhay in the name of the plaintiff.
The trial court granted the prayer for the issuance of the writ
of preliminary mandatory injunction in its order of March 16,
1970. In compliance therewith, Stock Certificate No. 16807
was cancelled and new Stock Certificate No. 27650 dated
January 5, 1970 was issued to and received by the plaintiff
on July 20, 1970."
On October 28, 1971, the trial court handed down its judgment ordering the
defendant (herein petitioner) to effect the transfer of the shares covered by
Stock Certificate No. 16807 in the name of herein respondent Incoporated
747
Mining Corporation and declaring permanent the writ of preliminary
mandatory injunction issued on March 16, 1970.
Private respondent seasonably appealed the aforesaid decision to the Court
of Appeals anchored on the lower court's alleged failure to award damages
for the wrongful refusal of petitioner to transfer the subject shares of stock
and alleged failure to award attorney's fees, cost of injunction bond and
expenses of litigation.
On August 27, 1986, respondent appellate court rendered the subject
decision the dispositive portion of which has already been quoted
hereinabove.
Hence, this petition.
In assailing the decision of the Court of Appeals, petitioner poses the
following issues:
1. May the Court of Appeals award damages by way of unrealized profits
despite the absence of supporting evidence, or merely on the basis of pure
assumption, speculation or conjecture; or can the respondent recover
damages by way of unrealized profits when it has not shown that it was
damaged in any manner by the act of petitioner?
2. May the appellate court deny the petitioner the chance to present evidence
discovered after judgment which were not only very material to its case, but
would also show the untenability and illegality of private respondent's
position?
We answer the first issue in the negative.
The petitioner alleges that the appellate court gravely and categorically erred
in awarding damages by way of unrealized profit (or lucro cesante) to private
respondent. Petitioner company also alleges that the claim for unrealized
profit must be duly and sufficiently established, that is, that the claimant must
submit proof that it was in fact damaged because of petitioner's act or
omission.
The stipulation of facts of the parties does not at all show that private
respondent intended to sell, or would sell or would have sold the stocks in
question on specified dates. While it is true that shares of stock may go up or
down in value (as in fact the concerned shares here really rose from fifteen
(15) centavos to twenty three or twenty four (23/24) centavos per share and
then fell to about two (2) centavos per share, still whatever profits could have
been made are purely SPECULATIVE, for it was difficult to predict with any
decree of certainty the rise and fall in the value of the shares. Thus this Court
has ruled that speculative damages cannot be recovered.
It is easy to say now that had private respondent gained legal title to the
shares, it could have sold the same and reaped a profit of P5,624.95 but it
could not do so because of petitioner's refusal to transfer the stocks in the
former's name at the time demand was made, but then it is also true that
human nature, being what it is, private respondent's officials could also have
refused to sell and instead wait for expected further increases in value.
In view of what has been said, We find no necessity to discuss the second
issue.
WHEREFORE, the assailed decision and resolutions of the Court of Appeals
are hereby SET ASIDE, and a new one is hereby rendered REINSTATING
the decision of the trial court. No costs.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Gutierrez, Jr., JJ., concur.
748
 Leonardo Abola for appellant.

Alfonso V. Agcaoli & Ramon A. Barcelona for appellee Lee E. Won.

Bienvenido A. Tan in his own behalf.

CASTRO, C.J.:

This is an appeal from the order of the Court of First Instance of Rizal, in civil
case 7656, dismissing the plaintiff-appellant's complaint of interpleader upon
the grounds of failure to state a cause of action and res judicata.

In its amended and supplemental complaint of October 23, 1963, the Wack
Wack Golf & Country Club, Inc., a non-stock, civic and athletic corporation
duly organized under the laws of the Philippines, with principal office in
Mandaluyong, Rizal (hereinafter referred to as the Corporation), alleged, for
its first cause of action, that the defendant Lee E. Won claims ownership of
its membership fee certificate 201, by virtue of the decision rendered in civil
case 26044 of the CFI of Manila, entitled "Lee E. Won alias Ramon Lee vs.
Wack Wack Golf & Country Club, Inc." and also by virtue of membership fee
certificate 201-serial no. 1478 issued on October 17, 1963 by Ponciano B.
Jacinto, deputy clerk of court of the said CFI of Manila, for and in behalf of
the president and the secretary of the Corporation and of the People's Bank
& Trust Company as transfer agent of the said Corporation, pursuant to the
order of September 23, 1963 in the said case; that the defendant Bienvenido
A. Tan, on the other hand, claims to be lawful owner of its aforesaid
membership fee certificate 201 by virtue of membership fee certificate 201-
G.R. No. L-23851 March 26, 1976 serial no. 1199 issued to him on July 24, 1950 pursuant to an assignment
made in his favor by "Swan, Culbertson and Fritz," the original owner and
holder of membership fee certificate 201; that under its articles of
WACK WACK GOLF & COUNTRY CLUB, INC., plaintiff-appellant,
incorporation and by-laws the Corporation is authorized to issue a maximum
vs.
of 400 membership fee certificates to persons duly elected or admitted to
LEE E. WON alias RAMON LEE and BIENVENIDO A. TAN, defendants-
proprietary membership, all of which have been issued as early as December
appellees.
1939; that it claims no interest whatsoever in the said membership fee

749
certificate 201; that it has no means of determining who of the two
defendants is the lawful owner thereof; that it is without power to issue two
separate certificates for the same membership fee certificate 201, or to issue
another membership fee certificate to the defendant Lee, without violating its
articles of incorporation and by-laws; and that the membership fee certificate
201-serial no. 1199 held by the defendant Tan and the membership fee
certificate 201-serial No. 1478 issued to the defendant Lee proceed from the
same membership fee certificate 201, originally issued in the name of "Swan,
Culbertson and Fritz".
For its second cause of action. it alleged that the membership fee certificate
201-serial no. 1478 issued by the deputy clerk of court of court of the CFI of
Manila in behalf of the Corporation is null and void because issued in
violation of its by-laws, which require the surrender and cancellation of the
outstanding membership fee certificate 201 before issuance may be made to
the transferee of a new certificate duly signed by its president and secretary,
aside from the fact that the decision of the CFI of Manila in civil case 26044
is not binding upon the defendant Tan, holder of membership fee certificate
201-serial no. 1199; that Tan is made a party because of his refusal to join it
in this action or bring a separate action to protect his rights despite the fact
that he has a legal and beneficial interest in the subject matter of this
litigation; and that he is made a part so that complete relief may be accorded
herein.
The Corporation prayed that (a) an order be issued requiring Lee and Tan to
interplead and litigate their conflicting claims; and (b) judgment. be rendered,
after hearing, declaring who of the two is the lawful owner of membership fee
certificate 201, and ordering the surrender and cancellation of membership
fee certificate 201-serial no. 1478 issued in the name of Lee.
In separate motions the defendants moved to dismiss the complaint upon the
grounds of res judicata, failure of the complaint to state a cause of action,
and bar by prescription. 1 These motions were duly opposed by the
Corporation. Finding the grounds of bar by prior judgment and failure to state
a cause of action well taken, the trial court dismissed the complaint, with
costs against the Corporation.
In this appeal, the Corporation contends that the court a quo erred (1) in
finding that the allegations in its amended and supplemental complaint do not
constitute a valid ground for an action of interpleader, and in holding that "the
principal motive for the present action is to reopen the Manila Case and
collaterally attack the decision of the said Court"; (2) in finding that the
decision in civil case 26044 of the CFI of Manila constitutes res judicata and
bars its present action; and (3) in dismissing its action instead of compelling
the appellees to interplead and litigate between themselves their respective
claims.
The Corporations position may be stated elsewise as follows: The trial court
erred in dismissing the complaint, instead of compelling the appellees to
interplead because there actually are conflicting claims between the latter
with respect to the ownership of membership fee certificate 201, and, as
there is not Identity of parties, of subject-matter, and of cause of action,
between civil case 26044 of the CFI of Manila and the present action, the
complaint should not have been dismissed upon the ground of res judicata.
On the other hand, the appellees argue that the trial court properly dismissed
the complaint, because, having the effect of reopening civil case 26044, the
present action is barred by res judicata.
Although res judicata or bar by a prior judgment was the principal ground
availed of by the appellees in moving for the dismissal of the complaint and
upon which the trial court actually dismissed the complaint, the determinative
issue, as can be gleaned from the pleadings of the parties, relates to the
propriety and timeliness of the remedy of interpleader.
The action of interpleader, under section 120 of the Code of Civil
Procedure, 2 is a remedy whereby a person who has personal property in his
possession, or an obligation to render wholly or partially, without claiming any
right to either, comes to court and asks that the persons who claim the said
personal property or who consider themselves entitled to demand
compliance with the obligation, be required to litigate among themselves in
order to determine finally who is entitled to tone or the one thing. The remedy
is afforded to protect a person not against double liability but against double
750
vexation in respect of one liability. 3 The procedure under the Rules of
Court 4 is the same as that under the Code of Civil Procedure, 5except that
under the former the remedy of interpleader is available regardless of the
nature of the subject-matter of the controversy, whereas under the latter an
interpleader suit is proper only if the subject-matter of the controversy is
personal property or relates to the performance of an obligation.
There is no question that the subject matter of the present controversy, i.e.,
the membership fee certificate 201, is proper for an interpleader suit. What is
here disputed is the propriety and timeliness of the remedy in the light of the
facts and circumstances obtaining.
A stakeholder 6 should use reasonable diligence to hale the contending
claimants to court. 7 He need not await actual institution of independent suits
against him before filing a bill of interpleader. 8 He should file an action of
interpleader within a reasonable time after a dispute has arisen without
waiting to be sued by either of the contending claimants. 9 Otherwise, he may
be barred by laches 10 or undue delay. 11 But where he acts with reasonable
diligence in view of the environmental circumstances, the remedy is not
barred. 12
Has the Corporation in this case acted with diligence, in view of all the
circumstances, such that it may properly invoke the remedy of interpleader?
We do not think so. It was aware of the conflicting claims of the appellees
with respect to the membership fee certificate 201 long before it filed the
present interpleader suit. It had been recognizing Tan as the lawful owner
thereof. It was sued by Lee who also claimed the same membership fee
certificate. Yet it did not interplead Tan. It preferred to proceed with the
litigation (civil case 26044) and to defend itself therein. As a matter of fact,
final judgment was rendered against it and said judgment has already been
executed. It is not therefore too late for it to invoke the remedy of
interpleader.
It has been held that a stakeholder's action of interpleader is too late when
filed after judgment has been rendered against him in favor of one of the
contending claimants, 13 especially where he had notice of the conflicting
claims prior to the rendition of the judgment and neglected the opportunity to
implead the adverse claimants in the suit where judgment was entered. This
must be so, because once judgment is obtained against him by one claimant
he becomes liable to the latter. 14 In once case, 15 it was declared:
The record here discloses that long before the rendition of
the judgment in favor of relators against the Hanover Fire
Insurance Company the latter had notice of the adverse
claim of South to the proceeds of the policy. No reason is
shown why the Insurance Company did not implead South in
the former suit and have the conflicting claims there
determined. The Insurance Company elected not to do so
and that suit proceeded to a final judgment in favor of
relators. The Company thereby became independently liable
to relators. It was then too late for such company to invoke
the remedy of interpleader
The Corporation has not shown any justifiable reason why it did not file an
application for interpleader in civil case 26044 to compel the appellees herein
to litigate between themselves their conflicting claims of ownership. It was
only after adverse final judgment was rendered against it that the remedy of
interpleader was invoked by it. By then it was too late, because to he entitled
to this remedy the applicant must be able to show that lie has not been made
independently liable to any of the claimants. And since the Corporation is
already liable to Lee under a final judgment, the present interpleader suit is
clearly improper and unavailing.
It is the general rule that before a person will be deemed to
be in a position to ask for an order of intrepleader, he must
be prepared to show, among other prerequisites, that he has
not become independently liable to any of the claimants. 25
Tex. Jur. p. 52, Sec. 3; 30 Am. Jur. p. 218, Section 8.
It is also the general rule that a bill of interpleader comes too
late when it is filed after judgment has been rendered in
favor of one of the claimants of the fund, this being
751
 especially true when the holder of the funds had notice of the
conflicting claims prior to the rendition of the judgment and
had an opportunity to implead the adverse claimants in the
suit in which the judgment was rendered. United Procedures
Pipe Line Co. v. Britton, Tex. Civ. App. 264 S.W. 176; Nash v.
McCullum, Tex. Civ. 74 S.W. 2d 1046; 30 Am. Jur. p. 223,
Sec. 11; 25 Tex. Jur. p. 56, Sec. 5; 108 A.L.R., note 5, p.
275. 16
Indeed, if a stakeholder defends a suit filed by one of the adverse claimants
and allows said suit to proceed to final judgment against him, he cannot later
on have that part of the litigation repeated in an interpleader suit. In the case
at hand, the Corporation allowed civil case 26044 to proceed to final
judgment. And it offered no satisfactory explanation for its failure to implead
Tan in the same litigation. In this factual situation, it is clear that this
interpleader suit cannot prosper because it was filed much too late.
If a stakeholder defends a suit by one claimant and allows it
to proceed so far as a judgment against him without filing a
bill of interpleader, it then becomes too late for him to do
so. Union Bank v. Kerr, 2 Md. Ch. 460; Home Life Ins. Co. v.
Gaulk, 86 Md. 385, 390, 38 A. 901; Gonia v. O'Brien, 223
Mass. 177, 111 N.E. 787. It is one o the main offices of a bill
of interpleader to restrain a separate proceeding at law by
claimant so as to avoid the resulting partial judgment; and if
the stakeholder acquiesces in one claimant's trying out his
claim and establishing it at law, he cannot then have that
part of the litigation repeated in an interpleader suit. 4
Pomeroy's Eq. Juris. No. 162; Mitfor's Eq. Pleading (Tyler's
Ed.) 147 and 236; Langdell's Summary of Eq. Pleading, No.
162' De Zouche v. Garrizon, 140 Pa. 430, 21 A/450. 17
It is the general rule that a bill of interpleader comes too late
when application therefore is delayed until after judgment
has been rendered in favor of one of the claimants of the
fund, and that this is especially true where the holder of the
fund had notice of the conflicting claims prior to the rendition
of such judgment and an opportunity to implead the adverse
claimants in the suit in which such judgment was rendered.
(See notes and cases cited 36 Am. Dec. 703, Am. St. Rep.
598, also 5 Pomeroy's Eq. Juris. Sec. 41.)
The evidence in the opinion of the majority shows beyond
dispute that the appellant permitted the Parker county suit to
proceed to judgment in favor of Britton with full notice of the
adverse claims of the defendants in the present suit other
than the assignees of the judgment (the bank and Mrs.
Pabb) and no excuse is shown why he did not implead them
in the suit. 18
To now permit the Corporation to bring Lee to court after the latter's
successful establishment of his rights in civil case 26044 to the membership
fee certificate 201, is to increase instead of to diminish the number of suits,
which is one of the purposes of an action of interpleader, with the possibility
that the latter would lose the benefits of the favorable judgment. This cannot
be done because having elected to take its chances of success in said civil
case 26044, with full knowledge of all the fact, the Corporation must submit
to the consequences of defeat.
The act providing for the proceeding has nothing to say
touching the right of one, after contesting a claim of one of
the claimants to final judgment unsuccessfully, to involve the
successful litigant in litigation anew by bringing an
interpleader action. The question seems to be one of first
impression here, but, in other jurisdictions, from which the
substance of the act was apparently taken, the rule prevails
that the action cannot be resorted to after an unsuccessful
trial against one of the claimants.
It is well settled, both by reasons and authority, that one who
asks the interposition of a court of equity to compel others,
claiming property in his hands, to interplead, must do so
before putting them to the test of trials at law. Yarborough v.
752
 Thompson, 3 Smedes & M. 291 (41 Am. Dec. 626); Gornish
v. Tanner, 1 You. & Jer. 333; Haseltine v. Brickery, 16 Grat.
(Va.) 116. The remedy by interpleader is afforded to protect
the party from the annoyance and hazard of two or more
actions touching the same property or demand; but one who,
with knowledge of all the facts, neglects to avail himself of
the relief, or elects to take the chances for success in the
actions at law, ought to submit to the consequences of
defeat. To permit an unsuccessful defendant to compel the
successful plaintiffs to interplead, is to increase instead of to
diminish the number of suits; to put upon the shoulders of
others the burden which he asks may be taken from his own.
....'
It is urged, however, that the American Surety Company of
New York was not in position to file an interpleader until it
had tested the claim of relatrix to final judgment, and that,
failing to meet with success, it promptly filed the interpleader.
The reason why, it urges, it was not in such position until
then is that had it succeeded before this court in sustaining
its construction of the bond and the law governing the bond,
it would not have been called upon to file an interpleader,
since there would have been sufficient funds in its hands to
have satisfied all lawful claimants. It may be observed,
however, that the surety company was acquainted with all of
the facts, and hence that it simply took its chances of
meeting with success by its own construction of the bond
and the law. Having failed to sustain it, it cannot now force
relatrix into litigation anew with others, involving most likely a
repetition of what has been decided, or force her to accept a
pro rata part of a fund, which is far from benefits of the
judgment. 19
Besides, a successful litigant cannot later be impleaded by his defeated
adversary in an interpleader suit and compelled to prove his claim anew
against other adverse claimants, as that would in effect be a collateral attack
upon the judgment.
The jurisprudence of this state and the common law states is
well-settled that a claimant who has been put to test of a trial
by a surety, and has establish his claim, may not be
impleaded later by the surety in an interpleader suit, and
compelled to prove his claim again with other adverse
claimants. American Surety Company of New York v. Brim,
175 La. 959, 144 So. 727; American Surety Company of
New York v. Brim (In Re Lyong Lumber Company), 176 La.
867, 147 So. 18; Dugas v. N.Y. Casualty Co., 181 La. 322,
159 So. 572; 15 Ruling Case Law, 228; 33 Corpus Juris,
477; 4 Pomeroy's Jurisprudence, 1023; Royal Neighbors of
America v. Lowary (D.C.) 46 F2d 565; Brackett v. Graves, 30
App. Div. 162, 51 N.Y.S. 895; De Zouche v. Garrison, 140
Pa. 430, 21 A. 450, 451; Manufacturer's Finance Co. v. W.I.
Jones Co. 141 Ga., 519, 81 S.E. 1033; Hancock Mutual Life
Ins. Co. v. Lawder, 22 R.I. 416, 84 A. 383.
There can be no doubt that relator's claim has been finally
and definitely established, because that matter was passed
upon by three courts in definitive judgments. The only
remaining item is the value of the use of the land during the
time that relator occupied it. The case was remanded solely
and only for the purpose of determining the amount of that
credit. In all other aspects the judgment is final. 20
It is generally held by the cases it is the office of interpleader
to protect a party, not against double liability, but against
double vexation on account of one liability. Gonia v. O'Brien,
223 Mass. 177, 111 N.E. 787. And so it is said that it is too
late for the remedy of interpleader if the party seeking this
relef has contested the claim of one of the parties and
suffered judgment to be taken.
In United P.P.I. Co. v. Britton (Tex. Civ. App.) 264 S.W. 576.
578, it was said: 'It is the general rule that a bill of
interpleader comes too late when application therefor is
delayed until after judgment has been rendered in favor of
753
 one of the claimants of the fund, and this is especially true
where the holder of the fund had notice of the conflicting
claims prior to the rendition of such judgment and an
opportunity to implead the adverse claimants in the suit in
which such judgment was rendered. See notes and cases
cited 35 Am. Dec. 703; 91 An. St. Rep. 598; also 5
Pomeroy's Equity Jurisprudence No. 41.'
ACCORDINGLY, the order of May 28, 1964, dismissing the complaint, is
affirmed, at appellant's cost.
Teehankee, Makasiar, Antonio, Esguerra, Muoz Palma, Aquino and
Concepcion, Jr., JJ., concur.
Barredo and Martin, JJ., took no part.

The principle thus stated has been recognized in many Fernando, J., is on leave.
cases in other jurisdictions, among which may be
cited American Surety Co. v. O'Brien, 223 Mass. 177, 111
N.E. 787; Phillips v. Taylor, 148 Md. 157, 129 A. 18; Moore v.
Hill, 59 Ga. 760, 761; Yearborough v. Thompson, 3 Smedes
& M. (11 Miss.) 291, 41 Am. Dec. 626. See, also, 33 C.J. p.
447, No. 30; Nash v. McCullum, (Tex. Civ. App.) 74 S.W. 2d
1042, 1047.

It would seem that this rule should logically follow since, after
the recovery of judgment, the interpleading of the judgment
creditor is in effect a collateral attack upon the judgment. 21

In fine, the instant interpleader suit cannot prosper because the Corporation
had already been made independently liable in civil case 26044 and,
therefore, its present application for interpleader would in effect be a G.R. No. L-7991 January 29, 1914
collateral attack upon the final judgment in the said civil case; the appellee
Lee had already established his rights to membership fee certificate 201 in LEON J. LAMBERT, plaintiff-appellant,
the aforesaid civil case and, therefore, this interpleader suit would compel vs.
him to establish his rights anew, and thereby increase instead of diminish T. J. FOX, defendant-appellee.
litigations, which is one of the purposes of an interpleader suit, with the
possiblity that the benefits of the final judgment in the said civil case might
O'Brien and DeWitt and C. W. Ney, for appellant.
eventually be taken away from him; and because the Corporation allowed
J. C. Hixon, for appellee.
itself to be sued to final judgment in the said case, its action of interpleader
was filed inexcusably late, for which reason it is barred by laches or
unreasonable delay. MORELAND, J.:

This is an action brought to recover a penalty prescribed on a contract as

punishment for the breach thereof.

754
Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail
book and stationery business, found itself in such condition financially that its
creditors, including the plaintiff and the defendant, together with many others,
agreed to take over the business, incorporate it and accept stock therein in
payment of their respective credits. This was done, the plaintiff and the
defendant becoming the two largest stockholders in the new corporation
called John R. Edgar & Co., Incorporated. A few days after the incorporation
was completed plaintiff and defendant entered into the following agreement:
Whereas the undersigned are, respectively, owners of large amounts
of stock in John R. Edgar and Co, Inc; and,
Whereas it is recognized that the success of said corporation
depends, now and for at least one year next following, in the larger
stockholders retaining their respective interests in the business of
said corporation:
Therefore, the undersigned mutually and reciprocally agree not to
sell, transfer, or otherwise dispose of any part of their present
holdings of stock in said John R. Edgar & Co. Inc., till after one year
from the date hereof.
Either party violating this agreement shall pay to the other the sum of
one thousand (P1,000) pesos as liquidated damages, unless
previous consent in writing to such sale, transfer, or other disposition
be obtained.
Notwithstanding this contract the defendant Fox on October 19, 1911, sold
his stock in the said corporation to E. C. McCullough of the firm of E. C.
McCullough & Co. of Manila, a strong competitor of the said John R. Edgar &
Co., Inc.
This sale was made by the defendant against the protest of the plaintiff and
with the warning that he would be held liable under the contract hereinabove
set forth and in accordance with its terms. In fact, the defendant Foz offered
to sell his shares of stock to the plaintiff for the same sum that McCullough
was paying them less P1,000, the penalty specified in the contract.
The learned trial court decided the case in favor of the defendant upon the
ground that the intention of the parties as it appeared from the contract in
question was to the effect that the agreement should be good and continue
only until the corporation reached a sound financial basis, and that that event
having occurred some time before the expiration of the year mentioned in the
contract, the purpose for which the contract was made and had been fulfilled
and the defendant accordingly discharged of his obligation thereunder. The
complaint was dismissed upon the merits.
It is argued here that the court erred in its construction of the contract. We
are of the opinion that the contention is sound. The intention of parties to a
contract must be determined, in the first instance, from the words of the
contract itself. It is to be presumed that persons mean what they say when
they speak plain English. Interpretation and construction should by the
instruments last resorted to by a court in determining what the parties agreed
to. Where the language used by the parties is plain, then construction and
interpretation are unnecessary and, if used, result in making a contract for
the parties. (Lizarraga Hermanos vs. Yap Tico, 24 Phil. Rep., 504.)
In the case cited the court said with reference to the construction and
interpretation of statutes: "As for us, we do not construe or interpret this law.
It does not need it. We apply it. By applying the law, we conserve both
provisions for the benefit of litigants. The first and fundamental duty of courts,
in our judgment, is to apply the law. Construction and interpretation come
only after it has been demonstrated that application is impossible or
inadequate without them. They are the very last functions which a court
should exercise. The majority of the law need no interpretation or
construction. They require only application, and if there were more
application and less construction, there would be more stability in the law,
and more people would know what the law is."
755
What we said in that case is equally applicable to contracts between the sum stipulated without the necessity of proving damages. Indeed one of
persons. In the case at bar the parties expressly stipulated that the contract the primary purposes in fixing a penalty or in liquidating damages, is to avoid
should last one year. No reason is shown for saying that it shall last only nine such necessity.
months. Whatever the object was in specifying the year, it was their
agreement that the contract should last a year and it was their judgment and It is also urged by the appelle in this case that the stipulation in the contract
conviction that their purposes would not be subversed in any less time. What suspending the power to sell the stock referred to therein is an illegal
reason can give for refusing to follow the plain words of the men who made stipulation, is in restraint of trade and, therefore, offends public policy. We do
the contract? We see none. not so regard it. The suspension of the power to sell has a beneficial
purpose, results in the protection of the corporation as well as of the
The appellee urges that the plaintiff cannot recover for the reason that he did individual parties to the contract, and is reasonable as to the length of time of
not prove damages, and cites numerous American authorities to the effect the suspension. We do not here undertake to discuss the limitations to the
that because stipulations for liquidated damages are generally in excess of power to suspend the right of alienation of stock, limiting ourselves to the
actual damages and so work a hardship upon the party in default, courts are statement that the suspension in this particular case is legal and valid.
strongly inclined to treat all such agreements as imposing a penalty and to
allow a recovery for actual damages only. He also cites authorities holding The judgment is reversed, the case remanded with instructions to enter a
that a penalty, as such, will not be enforced and that the party suing, in spite judgment in favor of the plaintiff and against the defendant for P1,000, with
of the penalty assigned, will be put to his proof to demonstrate the damages interest; without costs in this instance.
actually suffered by reason of defendants wrongful act or omission.
Arellano, C.J., Trent and Araullo, JJ., concur.
In this jurisdiction penalties provided in contracts of this character are
enforced . It is the rule that parties who are competent to contract may make
such agreements within the limitations of the law and public policy as they
desire, and that the courts will enforce them according to their terms. (Civil
Code, articles 1152, 1153, 1154, and 1155; Fornow vs. Hoffmeister, 6 Phil.
Rep., 33; Palacios vs. Municipality of Cavite, 12 Phil. Rep., 140; Gsell vs.
Koch, 16 Phil. Rep., 1.) The only case recognized by the Civil Code in which
the court is authorized to intervene for the purpose of reducing a penalty
stipulated in the contract is when the principal obligation has been partly or
irregularly fulfilled and the court can see that the person demanding the
penalty has received the benefit of such or irregular performance. In such
case the court is authorized to reduce the penalty to the extent of the benefits
received by the party enforcing the penalty. G.R. No. L-23241 March 14, 1925

In this jurisdiction, there is no difference between a penalty and liquidated HENRY FLEISCHER, plaintiff-appellee,
damages, so far as legal results are concerned. Whatever differences exists vs.
between them as a matter of language, they are treated the same legally. In BOTICA NOLASCO CO., INC., defendant-appellant.
either case the party to whom payment is to be made is entitled to recover

756
Antonio Gonzalez for appellant.
Emilio M. Javier for appellee.
JOHNSON, J.:
This action was commenced in the Court of First Instance of the Province of
Oriental Negros on the 14th day of August, 1923, against the board of
directors of the Botica Nolasco, Inc., a corporation duly organized and
existing under the laws of the Philippine Islands. The plaintiff prayed that said
board of directors be ordered to register in the books of the corporation five
shares of its stock in the name of Henry Fleischer, the plaintiff, and to pay
him the sum of P500 for damages sustained by him resulting from the refusal
of said body to register the shares of stock in question. The defendant filed a
demurrer on the ground that the facts alleged in the complaint did not
constitute sufficient cause of action, and that the action was not brought
against the proper party, which was the Botica Nolasco, Inc. The demurrer
was sustained, and the plaintiff was granted five days to amend his
complaint.
On November 15, 1923, the plaintiff filed an amended complaint against the
Botica Nolasco, Inc., alleging that he became the owner of five shares of
stock of said corporation, by purchase from their original owner, one Manuel
Gonzalez; that the said shares were fully paid; and that the defendant
refused to register said shares in his name in the books of the corporation in
spite of repeated demands to that effect made by him upon said corporation,
which refusal caused him damages amounting to P500. Plaintiff prayed for a
judgment ordering the Botica Nolasco, Inc. to register in his name in the
books of the corporation the five shares of stock recorded in said books in
the name of Manuel Gonzalez, and to indemnify him in the sum of P500 as
damages, and to pay the costs. The defendant again filed a demurrer on the
ground that the amended complaint did not state facts sufficient to constitute
a cause of action, and that said amended complaint was ambiguous,
unintelligible, uncertain, which demurrer was overruled by the court.
The defendant answered the amended complaint denying generally and
specifically each and every one of the material allegations thereof, and, as a
special defense, alleged that the defendant, pursuant to article 12 of its by-
laws, had preferential right to buy from the plaintiff said shares at the par
value of P100 a share, plus P90 as dividends corresponding to the year
1922, and that said offer was refused by the plaintiff. The defendant prayed
for a judgment absolving it from all liability under the complaint and directing
the plaintiff to deliver to the defendant the five shares of stock in question,
and to pay damages in the sum of P500, and the costs.
Upon the issue presented by the pleadings above stated, the cause was
brought on for trial, at the conclusion of which, and on August 21, 1924, the
Honorable N. Capistrano, judge, held that, in his opinion, article 12 of the by-
laws of the corporation which gives it preferential right to buy its shares from
retiring stockholders, is in conflict with Act No. 1459 (Corporation Law),
especially with section 35 thereof; and rendered a judgment ordering the
defendant corporation, through its board of directors, to register in the books
of said corporation the said five shares of stock in the name of the plaintiff,
Henry Fleischer, as the shareholder or owner thereof, instead of the original
owner, Manuel Gonzalez, with costs against the defendant.
The defendant appealed from said judgment, and now makes several
assignment of error, all of which, in substance, raise the question whether or
not article 12 of the by-laws of the corporation is in conflict with the provisions
of the Corporation Law (Act No. 1459).
There is no controversy as to the facts of the present case. They are simple
and may be stated as follows:
That Manuel Gonzalez was the original owner of the five shares of stock in
question, Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on
March 11, 1923, he assigned and delivered said five shares to the plaintiff,
Henry Fleischer, by accomplishing the form of endorsement provided on the
back thereof, together with other credits, in consideration of a large sum of
money owed by Gonzalez to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that
on March 13, 1923, Dr. Eduardo Miciano, who was the secretary-treasurer of
said corporation, offered to buy from Henry Fleischer, on behalf of the
corporation, said shares of stock, at their par value of P100 a share, for
757
P500; that by virtue of article 12 of the by-laws of Botica Nolasco, Inc., said
corporation had the preferential right to buy from Manuel Gonzalez said
shares (Exhibit 2); that the plaintiff refused to sell them to the defendant; that
the plaintiff requested Doctor Miciano to register said shares in his name;
that Doctor Miciano refused to do so, saying that it would be in contravention
of the by-laws of the corporation.
It also appears from the record that on the 13th day of March, 1923, two days
after the assignment of the shares to the plaintiff, Manuel Gonzales made a
written statement to the Botica Nolasco, Inc., requesting that the five shares
of stock sold by him to Henry Fleischer be noted transferred to Fleischer's
name. He also acknowledged in said written statement the preferential right
of the corporation to buy said five shares (Exhibit 3). On June 14, 1923,
Gonzalez wrote a letter to the Botica Nolasco, withdrawing and cancelling his
written statement of March 13, 1923 (Exhibit C), to which letter the Botica
Nolasco on June 15, 1923, replied, declaring that his written statement was
in conformity with the by-laws of the corporation; that his letter of June 14th
was of no effect, and that the shares in question had been registered in the
name of the Botica Nolasco, Inc., (Exhibit X).
As indicated above, the important question raised in this appeal is whether or
not article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict with the
provisions of the Corporation Law (Act No. 1459). Appellant invoked said
article as its ground for denying the request of the plaintiff that the shares in
question be registered in his (plaintiff's) name, and for claiming that it (Botica
Nolasco, Inc.) had the preferential right to buy said shares from Gonzalez.
Appellant now contends that article 12 of the said by-laws is in conformity
with the provisions of Act No. 1459. Said article is as follows:
ART. 12. Las acciones de la Corporacion pueden ser transferidas a
otra persona, pero para que estas transferencias tengan validez
legal, deben constar en los registros de la Corporacion con el debido
endoso del accionista a cuyo nombre se ha expedido la accion o
acciones que se transfieran, o un documento de
transferencia. Entendiendose que, ningun accionista transferira
accion alguna a otra persona sin participar antes por escrito al
Secretario-Tesorero. En igualdad de condiciones, la sociedad tendra
el derecho de adquirir para si la accion o acciones que se traten de
transferir. (Exhibit 2.)
The above-quoted article constitutes a by-law or regulation adopted by the
Botica Nolasco, Inc., governing the transfer of shares of stock of said
corporation. The latter part of said article creates in favor of the Botica
Nolasco, Inc., a preferential right to buy, under the same conditions, the
share or shares of stock of a retiring shareholder. Has said corporation any
power, under the Corporation Law (Act. No. 1459), to adopt such by-law?
The particular provisions of the Corporation Law referring to transfer of
shares of stock are as follows:
SEC. 13. Every corporation has the power:
xxx xxx xxx
(7) To make by-laws, not inconsistent with any existing law, for the
fixing or changing of the number of its officers and directors within
the limits prescribed by law, and for the transferring of its stock, the
administration of its corporate affairs, etc.
xxx xxx xxx
SEC. 35. The capital stock of stock corporations shall de divided into
shares for which certificates signed by the president or the vice-
president, countersigned by the secretary or clerk and sealed with
the seal of the corporation, shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property and may
be transferred by delivery of the certificate indorsed by the owner or
his attorney in fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the
transaction, that date of the transfer, the number of the certificate,
and the number of shares transferred.
758
 No share of stock against which the corporation holds any unpaid
claim shall be transferable on the books of the corporation.
Section 13, paragraph 7, above-quoted, empowers a corporation to
make by-laws, not inconsistent with any existing law, for the transferring of its
stock. It follows from said provision, that a by-law adopted by a corporation
relating to transfer of stock should be in harmony with the law on the subject
of transfer of stock. The law on this subject is found in section 35 of Act No.
1459 above quoted. Said section specifically provides that the shares of
stock "are personal property and may be transferred by delivery of the
certificate indorsed by the owner, etc."Said section 35 defines the nature,
character and transferability of shares of stock. Under said section they are
personal property and may be transferred as therein provided. Said section
contemplates no restriction as to whom they may be transferred or sold. It
does not suggest that any discrimination may be created by the corporation
in favor or against a certain purchaser. The holder of shares, as owner of
personal property, is at liberty, under said section, to dispose of them in favor
of whomsoever he pleases, without any other limitation in this respect, than
the general provisions of law. Therefore, a stock corporation in adopting a by-
law governing transfer of shares of stock should take into consideration the
specific provisions of section 35 of Act No. 1459, and said by-law should be
made to harmonize with said provisions. It should not be inconsistent
therewith.
The by-law now in question was adopted under the power conferred upon
the corporation by section 13, paragraph 7, above quoted; but in adopting
said by-law the corporation has transcended the limits fixed by law in the
same section, and has not taken into consideration the provisions of section
35 of Act No. 1459.
As a general rule, the by-laws of a corporation are valid if they are
reasonable and calculated to carry into effect the objects of the corporation,
and are not contradictory to the general policy of the laws of the land.
(Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71
Ala., 436; 46 Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of a corporation must
be reasonable and for a corporate purpose, and always within the charter
limits. They must always be strictly subordinate to the constitution and the
general laws of the land. They must not infringe the policy of the state, nor be
hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested
rights or impair the obligation of a contract, take away or abridge the
substantial rights of stockholder or member, affect rights of property or create
obligations unknown to the law. (People's Home Savings Bank vs. Superior
Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79
Am. St. Rep., 769.)
The validity of the by-law of a corporation is purely a question of law. (South
Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale and transfer of stock
must be found in the governing statute or the charter. Restrictions
upon the traffic in stock must have their source in legislative
enactment, as the corporation itself cannot create such impediments.
By-law are intended merely for the protection of the corporation, and
prescribe regulation and not restriction; they are always subject to
the charter of the corporation. The corporation, in the absence of
such a power, cannot ordinarily inquire into or pass upon the legality
of the transaction by which its stock passes from one person to
another, nor can it question the consideration upon which a sale is
based. A by-law cannot take away or abridge the substantial rights of
stockholder. Under a statute authorizing by- laws for the transfer of
stock, a corporation can do no more than prescribe a general mode
of transfer on the corporate books and cannot justify an
unreasonable restriction upon the right of sale. (4 Thompson on
Corporations, sec. 4137, p. 674.
The right of unrestrained transfer of shares inheres in the very nature
of a corporation, and courts will carefully scrutinize any attempt to
impose restrictions or limitations upon the right of stockholders to sell
and assign their stock. The right to impose any restraint in this
respect must be conferred upon the corporation either by the
governing statute or by the articles of the corporation. It cannot be
759
 done by a by-law without statutory or charter authority. (4 Thompson
on Corporations, sec. 4334, pp. 818, 819.)
The jus disponendi, being an incident of the ownership of property,
the general rule (subject to exceptions hereafter pointed out and
discussed) is that every owner of corporate shares has the same
uncontrollable right to alien them which attaches to the ownership of
any other species of property. A shareholder is under no obligation to
refrain from selling his shares at the sacrifice of his personal interest,
in order to secure the welfare of the corporation, or to enable another
shareholder to make gains and profits. (10 Cyc., p. 577.)
It follows from the foregoing that a corporation has no power to
prevent or to restrain transfers of its shares, unless such power is
expressly conferred in its charter or governing statute. This
conclusion follows from the further consideration that by-laws or
other regulations restraining such transfers, unless derived from
authority expressly granted by the legislature, would be regarded as
impositions in restraint of trade. (10 Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking on this
question. They hold that the power of a corporation to enact by-laws
restraining the sale and transfer of shares, should not only be in harmony
with the law or charter of the corporation, but such power should be
expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of shares is
found in section 35 of Act No. 1459, quoted above, as follows: "No transfer,
however, shall be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, the number
of the certificate, and the number of shares transferred." This restriction is
necessary in order that the officers of the corporation may know who are the
stockholders, which is essential in conducting elections of officers, in calling
meeting of stockholders, and for other purposes. but any restriction of the
nature of that imposed in the by-law now in question, is ultra vires, violative
of the property rights of shareholders, and in restraint of trade.
And moreover, the by-laws now in question cannot have any effect on the
appellee. He had no knowledge of such by-law when the shares were
assigned to him. He obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created by said by-law
between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said
by-law cannot operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares
without first offering them to the corporation for a period of thirty days
is not binding upon an assignee of the stock as a personal contract,
although his assignor knew of the by-law and took part in its
adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of
corporate stock, a purchaser is not affected by any contractual
restriction of which he had no notice. (Brinkerhoff-Farris Trust and
Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who has
assented to an unauthorized by-law has only the effect of a contract
by, and enforceable against, the assignor; the assignee is not bound
by such by-law by virtue of the assignment alone. (Ireland vs. Globe
Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of stock shall
not be valid unless approved by the board of directors, while it may
be enforced as a reasonable regulation for the protection of the
corporation against worthless stockholders, cannot be made
available to defeat the rights of third persons. (Farmers' and
Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)
Counsel for defendant incidentally argues in his brief, that the plaintiff does
not have any right of action against the defendant corporation, but against
760
the president and secretary thereof, inasmuch as the signing and registration
of shares is incumbent upon said officers pursuant to section 35 of the
Corporation Law. This contention cannot be sustained now. The question
should have been raised in the lower court. It is too late to raise it now in this
appeal. Besides, as stated above, the corporation was made defendant in
this action upon the demurrer of the attorney of the original defendant in the
lower court, who contended that the Botica Nolasco, Inc., should be made
the party defendant in this action. Accordingly, upon order of the court, the
complaint was amended and the said corporation was made the party
defendant.

Whenever a corporation refuses to transfer and register stock in cases like

the present, mandamus will lie to compel the officers of the corporation to
transfer said stock upon the books of the corporation. (26 Cyc. 347;
Hager vs. Bryan, 19 Phil., 138.)

In view of all the foregoing, we are of the opinion, and so hold, that the
decision of the lower court is in accordance with law and should be and is
hereby affirmed, with costs. So ordered.

Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.

761
 thereon. In this respect it is hereby held that there has been no such
contract, either express or implied, between the plaintiff and the defendants.

3. ID.; NON-EXISTENT OR IMAGINARY OBLIGATION. In the absence of

a similar contractual obligation and a legal provision applicable thereto, it is
logical to conclude that it would be unjust and unreasonable to compel the
said defendants to comply with a non- existent or imaginary obligation.
Whereupon, the judgment originally rendered to that effect is untenable and
should be set aside.

DECISION

[G.R. No. 38684. December 21, 1933.]

CYRUS PADGETT, Plaintiff-Appellee, v. BABCOCK & TEMPLETON, INC.,

and W. R. BABCOCK, Defendants-Appellants.
IMPERIAL, J.:
J. F. Boomer for appellant Babcock & Templeton, Inc.

W. R. Babcock in his own behalf.

Vicente Pelaez for Appellee. By resolution approved on November 25, 1933, this court set aside its
decision in this case, which was promulgated on October 13th of the same
SYLLABUS year, and thereby granted a rehearing before the second division. The
defendant W. R. Babcock and his counsel J. F. Boomer, both of whom were
1. SHARES OF CAPITAL STOCK; ILLEGAL RESTRICTION IMPOSED present during the said rehearing again argued the merits of the case.
THEREON. The restriction consisting in the word "nontransferable" Nobody appeared for the plaintiff.
appearing on the twelve (12) certificates, Exhibits F to F-11, is illegal on the
ground that it constitutes an undue limitation of the right of ownership and is The facts of the case have not suffered any change. They remain the same
in restraint of trade. It should, therefore, be eliminated. as those which we stated in the original decision as follows: "The appellee
was an employee of the appellant corporation and rendered services as such
2. ID.; OBLIGATION TO PURCHASE. There is no existing law nor from January 1, 1923, to April 15, 1929. During that period he bought 35
authority in support of the plaintiffs claim to the effect that the defendants are shares thereof at P100 a share at the suggestion of the president of said
obliged to purchase his shares at par value plus the interest demanded corporation. He was also the recipient of 9 shares by way of bonus during

762
Christmas seasons. In this way the said appellee became the owner of 44
shares for which the 12 certificates, Exhibits F to F-11, were issued in his
favor. The word nontransferable appears on each and every one of these
certificates. Before severing his connections with the said corporation, the
appellee proposed to the president that the said corporation buy his 44
shares at par value plus the interest thereon, or that he be authorized to sell
them to other persons. The corporation bought similar shares belonging to
other employees, at par value. Sometime later, the said president offered to
buy the appellees shares first at P85 each and then at P80. The appellee did
not agree thereto."cralaw virtua1aw library
The defendants admit that the 44 shares in question have become the
property of the plaintiff. They likewise grant that under the law the said
appellee has the right to have the restriction" nontransferable" appearing on
the 12 certificates eliminated therefrom. However, they vigorously contend
that there is no existing law nor authority in support of the proposition that
they are bound to redeem or buy said shares at par value. Their admission is
only limited to the proposition that after the restriction appearing thereon is
eliminated, the plaintiff may sell the said shares to anybody, at their market
value or at any price he sees fit.
We have not had the opportunity of hearing the opinion of the counsel for the
plaintiff. We have again studied the laws applicable thereto and have
searched for more authorities on the subject under discussion, but we have
not found anything that bears directly on the question whether or not the
defendants may be compelled, in this case, to buy the shares in question at
par value. However, the opinion seems to be unanimous that a restriction
imposed upon a certificate of shares, similar to the ones under consideration,
is null and void on the ground that it constitutes an unreasonable limitation of
the right of ownership and is in restraint of trade.
"Shares of corporate stock being regarded as property, the owner of such
shares may, as a general rule, dispose of them as he sees fit, unless the
corporation has been dissolved, or unless the right to do so is properly
restricted, or the owners privilege of disposing of his shares has been
hampered by his own action." (14 C. J., sec. 1033, pp. 663, 664.)
"Any restriction on a stockholders right to dispose of his shares must be
construed strictly; and any attempt to restrain a transfer of shares is regarded
as being in restraint of trade, in the absence of a valid lien upon its shares,
and except to the extent that valid restrictive regulations and agreements
exist and are applicable. Subject only to such restrictions, a stockholder
cannot be controlled in or restrained from exercising his right to transfer by
the corporation or its officers or by other stockholders, even though the sale
is to a competitor of the company, or to an insolvent person, or even though
a controlling interest is sold to one purchaser." (Ibid., sec. 1035, pp. 665,
666.)
In the case of Fleischer v. Botica Nolasco Co. (47 Phil., 583), we have
discussed the validity of a clause in the by-laws of the defendant corporation,
which provided that, under the same conditions, the owner of a share of
stock could not sell it to another person except to the defendant corporation.
In deciding the legality and validity of said restriction, we
held:jgc:chanrobles.com.ph
"The only restraint imposed by the Corporation Law upon transfer of shares
is found in section 35 of Act No. 1459, quoted above, as follows: No transfer,
however, shall be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, the number
of the certificate, and the number of shares transferred. This restriction is
necessary in order that the officers of the corporation may know who are the
stockholders, which is essential in conducting elections of officers, in calling
meetings of stockholders, and for other purposes. But any restriction of the
nature of that imposed in the by-law now in question, is ultra vires, violative
of the property rights of shareholders, and in restraint of trade." (Id., p. 592.)
It is obvious, therefore, that the restriction consisting in the word
"nontransferable," appearing on the 12 certificates, Exhibits F to F-11, is
illegal and should be eliminated.
As we have hereinbefore stated, there is no existing law nor authority in
support of the plaintiffs claim to the effect that the defendants are obliged to
buy his shares of stock at par value, plus the interest demanded thereon. In
763
this respect, we hold that there has been no such contract, either express or
implied, between the plaintiff and the defendants. In the absence of a similar
contractual obligation and of a legal provision applicable thereto, it is logical
to conclude that it would be unjust and unreasonable to compel the said
defendants to comply with a non-existent or imaginary obligation.
Whereupon, we are likewise compelled to conclude that the judgment
originally rendered to that effect is untenable and should be set aside.
Wherefore, the judgment appealed from is hereby reversed, and the
restriction consisting in the word "non-transferable" appearing on the 12
certificates of shares of stock, is declared null and void. The defendants
herein are hereby ordered to cancel the certificates in question and to issue
in lieu thereof new ones without any restriction whatsoever, with the costs of
both instances against the said defendants-appellants. So ordered.
Malcolm, Villa-Real, Abad Santos, and Hull, JJ., concur.
G.R. No. L-2808 August 31, 1951
JOSEFA SANTAMARIA, assisted by her husband, FRANCISCO
SANTAMARIA, Jr., plaintiff-appellee,
vs.
THE HONGKONG AND SHANGHAI BANKING CORPORATION and R. W.
TAPLIN, defendants-appellant.
Nicodemus L. Dasig and Sotto and Sotto for plaintiff and appellant.
Quijano, Rosete and Tizon for defendants and appellants.
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Manila
ordering the Hongkong and Shanghai Banking Corporation to pay the plaintiff
the sum of P8,041.20 plus the costs of suit. The case was certified to this
Court of Appeals.
The facts of this case found by the Court of Appeals are as follows:
Sometime in February, 1937, Mrs. Josefa T. Santamaria bought
10,000 shares of the Batangas Minerals, Inc., through the offices of
Woo, Uy-Tioco & Naftaly, a stock brokerage firm and pay therefore
the sum of P8,041.20 as shown by receipt Exh. B. The buyer
received Stock Certificate No. 517, Exh. "F", issued in the name of
Woo, Uy-Tioco & Naftaly and indorsed in bank by this firm.
On March 9, 1937, Mrs. Santamaria placed an order for the
purchase of 10,000 shares of the Crown Mines, Inc. with R.J.
Campos & Co., a brokerage firm, and delivered Certificate No. 517 to
the latter as security therefor with the understanding that said
certificate would be returned to her upon payment of the 10,000
Crown Mines, Inc. shares. Exh. D. is the receipt of the certificate in
question signed by one Mr. Cosculluela, Manager of the R.J.
Campos & Co., Inc. According to certificate Exh. E, R. J. Campos &
Co., Inc. bought for Mrs. Josefa Santamaria 10,000 shares of the
Crown Mines, Inc. at .225 a share, or the total amount of P2,250.
At the time of the delivery of a stock Certificate No. 517 to R.J.
Campos & Co., Inc. this certificate was in the same condition as that
when Mrs. Santamaria received from Woo, Uy-Tioco & Naftaly, with
the sole difference that her name was later written in lead pencil on
the upper right hand corner thereof.
764
Two days later, on March 11, Mrs. Santamaria went to R.J. Campos
& Co., Inc. to pay for her order of 10,000 Crown Mines shares and to
get back Certificate No. 517. Cosculluela then informed her that R.J.
Campos & Co., Inc. was no longer allowed to transact business due
to a prohibition order from Securities and Exchange Commission.
She was also inform that her Stock certificate was in the possession
of the Hongkong and Shanghai Banking Corporation.
Certificate No. 517 came into possession of the Hongkong and
Shanghai Banking Corporation because R.J. Campos & Co., Inc.
had opened an overdraft account with this bank and to this effect it
had executed on April 16, 1936 a document of hypothecation, Exhibit
1, by the term of which R.J. Campos & Co., Inc. pledged to the said
bank "all stocks, shares and securities which I/we may hereafter
come into their possession of my/our account and whether originally
deposited for safe custody only or for any other purpose whatever or
which may hereinafter be deposited by me/us in lieu of or in addition
to the Stocks Shares and Securities now deposited or for any other
purposes whatsoever."
On March 11, 1937, as shown by Exhibit G. Certificate No. 517,
already indorsed by R.J. Campos Co. Inc. to the Hongkong &
Shanghai Banking Corporation, was sent by the latter to the office of
the Batangas Minerals, Inc. with the request that the same be
cancelled and a new certificate be issued in the name of R.W. Taplin
as trustee and nominee of the banking corporation. Robert W. Taplin
was an officer of this institution in charge of the securities belonging
to or claimed by the bank. As per this request the Batangas Minerals,
Inc. on March 12, 1937, issued Certificate No. 715 in lieu of
Certificate No. 517, in the name of Robert W. Taplin as trustee and
nominee of the Hongkong & Shanghai Banking Corporation.
(Exhibits G, H, I, J, 1, 4 and 5.)
According to Mrs. Santamaria, she made the claim to the bank for
her certificate, though she did not remember the exact date, but it
was most likely on the following day of that when she went to
Cosculluela for the purpose of paying her order for 10,000 shares of
the Crown Mines, Inc., or else on March 13, 1937. In her interview
with Taplin, the bank's representative, she informed him that the
certificate belonged to her, and she demanded that it be returned to
her. Taplin then replied that the bank did not know anything about the
transaction had between her and R.J. Campos & Co., Inc., and that
he could not do anything until the case of the bank with Campos
shall have been terminated. This declaration was not contradicted by
the adverse party.
"In Civil Case No. 51224, R.J. Campos & Co., Inc. was declared
insolvent, and on July 12, 1937, the Hongkong & Shanghai Banking
Corporation asked permission in the insolvency court to sell the R.J.
Campos & Co., Inc., securities listed in its motion by virtue of the
document of hypothecation Exhibit 1. In an order dated July 15,
1937, the insolvency court granted this motion.
"On June 3, 1938, to 10,000 shares of Batangas Minerals, Inc.
represented by Certificate No. 715, were sold to the same bank by
the Sheriff for P300 at the foreclosure sale authorized by said order.
(Exhibits F, 2 and 3.)
R.J. Campos, the president of R.J. Campos & Co., Inc., was
prosecuted for estafa and found guilty of this crime and was
sentenced by the Manila Court of First Instance in Criminal Case No.
54428, to an imprisonment and to indemnify the offended party, Mrs.
Josefa Santamaria, in the amount of P8,041.20 representing the
value of the 10,000 shares of Batangas Minerals, Inc. (Exhibits I and
J.) The decision was later confirmed by the Court of Appeals.
(Exhibits J.) The offended party and R. W. Taplin were among the
witnesses for the prosecution in this criminal case No. 54428.
(Exhibits 4.).
When Mrs. Santamaria failed in her efforts to force the civil judgment
rendered in her favor in the criminal case because the accused
became insolvent, she filed her complaint in this case on October 11,
1940. At the trial both parties agreed that the 10,000 Batangas
765
 Minerals shares formerly represented by Certificate No. 517 and
thereafter by Certificate No. 715, have no actual market value.
The errors assigned by the defendants-appellants as committed by the lower
court are:
I the person or firm appearing on its face as the owner thereof. The defendant
The trial court erred in finding that the plaintiff-appellee was not
chargeable with negligence in the transaction which gave rise to this
case.
II
The trial court erred in holding that it was the obligation of the bank
to have inquired into the ownership of the certificate when it received
it from R.J. Campos & Company and in concluding that the bank was
negligent for not having done so.
III
The trial court erred on ordering defendants-appellants to pay to
plaintiff the sum of P8,041.20.
1. Defendants-appellants contend in the first place that the trial court erred in
finding that the plaintiff-appellee was not chargeable with negligence in the
transaction which gave rise to this case.
A careful analysis of the facts seems to justify this contention. Certificate of
stock No. 517 was made out in the name of Wo, Uy-Tioco & Naftaly, brokers,
and was duly indorsed in bank by said brokers. This certificate of stock was
delivered by plaintiff to R.J. Campos & Co., Inc. to comply with a requirement
that she deposit something on account if she wanted to buy 10,000 shares of
Crown Mines Inc. In making said deposit, plaintiff did not take any precaution
to protect herself against the possible misuse of the shares represented by
the certificate of stock. Plaintiff could have asked the corporation that had
issued said certificate to cancel it and issue another in lieu thereof in her
name to apprise the holder that she was the owner of said certificate. This
she failed to do, and instead she delivered said certificate, as it was, to R.J.
Campos & Co., Inc., thereby clothing the latter with apparent title to the
shares represented by said certificate including apparent authority to
negotiate it by delivering it to said company while it was indorsed in blank by
Bank had no knowledge of the circumstances under which the certificate of
stock was delivered to R.J. Campos & Co., Inc., and had a perfect right to
assume that R.J. Campos & Co., Inc. was lawfully in possession of the
certificate in view of the fact that it was a street certificate, and was in such
form as would entitle any possessor thereof to a transfer of the stock on the
books of the corporation concerned. There is no question that, in this case,
plaintiff made the negotiation of the certificate of stock to other parties
possible and the confidence she placed in R.J. Campos & Co., Inc. made the
wrong done possible. This was the proximate cause of the damage suffered
by her. She is, therefore, estopped from claiming further title to or interest
therein as against a bona fide pledge or transferee thereof, for it is a well-
known rule that a bona fide pledgee or transferee of a stock from the
apparent owner is not chargeable with knowledge of the limitations placed on
it by the real owner, or of any secret agreement relating to the use which
might be made of the stock by the holder (Fletcher, Cyclopedia of
Corporations, section 5562, Vol. 12, p. 521).
On the other hand, it appears that this certificate of stock, indorsed as it was
in blank by Woo, Uy-Tioco & Naftaly, stock brokers, was delivered to The
Hongkong and Shanghai Banking Corporation by R.J. Campos & Co., Inc.,
duly indorsed by the latter, pursuant to a letter of hypothecation executed by
R.J. Campos & Co., Inc., in favor of said Bank (Exhibit "1"). The said
certificate was delivered to the Bank in the ordinary course of business,
together with many other securities, and at the time it was delivered, the
Bank had no Knowledge that the shares represented by the certificate
belonged to the plaintiff for, as already said, it was in the form of street
certificate which was transferable by mere delivery. The rule is "where one of
two innocent parties must suffer by reason of a wrongful or unauthorized act,
the loss must fall on the one who first trusted the wrong doer and put in his
766
hands the means of inflicting such loss" (Fletcher Cyclopedia of
Corporations, supra).
It is therefore clear that plaintiff, in failing to take the necessary precautions
upon delivering the certificate of stock to her broker, was chargeable with
negligence in the transaction which resulted to her own prejudice, and as
such, she is estopped from asserting title to it as against the defendant Bank.
2. The next contention of the defendant is that the trial court erred in holding
that it was the obligation of the defendant Bank to have inquired into the
ownership of the certificate when it received it from R.J. Campos & Co., Inc.
and in concluding that the Bank was negligent for not having done so,
contrary to the claim of the plaintiff that defendant Bank acted negligently, if
not in bad faith, in accepting delivery of said certificate from RJ. Campos &
Co., Inc.
Let us now see the material facts on this point. Certificate No. 517 came into
the possession of the defendant Bank because R.J. Campos & Co., Inc. had
opened an overdraft account with said Bank and to this effect it had executed
on April 16, 1946, a letter of hypothecation by the terms of which R.J.
Campos & Co., Inc. pledged to the said Bank "all Stocks, Shares and
Securities which I/we may hereafter come into their possession on my/our
account and whether originally deposited for safe custody only or for any
other purpose whatever or which may hereafter be deposited by me/us in lieu
of or in addition to the Stocks, Shares, and Securities now deposited or for
any other purpose whatsoever." On March 13, 1937, plaintiff went to the
office of the Bank to claim for her certificate. In her interview with one Robert
W. Taplin, the officer in charge of the securities of that institution, she
informed him that the certificate belonged to her and she demanded that it be
returned to her. Taplin then replied that the Bank did not know anything about
the transaction had between her and that he could not do anything until the
case of the Bank with R.J. Campos & Co., Inc. had been terminated. It
further appears that when the certificate of stock was delivered by plaintiff to
R.J. Campos & Co., Inc., the manager thereof, Sebastian Cosculluela, wrote
in pencil on the right margin the name of Josefa T. Santamaria, pursuant to
the practice followed by said firm to write on that part of the certificate the
name of the owner for purposes of identification. Upon the facts thus stated,
the question that asserts itself is: was the defendants Bank obligated to
inquire who was the real owner of the shares represented by the certificate of
stock, and could it be charged with negligence for having failed to do so?
It should be noted that the certificate of stock in question was issued in the
name of the brokerage firm-Woo, Uy-Tioco & Naftaly and that it was duly
indorsed in blank by said firm, and that said indorsement was guaranteed by
R.J. Campos & Co., Inc., which in turn indorsed it in blank. This certificate is
what it is known as street certificate. Upon its face, the holder was entitled to
demand its transfer into his name from the issuing corporation. The Bank
was not obligated to look beyond the certificate to ascertain the ownership of
the stock at the time it received the same from R.J. Campos & Co., Inc., for it
was given to the Bank pursuant to their letter of hypothecation. Even if said
certificate had been in the name of the plaintiff but indorsed in blank, the
Bank would still have been justified in believing that R.J. Campos & Co., Inc.
had title thereto for the reason that it is a well-known practice that a
certificate of stock, indorsed in blank, is deemed quasi negotiable, and as
such the transferee thereof is justified in believing that it belongs to the
holder and transferor (Heyman vs. Hamilton National Bank, 266 S.W. 1043;
Fletcher, Cyclopedia of Corporations, Vol. 12, pp. 521-524, 525-527;
McNeil vs. Tenth National Bank, 7 Am. Rep. 341).
The only evidence in the record to show that the certificate of stock in
question may not have belonged to R.J. Campos & Co., Inc. is the testimony
of the plaintiff to the effect that she had approached Robert W. Taplin on
March 13, 1937, and informed him that she was the true owner of said
certificate and demanded the return thereof, or its value, but even assuming
for the sake of argument that what plaintiff has stated is true, such an
incident would merely show that plaintiff has an adverse claim to the
ownership of said certificate of stock, but that would not necessarily place the
Bank in the position to inquire as to the real basis of her claim, nor would it
place the Bank in the obligation to recognize her claim and return to her the
certificate outright. A mere claim and of ownership does not establish the fact
of ownership. The right of the plaintiff in such a case would be against the
transferor. In fact, this is the attitude plaintiff has adopted when she filed a
charge for estafa against Rafael J. Campos, which culminated in his
prosecution and conviction, and it is only when she found him to be insolvent
767
that she decided to go against the Bank. The fact that on the right margin of
the said certificate the name of the plaintiff appeared written, granting it to be
true, can not be considered sufficient reason to indicate that its owner was
the plaintiff considering that said certificate was indorsed in blank by her
brokers Woo, Uy-Tioco & Naftaly, was guaranteed by indorsement in blank
by R.J. Campos & Co., Inc., and was transferred in due course by the latter
to the Bank under their letter of hypothecation. Said indicium could at best
give the impression that the plaintiff was the original holder of the certificate.

The Court has noticed that the defendant Bank was willing from the very
beginning to compromise this case by delivering to the plaintiff certificate of
stock No. 715 that was issued to said Bank by the issuer corporation in lieu
of the original as alleged and prayed for in its amended answer to the
complaint dated April 2, 1941. Considering that in the light of the law and G.R. No. L-4818 February 28, 1955
precedents applicable in this case, the most that plaintiff could claim is the
return to her of the said certificate of stock (Howson vs. Mechanics Sav. APOLINARIO G. DE LOS SANTOS and ISABELO
Bank, 183 Atl., p. 697), the Court, regardless of the conclusions arrived at as ASTRAQUILLO, plaintiffs-appellees,
above stated, is inclined to grant the formal tender made by the defendant to vs.
the plaintiff of said certificate. J. HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED STATES,
SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY ADMINISTRATION
Wherefore, the decision of the lower court is hereby modified in the sense of OF THE UNITED STATES, defendant-appellant.
ordering the defendant to deliver to the plaintiff certificate of stock No. 715, REPUBLIC OF THE PHILIPPINES, intervenor-appellant.
without pronouncement as to costs.
Jose P. Laurel, Adolfo A. Scheerer, Antonio Quirino, and J. C. Orendain, for
Paras, C.J., Feria, Bengzon and Jugo, JJ., concur. appellees.
Padilla, J., concurs in the result. Harold I. Baynton, Stanley Gilbert, Juan T. Santos, and Lino M. Patajo, and
Perkins, Ponce Enrile & Associates, for appellant.
Office of the Solicitor General Pompeyo Diaz and Solicitor Pacifico P. de
Castro for intervenor-appellant.

CONCEPCION, J.:

This action involves the title to 1,600,000 shares of stock of the Lepanto
Consolidated Mining Co., Inc., a corporation duly organized and existing
under the laws of the Philippines, hereinafter referred to, for the sake of
brevity, as the Lepanto. Originally, one-half of said shares of stock were

768
claimed by plaintiff, Apolinario de los Santos, and the other half, by his co-
plaintiff Isabelo Astraquillo. During the pendency of this case, the latter has
allegedly conveyed and assigned his interest in and to said half claimed by
him to the former. The shares of stock in question are covered by several
stock certificates issued in favor of Vicente Madrigal, who is registered in the
books of the Lepanto as owner of said stocks and whose indorsement in
blank appears on the back of said certificates, all of which, except certificates
No. 2279 marked Exhibit 2 covering 55,000 shares, are in plaintiffs'
possession. So was said Exhibit 2, up to sometime in 1945 or 1946 when
said possession was lost under the conditions set forth in subsequent pages.
Briefly stated, plaintiffs contend that De los Santos bought 55,000 shares
from Juan Campos, in Manila, early in December, 1942; that he bought
300,000 shares from Carl Hess, in the same city, several days later; and that,
before Christmas of 1942, be bought 800,000 shares from Carl Hess, this
time for the account and benefit of Astraquillo. By virtue of vesting P-12,
dated February 18, 1945, title to the 1,600,000 shares of stock in dispute
was, however, vested in the Alien Property Custodian of the U. S.
(hereinafter referred to as the Property Custodian) as Japanese property.
Hence, plaintiffs filed their respective claims with the Property Custodian. In
due course, the Vested Property Claims Committee of the Philippine Alien
Property Administration made a "determination," dated March 9, 1948,
allowing said claims, which were considered and heard jointly as Claim No.
535, but, upon personal review, the Philippine Alien Property Administration
made by said Committee and decreed that "title to the shares in question
shall remain in the name of the Philippine Alien Property Administrator."
Consequently, plaintiffs instituted the present action to establish title to the
aforementioned shares of stock. In their complaint, they pray that judgment
be rendered declaring them lawful owners of said shares of stock, with such
dividends, profits and rights as may have accrued thereto; requiring the
defendant to render accounts and to transfer said shares of stock to plaintiffs'
names; and sentencing the former to pay the costs.
The defendant herein is the Attorney General of the U. S., successor to the
"Administrator". He contends, substantially, that, prior to the outbreak of the
war in the Pacific, said shares of stock were bought by Vicente Madrigal, in
trust for, and for the benefit of, the Mitsui Bussan Kaisha (hereinafter referred
to as the "Mitsuis"), a corporation organized in accordance with the laws of
Japan, the true owner thereof, with branch office in the Philippines; that on or
before March, 1942, Madrigal delivered the corresponding stock certificates,
with his blank indorsement thereon, to the Mitsuis, which kept said
certificates, in the files of its office in Manila, until the liberation of the latter by
the American forces early in 1945; that the Mitsuis had never sold, or
otherwise disposed of, said shares of stock; and that the stock certificates
aforementioned must have been stolen or looted, therefore, during the
emergency resulting from said liberation.
Inasmuch as, pursuant to the Philippine Property Act, all property vested in
the United States, or any of its officials, under the Trading with the Enemy
Act, as amended, located in the Philippines at the time of such vesting, or the
proceeds thereof, shall be transferred to the Republic of the Philippines, the
latter sought permission, and was allowed, to intervene in this case and filed
an answer adopting in substance the theory of the defendant.
After due hearing, the Court of First Instance of Manila, presided over by
Honorable Higinio B. Macadaeg, Judge, rendered a decision the dispositive
part of which reads, as follows:
In view of the foregoing consideration, judgment is hereby rendered
in favor of the plaintiffs and against the defendant, declaring the
former the absolute owners of the shares of stock of the Lepanto
consolidated Mining Company, covered by the certificates of stock,
respectively, in their (plaintiffs') possession. The transfer of said
shares of stock in favor of the Alien Property Custodian of the U. S.
of America, now Philippine Alien Property Administration, is hereby
declared null and void and of no effect. Consequently, the Lepanto
consolidated mining Company is ordered to cancel the certificates of
stock issued in the name of the Philippine Alien Property Custodian
or Philippine Alien Property Administrator, as the case may be.
Defendant shall pay the cost of the proceeding. (p. 67, R.A.)
The defendant and the intervenor have appealed from this decision. The
main question for determination in this appeal is whether or not plaintiffs had
769
purchased the shares of stock in question. In support of the negative answer,
appellants have introduced the testimony of Vicente Madrigal, Matsune
Kitajima, Kingy Miwa, Miguel Simon, E. A. Perkins and Victor E. Lednicky, as
well as several pieces of documentary evidence.
Mr. Madrigal, whose testimony before the claims Committee of the Philippine
Alien Property Administration was admitted with plaintiffs' consent, stated that
he purchased the shares of stock in question, among others, for the Mitsuis
and at their request; that he paid with his own funds the corresponding price,
which was later reimbursed to him by the Mitsuis; that he held the
corresponding stock certificates, which were issued in his name, with the
understanding that he would effect the necessary transfer, to the Mitsuis,
upon demand; and that, shortly before the outbreak of war, he delivered said
stock certificates, with his blank endorsement thereon, to the Mitsuis, to
whom said stock belonged.
Matsune Kitajima declared that in June 1941 he relieved one Kobayashi, as
manager of the branch office of the Mitsuis in Manila; that he then receive
from Kobayashi the stock certificates for about 1,900,000 shares of the
Lepanto, belonging to the Mitsuis, but issued in favor of the Vicente Madrigal,
except the certificates for 200,000 shares, which were in the name of the
Mitsuis; that all these certificates were in kept in a steel safe in said office of
the Mitsuis; that, in July 1941, he returned the stock certificates to Madrigal,
with the request that he buy for the Mitsuis, from time to time, some more
shares of stock, in small lots; that Madrigal bought 200,000 additional shares
of the Lepanto for the Mitsuis; that, late in November or early in December,
1941, the stock certificates of the aforementioned 2,100,000 shares were
returned to the Mitsuis, which had decided to stop buying, in view of the
strained international situation then prevailing; that, as branch manager of
the Mitsuis, he was the only official authorized to dispose of the shares in
question, none of which was alienated by him; and that he had the
aforementioned stock certificates in his possession continuously until early in
April 1943, when he delivered the same to his successor in office, Kingy
Miwa.
Apart from corroborating Kitajima's testimony relative to said delivery of stock
certificates in April 1943, Kingy Miwa testified that he kept the latter in his
possession, as branch manager of the Mitsuis; that said shares of stock were
never sold or otherwise disposed of by the Mitsuis; that, late in September
1944, he bade his assistant, one Miyazawa, to transfer all important
documents to their residence and headquarters, at Taft Avenue, Manila,
although he did not know personally whether or not the transfer was actually
carried out; and that in January 1945, when the Japanese were about to
evacuate Manila, he told his Assistant Manager, one Shinoda, to burn all
important papers before leaving the city.
Miguel Simon, brother of Carl Hess, from whom plaintiffs claim to have
purchased 1,100,000 shares of stock, affirmed that Hess lived in front of his
(Simon's) house; that they were close to each other and had long been
associated in business; that he was the office manager of "Hess and Zeitling"
before the war; that Hess used to tell him his daily transactions during the
occupation; that at that time, Hess did not have in possession any certificates
of stock of the Lepanto in the name of Vicente Madrigal; that neither did
Hess, during that period, operate as broker, for being American, he was
under Japanese surveillance, and that Hess had made, during the
occupation, no transaction involving mining shares, except when he sold
12,000 shares of the Benguet Consolidated, inherited from his mother,
sometime in 1943.
E. A. Perkins, a member of the law firm DeWitt, Perkins & Ponce Enrile
testified substantially as follows: On October 27, 1945, Leonardo Recio
brought stock certificate no. 2279 (Exhibit 2) and offered the same for sale to
Clyde DeWitt, who in turn, asked Perkins, whose room adjoined that of
DeWitt, to join them. Recio showed Exhibit 2 to DeWitt stating that he (Recio)
wanted P0.13 per share. DeWitt handed Exhibit 2 over to Perkins, who, after
examining the instrument, returned it to DeWitt. The latter, thereafter,
checked it with a communication of the Property Custodian and then advised
Recio that said Exhibit 2 was one of the stock certificates looted from the
Mitsuis and that he (DeWitt) would have to report the matter to said official.
As DeWitt, thereupon, telephoned one Mr. Erickson, of the Property
Custodian's office, Recio stepped out of the room without Exhibit 2, which
neither he or plaintiffs had ever tried to recover.
770
Victor E. Lednicky, one of the organizers and prewar directors of the Lepanto,
and present vice-president and member of its board of director, asserted that,
having learned from a soldier of the existence of mining papers and
securities of the Lepanto in the offices of the Mitsuis at the Ayala Building,
formerly known as the National city Bank Building in Manila, he went thereto
in February 1945 and saw many documents scattered on the desks and floor
of said premises. Among said papers, he noticed two stock certificates of the
Lepanto, one, in the name of either a Japanese or Chinese, and the other, in
the name of Vicente Madrigal, endorsed in blank. Soon, however, he heard
voices from the stairs, whereupon he departed hurriedly, for fear of being
mistaken for a looter.
After analyzing the foregoing evidence for the defense, the lower court found
the same "inherently improbable" and seemingly concluded that, as a
consequence, it should accept plaintiffs' version, for which reason judgment
was rendered as above stated. It is well settled, in this jurisdiction, that the
findings of fact particularly those relating to the credibility of the opposing
witnesses made by the Judge a quo, should not be disturbed on appeal, in
the absence of strong and cogent reasons therefor. This policy is predicated
upon the circumstance that the trial court has had an opportunity, denied to
the appellate court to observe the behaviour of the witnesses during the
hearing, a potent factor in gauging their bias and veracity. In the case at bar,
however, we notice that, rejecting the theory of the defense, the court of
origin was guided, not by the conduct of the witnesses in the name course of
their testimony, but by what His Honor, the trial Judge, regarded as the
inherent weakness thereof, in the evaluation of which court does not enjoy
the advantage already adverted to.
Moreover, the decision appealed from appears to have assumed that
plaintiffs' pretense must necessarily be relied upon, owing to the infirmities
said to have been found in the theory of the defense. This view suffers from a
fatal defect. It overlooks that fact that the burden of proof is upon the
plaintiffs, and that, accordingly, a decision in their favor is not in order unless
a preponderance of the evidence supports their claim. To put it differently, the
alleged improbabilities in the testimony of the witnesses for the defense will
not justify a judgment against the latter, if the evidence for the plaintiffs is
more improbable than, or, at least, as improbable as, that of the defense.
Such is the situation obtaining in the case at bar. Indeed, upon careful
examination of the record before us, we find it impossible to share the
conclusions, made in the decision appealed from, relative to the alleged
flaws in the version of the defense.
Let us, first, examine the evidence for the plaintiffs, consisting, mainly, of their
own testimony and that of Primitivo Javier and Leonardo Recio.
According to De los Santos, on or about December 8, 1942, he purchased
from Juan Campos, in Manila, 500,000 shares of stock of the Lepanto, for
the aggregate sum of P30,000.00, or about P0.06 each share, paid in cash,
in exchange for the corresponding stock certificates, which were delivered to
him. Several days later, he bought from Carl Hess, in Manila, 300,000 shares
of the Lepanto, at the same rate. Soon after, he visited his daughter in
Baguio, where he, likewise, saw his co-plaintiff, and former secretary, Isabelo
Astraquillo. Before leaving Astraquillo's house, De los Santos happened to
mention his aforesaid purchases of Lepanto shares, at P0.06 each,
whereupon, Astraquillo expressed the wish to buy 800,000 shares at the
same price, the amount of which he delivered to De los Santos the next day.
Upon his return to Manila, De los Santos purchased from Hess said 800,000
shares, the certificates of which were turned over by the former to Astraquillo,
in Baguio, at about Christmas time. Over 3 years later, or in January 1946,
De los Santos repaired to the offices of the Lepanto in Manila to ascertain
whether it accepted certificates of stock for registration. He then received a
negative answer. Upon further inquiry, he learned, in February 1946, that the
shares in the name of Madrigal were blocked. So engaged the services of
Atty. A. Scheerer, who secured an order of release from the Freezing Control
Office of the United States Treasury Department. As he brought a copy of
this order to the offices of the Lepanto, on or about May 1, 1946, he was
advised that no transfer could be affected without the authority of Clyde
DeWitt, the company president. Thereupon, De los Santos caused to be
filed, with the offices of the Property Custodian, the corresponding claim for
the shares of stock in question, with the result already adverted to.
Astraquillo tried to corroborate the testimony of De los Santos, concerning
the purchase of 800,000 shares of stock on behalf of the former. Moreover,
Astraquillo declared that, being in need of money, he came to Manila in
771
November or December 1945, and delivered to stock broker Leonardo Recio
stock certificate No. 2279 (Exhibit 2) for 55,000 shares, with a view to
disposing of the same at a price ranging from P0.13 to P0.15 each. He
advised Recio that, in the absence of any buyer, hew could see Mr. DeWitt,
who, probably, would be interested in purchasing the shares. Sometime later,
Astraquillo learned that, according to Recio, upon seeing Exhibit 2, DeWitt
retained it upon the ground that the shares represented therein had been
blocked by the United States and that he (Recio) got therefor a receipt,
which was subsequently lost in a fire that destroyed his (Recio's) dwelling. As
Astraquillo hurried to Manila, he was told that representatives of the CIC
would go to Baguio to investigate. So, he returned to Baguio, but he did not
wait for the investigation in that city. Late in February or early in March, 1946,
he came back to Manila and asked the assistance of De los Santos,
whereupon both contacted Atty. Scheerer for the purpose already stated.
Primitivo Javier narrated that, late in 1945, he received Exhibit 2 from his
uncle, Astraquillo, who wanted to sell the 55,000 shares represented by said
stock certificate (No. 2279) at a price ranging from P0.12 to P0.15 each
share. He, in turn, delivered the certificate to Recio, a licensed broker.
Subsequently, Recio reported to him that he (Recio) had brought Exhibit 2 to
the office of Mr. DeWitt, whom he did not see on his first visit; that he then left
Exhibit 2 in the hands of a person who worked in said office, one Atty. Orlina,
who issued a receipt therefor; that, when Recio came back, later on, DeWitt
told him that Exhibit 2 was defective; and that, accordingly, Exhibit 2 was left
in the possession of Mr. DeWitt. Javier relayed this information to Astraquillo,
who, thereupon, came to Manila. Both went to the temporary residence of
Recio in Sampaloc, his house in San Juan del Monte, Rizal, having been
destroyed by fire late in December 1945. Recio then advised them that said
receipt had been burned with his house.
Leonardo Recio said that sometime in 1945, Javier gave him Exhibit 2,
stating that it belonged to his uncle, who wanted to alienate the
corresponding shares of stock at P0.15, more or less, each, and suggesting
that he offer the same to Mr. DeWitt: In the latter's office, Atty. Orlina told
Recio that DeWitt was busy and bade him (Recio) to return later. Recio
delivered Exhibit 2 to Orlina, who gave him a receipt, which, subsequently,
he showed to Javier. When, soon after, he went back to Orlina, the latter
introduced him to Mr. DeWitt, who stated that the shares of stock covered by
Exhibit 2 were included in the list of questioned shares. DeWitt, also, asked
him whether he would leave the certificate, to which Recio replied
affirmatively. While he was away, several months later, or shortly before
Christmas, his house at Blumentrit Street, San Juan del Monte, Rizal, and
everything contained therein, including the aforementioned receipt, which
was in his wallet, were destroyed by fire.
It thus appears that the only evidence on the alleged sale of the shares of
stock in question to the plaintiffs the main issue in the case at bar is the
testimony of Apolinario de los Santos, who now claims to be the sole owner
thereof. Juan Campos and Carl Hess, the alleged vendors, could not take the
witness stand, for Hess was executed by the Japanese, and Campos died
during the liberation of Manila. Thus, death has sealed the lips of the only
persons who could have positively corroborated or contradicted the
aforementioned testimony of De los Santos. Was this a mere accident of fate,
as plaintiffs would have us believe? Or were Campos and Hess named by
the plaintiffs as their immediate predecessors in interest precisely because,
as contended by appellants, said deceased persons could no longer said
testimony?
For obvious reasons, the Court can not answer these questions with absolute
certainty. It can only explore the possibilities and probabilities of the case, in
the light of human experience. And, viewed from this angle, it can not be
denied that the demise of Campos and Hess before the filing of plaintiffs
claim seriously impairs the weight thereof. That the Grim Reaper had chosen
to strike at one of the alleged predecessors of the plaintiffs is a matter that
may be attributed to sheer fortuitousness. When, as in the case at bar, not
one, but both have thus been eliminated,, it is clear, however, that this
circumstances is most unusual, and most place the Court on guard.
The need for caution becomes more imperative when we bear in mind that
an important piece of documentary evidence, which allegedly existed after
liberation, and could have effectively corroborated one phase of the plaintiff's
contention, had, according to their evidence, disappeared through still
another unfortunate turn of the wheel of fate. It will be recalled that late in
1945, Leonardo Recio, allegedly acting on behalf of Astraquillo, offered to
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sell to Atty. DeWitt the 55,000 shares represented by stock certificate No.
2279 (Exhibit 2). Recio testified that, having been unable to see DeWitt,
when he (Recio) went to the latter's office, for the first time, said Exhibit 2
was left by him (Recio) in the hands of Atty. Orlina who worked therein and
gave him a receipt therefor. This receipt, if produced, would have surely
afforded us tangible proof of the veracity of, at least this part of plaintiffs'
story. Yet, we are now told that, one day in December, 1945, Recio's
house accidentally caught fire, and that the latter consumed, also, said
receipt, kept in a wallet, which, by accident, he had failed to bring with him.
Aren't there too many accidents in plaintiffs' version? At any rate, we have
thus been deprived of all means to check with reasonable certainty the truth
of any of the controverted portions of their pretense. In other words, the
same is based, and must stand or fall, therefore, upon the uncorroborated
testimony of plaintiff Apolinario de los Santos, and the credence and weight
that may be given thereto. Upon a review of the record, we find, however,
that said testimony is highly improbable and inherently weak, for, among
other things:
(1) De los Santos declared that, in December, 1942, he purchased 300,000
shares from Juan Campos and 1,300,000 shares from Carl Hess, at P0.06
each share. As an enterprise controlled by Americans, the Lepanto had been
seized by the Japanese who, accordingly, were operating it. At that time,
there were no clear, or, even, substantial, indications that changes would
take place, either in the local or in the international situation in the near of
foreseeable future. In deed, the morale of the population in democratic
countries, particularly in the Philippines, was then at its lowest ebb. Both in
Europe and in the Pacific, the Axis powers had reached in enemy territories
the highest degree of penetration attained during the last war. Before the
world had recovered from the shock produced by the German blitzkrieg
operations in the low countries and in France, the Nazis were already
knocking at the gates of Stalingrad entrenched in New Guinea and the
Soloman Islands. The people had a hazy notion about the facts pertinent to
the Battle of Midway (June 3-6, 1942) and the implications thereof were by
and large unknown. In other words, the conditions were such as to warrant
the general belief that the Lepanto would remain under the authority and
management of the Japanese Imperial forces for an indefinite period of time.
As a consequence, the Lepanto stock had not merely a doubtful value, but
as admitted by Santos even, no market value at all (p. 132, t.s.n). Indeed,
the stockholders could neither collect dividends nor exercise their voting
power, or otherwise participate in the operation of the enterprise. Moreover,
there was a possibility of its assets being fully confiscated, for all practical
purposes, should Japan emerge victorious in the was in the Pacific, which it
appeared to be winning easily up to that time (December, 1942).
(2) Inasmuch as citizens of the United States held a majority of the shares of
stock of the Lepanto, the same had from the view point of the Japanese, an
enemy character, and the purchase of said stocks was, therefore, a hostile
act. As a matter of fact, in the proceedings before the Vested Property Claims
Committee, the parties including plaintiffs herein had stipulated "that
such transfers and dealings in said stock were prohibited by the Japanese
during the occupation and hence were dangerous." (Record on Appeal, p.
110). Said transactions could jeopardize the life of the parties thereto and De
los Santos was aware of the "highly dangerous" or "very risky" nature of the
"mere possession" of the stock certificates in question. (pp. 141, 143, t. s. n.)
(3) Astraquillo is merely a former employee of De los Santos, who had,
therefore, no reason to risk his neck, not only by allegedly buying 800,000
shares of stock for Astraquillo, but, also, by avowedly bringing with him (De
los Santos) the corresponding stock certificates from Manila to Baguio, to
make delivery thereof to Astraquillo, as the defense would have us believe,
notwithstanding the many Japanese check points in the 250 kilometers
highway connecting both cities and the absence of any monetary or other
gain he could have derived from the acts he professes to have performed.
(4) According to the Ballantyne schedule the accuracy of which has not
been impugned by plaintiffs herein the Japanese war notes in the
Philippines had the same exchange of purchase value as the currency of our
legitimate government, in December, 1942 and this was conceded by De
los Santos (p. 136, t. s. n.) when they claim to have purchased the
Lepanto stocks. The P48,000 supposedly paid by the De los Santos, and the
identical sum allegedly disbursed by Astraquillo, for their respective stock,
represented, therefore, the same amount in legal tender of the
Commonwealth of the Philippines. In fact, according to the evidence for the
plaintiffs, part of the price allegedly paid by Astraquillo, or P6,000, were in the
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genuine Philippine money, representing his savings for 25 years. Said sum of
P6,000 being insufficient to cover the cost of 800,000 shares of stock,
Astraquillo, it is urged, alienated other properties to raise the amount
necessary thereof. It is very difficult to believe that the plaintiffs would have
parted with P48,000 each precisely when, owing to the abnormal
conditions brought about by the occupation, said funds might be needed, at
any time, to meet unforeseen emergencies of the gravest and most vital
nature for shares of stock of dubious value then and in the foreseeable
future.
(5) We are not satisfied that either De los Santos or Astraquillo possessed
enough resources to have P48,000, in cash, each, in December 1942. Their
evidence on this point is too general apart from being based exclusively
upon their respective oral testimonies, which are absolutely uncorroborated
to support their contention. At any rate, De los Santos admitted that he is
"not yet" rich (p. 134, t. s. n.), and his testimony suggests that he did not
even own the house in which he lived.
(6) Campos offered to sell his stocks, according to De los Santos, at P0.06
each (although its par value was P0.10), stating that "he (Campos) needed
money" (p. 43, t.s.n.), and advised him that Hess was, also, willing to dispose
of his own stocks at the same price. Being, accordingly, aware that Campos
and Hess were in need of money and considering the risks attending the
transaction, it is but logical to expect De los Santos, an experienced trader in
stocks, to bargain for a lower price. Yet, the evidence for the plaintiffs shows
that neither he nor Astraquillo tried to do so, contrary to the normal course of
events.
(7) De los Santos could not have purchased 1,300,000 shares of stock, from
Hess, and received from him the corresponding stock certificates, endorsed
in blank by Vicente Madrigal, for Hess had never had such stock certificates
in his possession during the occupation. There is no plausible reason to
doubt the veracity of the testimony of Miguel Simon to this effect, for the
latter had no possible motive to commit perjury, and was in a position to
know what he was talking about. Apart from being a brother-in-law of Hess,
Simon was manager of the firm Hess & Zeitling, of which Hess was the
senior partner, who used to inform him (Simon) of his (Hess) business
transactions.
(8) Campos and Hess could not have delivered the stock certificates for the
1,600,000 shares of stock in question, and, consequently, said shares of
stock could not have been sold by them, to De los Santos in December 1942,
inasmuch as from December 1941 to April 1943, said stock certificates were
continuously in the custody of Matsume Kitajima, manager of the Mitsuis in
Manila, whose testimony was corroborated by his successor in office, Kingy
Miwa, to whom Kitajima turned over the stock certificates in April 1943. The
sincerity of Matsume Kitajima and Kingy Miwa can not doubted, for neither
appears to have any possible reason to trifle with the facts. Indeed, their
testimony, if accepted as true, would ultimately result in the confiscation, by
the Republic of the Philippines, of the shares of stock in question and, thus,
place the same beyond the reach of the Mitsuis.
It has been intimated that Kitajima and Kingy may have testified as they did,
either to protect themselves, because they might have disposed of the
shares of stock in question for their personal benefit, or because there had
been undue influence or pressure from the authorities presumably officers
of the government of the United States. But these are mere speculations,
without sufficient basis. Besides, judicial notice may be taken of the
circumstance that, during the occupation, even minor Japanese officials
could easily make money, in the Japanese properties. Again, in December,
1942, the Japanese in the Philippines appeared to have no doubts that, in
effect, Japan had already won the war. In short, Kitajima and Kingy must
have thought that, sooner or later, Japan would own the Lepanto and that,
therefore, they would have to account for the shares of stock under
774
consideration. Consequently, it is most unlikely that neither would have
misappropriated said shares of stock as suggested by the plaintiffs.
The benefits which the Mitsuis and Japan may derive from a decision against
the plaintiffs inasmuch as the value of the shares of stock in question
would then be credited in payment of the reparation which may be demanded
by the Philippines and/or the United States has been pointed out, in the
dissenting opinion, as a possible motive for the commission of perjury by
Kitajima and Kingy. Besides being purely conjectural in nature, this line of
thought which not even the plaintiffs have taken would have no leg to
stand on, unless we assume that the Mitsuis had sold or otherwise disposed
of said stocks during the year 1942, but before the alleged transactions
between Campos and Hess, on the one hand, and the plaintiffs on the other,
in December of that year. It is inconceivable, however, that the Mitsuis would
part with the stocks in question, precisely when Japanese was at the crest of
its military and political victories. Indeed, even if its officers had already
foreseen, at the time, the eventual defeat of the axis powers and
everything then appeared to indicate the contrary the Mitsuis could not
have disposed of said stocks without thereby revealing their own lack of faith
in the ability of Japan to achieve final victory. Thus, the Mitsuis would have
caused a grave injury upon the Japanese propaganda and thereby earned
severe punishment from the Imperial Government. Nothing, absolutely
nothing, in the record, or in contemporary history, warrants the belief that the
Mitsuis, who were closely associated with the Japanese Government, could
be guilty of such folly.
Let us now turn our attention to the evidence for the defense, beginning with
the testimony of Victor E. Lednicky. It will be recalled that this witness
claimed to have gone to the premises of the Mitsuis, sometime in February
1945, including two (2) Lepanto certificates of stock, one of which was in the
name of Vicente Madrigal, whose blank indorsement appeared thereon.
Thus, the defense sought to prove that the certificates of the shares of stock
involved in this case have probably been looted. The lower court found
Lednicky's story inherently improbable and then concluded that the theory of
the looting must, consequently, be "ruled out". To our mind, however, the
testimony of Lednicky is not inherently improbable. Besides, it is a matter of
common knowledge, of which judicial notice may be taken, that many offices
and dwellings were looted during the liberation of Manila. The possibility that
possession of the stock certificates in question may have been secured by
looting should not be "ruled out," therefore, irrespective of the credence and
weight given to the testimony of Lednicky. Actually, said certificates are
included in the list of stocks certificates of the Lepanto which, soon after
liberation, were reported and considered looted from the Mitsuis, and,
accordingly, "blocked" or "frozen" by the authorities. Irrespective of the
foregoing, De los Santos could not have obtained those certificates from
Campos and Hess in December 1942, inasmuch, as, from December 1941 to
April 1943, Kitajima had been continuously in possession of said documents,
none of which had been held by Hess during the occupation.
The lower court considered against the defense the circumstance that
Lednicky, Simon and Perkins had not testified before the Vested Property
Claims Committee. There is no evidence, however, that any of them knew of
the proceedings before said committee. Furthermore, none of them has any
personal interest in the outcome of this action. Consequently, they have no
possible motive to distort the truth, unlike De los Santos, who, as the present
claimant of all shares of stock in dispute, will de directly affected by the
outcome of the case at bar. His testimony, therefore, cannot be more weighty
than that of the aforementioned witnesses for the defense.
The decision appealed from criticizes the testimony of Perkins upon the
following grounds:
(1) Having taken no part in the alleged looting of Exhibit 2, Recio had nothing
to fear in connection therewith and, so, he could not have left the office of Mr.
DeWitt, while the latter was talking over the telephone with a representative
of the Alien Property Custodian; .
(2) Inasmuch as DeWitt had stated that Exhibit 2 was included in the list of
looted stock certificates, Perkins should have known that, as holder of the
certificate, Recio is presumed to be the one who stole the same. Why then
plaintiffs inquire did Perkins fail to prevent Recio from leaving said office?
775
As regards the first observation, suffice it to say that, as bearer of the Exhibit conscience of a man who came to the Court with a mental
2, Recio who, according to the lower court, is an intelligent man must reservation, but who may have been compelled under the
have realized the danger, probably unforeseen by him, of being considered a circumstances to play the role of a willing tool. (p. 54, R.A.)
privy to the looting of said stock certificates, of which he might have been
unaware before the conference with Mr. DeWitt. Hence, Recio's fright and The following portion of Miwa's testimony illustrates the point referred to in
virtual flight. Verily, the testimony of Perkins on this point is borne out by the the decision appealed from:
undisputed fact that Exhibit 2 was left by Recio in the hands of DeWitt, and
that neither Astraquillo, nor his alleged successor in interest, De los Santos, ATTY. QUIRINO:
has ever demand from DeWitt the return of said certificate, or even
recriminated Recio for having voluntarily parted with its possession, as he
Q. Will you please go over this paper which for purposes of
would have us believe, without authority therefor, as a broker or agent who
identification we request that it be marked as Exhibit M for the
was supposed merely to find a buyer.
plaintiffs and which was marked Exhibit 6-b before the Vested
Property Claims Committee, and tell us if you know that document?
As to the second observation, Perkins knew that Recio was acting solely as a A. No. I do not remember this paper.
broker or agent. As such, he was not the real holder of Exhibit 2, and,
consequently, the presumption adverted to did not apply to him. Even if it did,
Q. Mr. Miwa, at the bottom of this certificate or Exhibit M, which
however, what could Perkins have done? Use force or violence upon the
was Exhibit 6b in the committee and submitted by the Alien Property
person of Recio, or ask a policeman to detain him? Neither step, however,
Administration, there is a typewritten name, Kingy Miwa, and above it
could have been taken without some risks. To begin with, Perkins could not
is a signature. Will you kindly tell the Court if that is your signature or
have properly taken the law in his own hands. Had he done so, Recio could
not? Please look over it again. A. No. It is not mine.
have legally used force against force. Moreover, said presumption is
rebuttable and would have easily been offset by the undeniable fact that
Recio had acted merely in a representative capacity. Again, why should Q. Please examine it carefully and tell the Court afterwards if you
Perkins take the initiative in the matter? Was it not being handled by his recognize that signature. Examine it carefully. A. It looks
associate in the law firm, Mr. DeWitt, one of the most able members of the very similar to my signature.
Philippine Bar? It may not be amiss to add that the record before us
discloses absolutely nothing that may cast even a shadow of doubt upon the Q. But would you want or are you willing to go on record and say
honesty of Mr. Perkins. that it is not your signature? A. I can not say. I don't exactly
remember that I signed this, but it looks very similar to my signature.
The language of the lower court in commenting on the testimony of Miwa
was: Q. You will not testify under oath that this is your signature?
A. Yes. sir.
. . . In general, the testimony of Miwa is unreliable. His behaviour in
Court in denying first and then in accepting later his own signature Q. What do you mean to say by "yes, sir"? Do you swear that this
throws him to a position where the Court must look upon him with is your signature or not your signature? A. I think this is my
suspicion and distrust. His prevarication before the Court as to the signature.
genuineness of his own signature was probably due to the

776
 Q. So, you are willing to go on record now that that signature
appearing in Exhibit "M" is your signature? A. Yes, I think
so. (pp. 125-126, t. s. n.)
We do not agree with its appraisal by the lower court. It is clear that, as he
did not remember the execution of Exhibit M several years before the hearing
of this case, Miwa had doubts about the genuineness of the signature
thereon, but the appearance thereof, similar or identical to that of his own
signature, prevented him from denying its authenticity. This does not indicate
lack of veracity on his part. At any rate, plaintiffs claim to have bought the
shares of stock in question in December, 1942, or during the management of
Kitajima, who held the corresponding stock certificates continuously from
December, 1941, to April, 1943, when Miwa substituted him, so that neither
Campos nor Hess could have delivered those certificates to De los Santos in
December 1942. Apart from this, if there are flaws in the proof for the
defense, those of the evidence for the plaintiffs are much bigger and more
substantial and vital. Consequently, we hold that plaintiffs have not
established their pretense by a preponderance of the evidence.
Even, however, if Juan Campos and Carl Hess had sold the shares of stock
in question, as testified to by De los Santos, the result, insofar as plaintiffs
are concerned, would be the same. It is not disputed that said shares of
stock were registered, in the records of the Lepanto, in the name of Vicente
Madrigal. Neither it is denied that the latter was, as regards said shares of
stock, a mere trustee for the benefit of the Mitsuis. The record shows and
there is no evidence to the contrary that Madrigal had never disposed of
said shares of stock in any manner whatsoever, except by turning over the
corresponding stock certificates, late in 1941, to the Mitsuis, the beneficial
and true owners thereof. It has, moreover, been established,, by the
uncontradicted testimony of Kitajima and Miwa, the managers of the Mitsuis
in the Philippines, from 1941 to 1945, that the Mitsuis had neither sold,
conveyed, or alienated said shares of stock, nor delivered the
aforementioned stock certificates, to anybody during said period. Section 35
of the Corporation Law reads:
The capital stock corporations shall be divided into shares for which
certificates signed by the president or the vice-president,
countersigned by the secretary or clerk and sealed with the seal of
the corporation, shall be issued in accordance with the by-laws.
Shares of stock so issued are personal property and may be
transferred by delivery of the certificate endorsed by the owner or his
attorney in fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate,
and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid
claim shall be transferable on the books of the corporation.
(Emphasis supplied.)
Pursuant to this provision, a share of stock may be transferred by
endorsement of the corresponding stock certificate, coupled with its delivery.
However, the transfer shall "not be valid, except as between the parties," until
it is "entered and noted upon the books of the corporation." no such entry in
the name of the plaintiffs herein having been made, it follows that the transfer
allegedly effected by Juan Campos and Carl Hess in their favor is "not valid,
except as between" themselves. It does not bind either Madrigal or the
Mitsuis, who are not parties to said alleged transaction. What is more, the
same is "not valid," or, in the words of the Supreme Court of Wisconsin (Re
Murphy, 51 Wisc. 519, 8 N. W. 419) which were quoted approval in Uson
vs. Diosomito (61 Phil., 535) "absolutely void" and, hence, as good as
non-existent, insofar as Madrigal and the Mitsuis are concerned. For this
reason, although a stock certificate is sometimes regarded as quasi-
negotiable, in the sense that it may be transferred by endorsement, coupled
with delivery, it is well settled that the instrument is non-negotiable, because
the holder thereof takes it without prejudice to such rights or defenses as the
registered owner or creditor may have under the law, except insofar as such
rights or defenses are subject to the limitations imposed by the principles
governing estoppel.
Certificates of stock are not negotiable instruments (post, Par. 102),
consequently, a transferee under a forged assignment acquires no
777
 title which can be asserted against the true owner, unless his own
negligence has been such as to create an estoppel against him
(Clarke on Corporations, Sec. Ed. p. 415). If the owner of the
certificate has endorsed it in blank, and it is stolen from him, no title
is acquired by an innocent purchaser for value (East Birmingham
Land Co. vs. Dennis, 85 Ala. 565, 2 L.R.A. 836; Sherwood vs. mining
co., 50 Calif. 412). As was said by the Supreme Court of the United
States in a leading case (Western Union Telegraph
Co. vs. Davenfort, 97 U. S. 369; 24 L. Ed. 1047)
"Neither the absence of blame on the part of the officers of the
company in allowing an unauthorized transfer of stock, nor the good
faith of the purchaser of stolen property, will avail as an answer to
the demand of the true owner. The great principle that no one can
deprived of his property without his assent, except by processes of
the law, requires, in the case mentioned, that the property wrongfully
transferred or stolen should be restored to its rightful owner." (The
Philippine Law of Stock Corporations by Fisher, p. 132.) (Emphasis
supplied.)
In the language of Fletcher's Cyclopedia Corporations (Vol. 12, pp. 521-534):
The doctrine that a bona fide purchaser of shares under a forged or
unauthorized transfer acquires no title as against the true owner
does not apply where the circumstances are such as to estop the
latter from asserting his title. . . .
xxx xxx xxx
A reason often given for the rule is that it is a case for the application
of the maxim that where one of two innocent parties must suffer by
reason of a wrongful or unauthorized act, the loss must fall on the
one who first trusted the wrongdoer and put in his hands the means
of inflicting such loss. But "negligence which will work an estoppel of
this kind must be a proximate cause of the purchase or advancement
of money by the holder of the property, and must enter into the
transaction itself "; the negligence must be in or immediately
connected with the transfer itself . Furthermore, "to establish this
estoppel it must appear that the true owner had conferred upon the
person who has diverted the security the indicia of ownership, or an
apparent title or authority to transfer the title." So the owner is not
guilty of negligence in merely entrusting another with the possession
of his certificate of stock, if he does not, by assignment or otherwise,
clothe him with the apparent title. Nor is he deprived of his title or his
remedy against the corporation because he intrusts a third person
with the key of a box in which the certificate are kept, where the latter
takes them from the box and by forging the owner's name to a power
of attorney procures their transfer on the corporate books. Nor is the
mere indorsement of an assignment and power of attorney in blank
on a certificate of stock, which is afterwards lost or stolen, such
negligence as will estop the owner from asserting his title as against
a bona fide purchaser from the finder or thief, or from holding the
corporation liable for allowing a transfer on its books, where the loss
or theft of the certificate was not due to any negligence on the part of
the owner, although there is some dangerous and wholly
unjustifiable dictum to the contrary. So it has been held that the fact
that stock pledged to a bank is endorsed in blank by the owner does
not estop him from asserting title thereto as against a bona fide
purchaser for value who derives his title from one who stole the
certificate from the pledgee. And this has also been held to be true
though the thief was an officer of the pledgee, since his act in
wrongfully appropriating the certificate cannotbe regarded as a
misappropriation by the bank to whose custody the certificate was
intrusted by the owner, even though the bank may be liable to the
pledgor. . . . . A person is not guilty of negligence in leaving a
certificate of stock endorsed in blank in a safe deposit box used by
himself and another jointly, so as to be estopped from asserting his
title after the certificate has been stolen by the other, and sold or
pledged to a bona fide purchaser or pledgee. Nor is he negligent in
putting a certificate so endorsed in a place to which an employee
had access, where he has no reason to doubt the latter's
honesty, . . . . (Emphasis supplied.)
778
In the leading case of Knox vs. Eden Muscee American Co. (42 N. E. 988,
992-993), the rule has been forcefully stated as follows:
The courts have been frequently importuned to extend the qualities
of negotiability of stock certificates beyond the limits mentioned, and
clothe them with the same character of complete negotiability as
attaches to commercial paper, so as to make a transfer to a
purchaser in good faith for value equivalent to actual title, although
there was no agency in the transferor, and the certificate had been
lost without the fault of the true owner, or had been obtained by theft
or robbery. But the courts have refused to accede to this view, and
we have found no case entitled to be regarded as authority which
denies to the owner of a stock certificate which has been lost without
his negligence, or stolen, the right to reclaim it from the hands of any
person in whose possession it subsequently comes, although the
holder may have taken it in good faith and for value. The precise
question has not often been presented to the courts, for the reason,
probably, that they have with great uniformity held that stock
certificates were not negotiable instruments in the broad meaning of
that phrase; but whenever the question has a risen it has been held
that the title of the true owner of a lost or stolen certificate may be
asserted against any one subsequently its possession although the
holder may be bona fide purchaser. Anderson vs. Nicholas, 28 N. Y.
600; Power vs. Robinson, 52 Fed. 520; Biddle vs. Bayard, 13 Pa. St.
150; Barstow vs. mining Co., 64 Cal. 388, 1 Pac. 349. See
Shaw vs.Railroad Co., 101 U. S. 557. . . . It is plain, we think, that the
argument in support of the judgment in this case, base on the
complete negotiability of stock certificates, is not supported by, but is
contrary to, the decisions. If public policy requires that a further
advance should be made in more completely assimilating them to
commercial paper in the qualities of negotiability, the legislature, and
not the courts, should so declare. Under the law as it has hitherto
prevailed there does not seem to have been any serious hindrance
in dealing with property of this character. It may, perhaps, be
doubted, taking into consideration the interests of investors as well
as dealers, whether it would be wise to remove the protection which
the true owner of a stock certificate now has against accident, theft,
or robbery. The system of registry of negotiable bonds, which
prevails to a considerable extent, authorized by statutes of some of
the states and of the United States, seems to indicate a tendency
to restrict, rather than to extend, the range of negotiable instruments.
(Emphasis supplied.)
The status of quasi-negotiability generally accorded to, and at present
enjoyed by, certificates of stock, under the Philippine law, is in itself a
recognition of the fact that the certificates are non-negotiable. Instead of
sustaining appellees' claim, section 5 of the uniform Stock Transfer Act,
which "gives full negotiability to certificates of stock," refutes said claim and
confirms the non-negotiable character of stock certificates in the absence of
said Unifrom Act, for, obviously, the same could not have given, negotiability
to an instrument already possessing this attribute prior thereto. Again, apart
from being distinct from the general Corporation Law, the aforementioned
Uniform Act is not in force in the Philippines. In this connection, it should be
noted that this special piece of legislation was adopted in some states of the
union as early as the year 1910. The failure of the Philippine government to
incorporate its provisions in our statute books, for a period of almost 45
years, is, to our mind, clear proof of the unwillingness of our department to
change the policy set forth in section 35 of Act No. 1459. Needless to say,
this fact negates our authority which is limited to the interpretation of the
law, and its application, with all its imperfections to abandon what the
dissenting opinion characterizes as the "civil law standpoint," and substitute,
in lieu thereof, the commercial viewpoint, by applying said section 5 of the
Uniform Stock Transfer Act, although not a part of the law of the land. Indeed,
even in matters generally considered as falling within "commercial territory",
the Roman Law concept has not given way in the Philippines to the Common
Law approach, except when there is explicit statutory provision to the
contrary.
In the case at bar, neither madrigal nor the Mitsuis had alienated shares of
stock in question. It is not even claimed that either had, through negligence,
given occasion for an improper or irregular disposition of the
corresponding stock certificates. Plaintiffs merely argue without any evidence
whatsoever thereon that Kitajima might have, or must have, assigned the
certificates on or before December 1942, although, as above stated, this is,
779
not only, improbable, under the conditions, then obtaining, but, also., by the defense and, to our mind, has not been established by a
impossible, considering that, in April 1943, Kitajima delivered the instruments preponderance of the evidence. Hence, as the undisputed principal or
to Miwa, who kept them in its possession until 1945. At any rate, such beneficiary of the registered owner (Madrigal), the Mitsuis may claim his
assignment by Miwa granting for the sake of argument the accuracy of the rights, which cannot be exercised by the plaintiffs, not only because their
surmise of plaintiffs herein was unauthorized by the mitsuis, who, in the alleged title is not derived either from madrigal or from the Mitsuis, but, also,
light of the precedents cited above, are not chargeable with negligence. In because it is in derogation, of said rights. madrigal and the Mitsuis
other words, assuming that Kitajima had been guilty of embezzlement, by are not privies to the alleged sales by Campos and Hess to the plaintiffs,
negotiating the stock certificates in question for his personal benefit, as contrary to the latter's pretense.
claimed by the plaintiffs, the title of his assignees and successors in interest
would still be subject to the rights of the registered owner, namely, Madrigal, In conclusion, when the Property Custodian issued the Vesting Order
and consequently, of the party for whose benefit and account the latter held complained of, the shares of stock in question belonged to the Mitsuis,
the corresponding shares of stock, that is to say, the Mitsuis. admittedly an enemy corporation, so that Vesting Order is in conformity with
law and should be upheld. Wherefore, the decision appealed from is hereby
At any rate, at the time of the alleged sales in their favor, plaintiffs were reversed, and the complaint, accordingly, dismissed, with costs against the
aware of sufficient facts to put them on notice of the need of inquiring into the plaintiffs-appellees. It is so ordered.
regularity of the transactions and the title of the supposed vendors. Indeed,
the certificates of stock in question were in the name of madrigal. Obviously, Paras, C. J., Pablo, Padilla, Montemayor, Reyes, A., Jugo and Labrador,
therefore, the alleged sellers (Campos and Hess) were not registered owners JJ., concur.
of the corresponding shares of stock. Being presumed to know the law
particularly the provisions of section 35 of Act No. 1459 and, as
experienced traders in shares of stock, plaintiffs must have, accordingly,
been conscious of the consequent infirmities in the title of the supposed
vendors, or of the handicaps thereof. Moreover, the aforementioned sales
were admittedly hostile to the Japanese, who had prohibited it and plaintiffs
had actual knowledge of these facts and of the risks attendant to the alleged
transaction. In other words, plaintiffs advisedly assumed those risks and,
hence, they can not validly claim, against the registered stockholder, the
status of purchasers in good faith.

The lower court held, and plaintiffs maintain that, not being the registered
owners of the shares of stock in question, the Mitsuis can not assert a better
right than said plaintiffs. This pretense is untenable. Inasmuch as Madrigal,
the registered owner of said shares of stock, has always acknowledged that
he held the same merely as an agent of, or trustee for, the mitsuis and this
is not denied it follows that the latter are entitled to invoke such rights as
Madrigal had as registered stockholder. Upon the other hand, even the
alleged sale by Juan Campos and Carl Hess to plaintiffs herein is contested

780
781

G.R. No. L-40620 May 5, 1979
RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA,
EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES DE LA RAMA-
BORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First
Instance of Negros Occidental, Branch II, BENJAMIN LOPUE, SR.,
BENJAMIN LOPUE, JR., LEONITO LOPUE, and LUISA U.
DACLESrespondents.
Exequiel T. A Alejandro for petitioners.
Acua, Lirazan & Associates for private respondents.
CONCEPCION JR., J,:
Petition for certiorari to review the order of the respondent judge, dated
January 2, 1975, denying the petitioners' motion to dismiss the complaint
filed in Civil Case No. 10257 of the Court of First Instance of Negros
Occidental, entitled, "Benjamin Lopue Sr., et al., plaintiffs, versus Ricardo
Gamboa, et al., defendants," as well as the order dated April 4, 1975,
denying the motion for the reconsideration of Said order.
In the aforementioned Civil Case No. 10257 of the Court of First Instance of
Negros Occidental, the herein petitioners, Ricardo L. Gamboa, Lydia R.
Gamboa, Honorio de la Rama, Eduardo de la Rama, and the late Mercedes
de la Rama-Borromeo, now represented by her heirs, as well as Ramon de
la Rama, Paz de la Rama-Battistuzzi, and Enzo Battistuzzi, were sued by the
herein private respondents, Benjamin Lopue, Sr., Benjamin Lopue, Jr.,
Leonito Lopue, and Luisa U. Dacles to nullify the issuance of 823 shares of
stock of the Inocentes de la Rama, Inc. in favor of the said defendants. The
gist of the complaint, filed on April 4, 1972, is that the plaintiffs, with the
exception of Anastacio Dacles who was joined as a formal party, are the
owners of 1,328 shares of stock of the Inocentes de la Rama, Inc., a
domestic corporation, with an authorized capital stock of 3,000 shares, with a
par value of P100.00 per share, 2,177 of which were subscribed and issued,
thus leaving 823 shares unissued; that upon the plaintiffs' acquisition of the
shares of stock held by Rafael Ledesma and Jose Sicangco, Jr., then
President and Vice-President of the corporation, respectively, the defendants
Mercedes R. Borromeo, Honorio de la Rama, and Ricardo Gamboa,
remaining members of the board of directors of the corporation, in order to
forestall the takeover by the plaintiffs of the afore-named corporation,
surreptitiously met and elected Ricardo L. Gamboa and Honorio de la Rama
as president and vice-president of the corporation, respectively, and
thereafter passed a resolution authorizing the sale of the 823 unissued
shares of the corporation to the defendants, Ricardo L. Gamboa, Lydia R.
Gamboa, Honorio de la Rama, Ramon de la Rama, Paz R. Battistuzzi
Eduardo de la Rama, and Mercedes R. Borromeo, at par value, after which
the defendants Honorio de la Rama, Lydia de la Rama-Gamboa, and Enzo
Battistuzzi were elected to the board of directors of the corporation; that the
sale of the unissued 823 shares of stock of the corporation was in violation of
the plaintiffs' and pre-emptive rights and made without the approval of the
board of directors representing 2/3 of the outstanding capital stock, and is in
disregard of the strictest relation of trust existing between the defendants, as
stockholders thereof; and that the defendants Lydia de la Rama-Gamboa,
Honorio de la Rama, and Enzo Battistuzzi were not legally elected to the
board of directors of the said corporation and has unlawfully usurped or
intruded into said office to the prejudice of the plaintiffs. Wherefore, they
prayed that a writ of preliminary injunction be issued restraining the
defendants from committing, or continuing the performance of an act tending
to prejudice, diminish or otherwise injure the plaintiffs' rights in the corporate
properties and funds of the corporation, and from disposing, transferring,
selling, or otherwise impairing the value of the 823 shares of stock illegally
issued by the defendants; that a receiver be appointed to preserve and
administer the property and funds of the corporation; that defendants Lydia
de la Rama-Gamboa, Honorio de la Rama, and Enzo Battistuzzi be declared
782
as usurpers or intruders into the office of director in the corporation and,
consequently, ousting them therefrom and declare Luisa U. Dacles as a
legally elected director of the corporation; that the sale of 823 shares of stock
of the corporation be declared null and void; and that the defendants be
ordered to pay damages and attorney's fees, as well as the costs of suit . 1
Acting upon the complaint, the respondent judge, after proper hearing,
directed the clerk of court "to issue the corresponding writ of preliminary
injunction restraining the defendants and/or their representatives, agents, or
persons acting in their behalf from the commission or continuance of any act
tending in any way to prejudice, diminish or otherwise injure plaintiffs' rights
in the corporate properties and funds of the corporation Inocentes de la
Rama, Inc.' and from disposing, transferring, selling or otherwise impairing
the value of the certificates of stock allegedly issued illegally in their names
on February 11, 1972, or at any date thereafter, and ordering them to deposit
with the Clerk of Court the corresponding certificates of stock for the 823
shares issued to said defendants on February 11, 1972, upon plaintiffs'
posting a bond in the sum of P50,000.00, to answer for any damages and
costs that may be sustained by the defendants by reason of the issuance of
the writ, copy of the bond to be furnished to the defendants. " 2 Pursuant
thereto, the defendants deposited with the clerk of court the corporation's
certificates of stock Nos. 80 to 86, inclusive, representing the disputed 823
shares of stock of the corporation. 3
On October 31, 1972, the plaintiffs therein, now private respondents, entered
into a compromise agreement with the defendants Ramon de la Rama, Paz
de la Rama Battistuzzi and Enzo Battistuzzi , 4 whereby the contracting
parties withdrew their respective claims against each other and the
aforenamed defendants waived and transferred their rights and interests over
the questioned 823 shares of stock in favor of the plaintiffs, as follows:
3. That the defendants Ramon L. de la Rama, Paz de la
Rama Battistuzzi and Enzo Battistuzzi will waive, cede,
transfer or other wise convey, as they hereby waive, cede,
transfer and convey, free from all liens and encumbrances
unto the plaintiffs, in such proportion as the plaintiffs may
among themselves determine, all of the rights, interests,
participations or title that the defendants Ramon L. de la
Rama, Paz de la Rama Battistuzzi Enzo Battistuzzi now
have or may have in the eight hundred twenty-three (823)
shares in the capital stock of the corporation INOCENTES
DELA RAMA, INC.' which were issued in the names of the
defendants in the above-entitled case on or about February
11, 1972, or at any date thereafter and which shares are the
subject-matter of the present suit.
The compromise agreement was approved by the trial court on December 4,
1972, 5 As a result, the defendants filed a motion to dismiss the complaint, on
November 19, 1974, upon the grounds: (1) that the plaintiffs' cause of action
had been waived or abandoned; and (2) that they were estopped from further
prosecuting the case since they have, in effect, acknowledged the validity of
the issuance of the disputed 823 shares of stock. The motion was denied on
January 2, 1975. 6
The defendants also filed a motion to declare the defendants Ramon L. de la
Rama, Paz de la Rama Battistuzzi and Enzo Battistuzzi in contempt of court,
for having violated the writ of preliminary injunction when they entered into
the aforesaid compromise agreement with the plaintiffs, but the respondent
judge denied the said motion for lack of merit. 7
On February 10, 1975, the defendants filed a motion for the reconsideration
of the order denying their motion to dismiss the complaint' and subsequently,
an Addendum thereto, claiming that the respondent court has no jurisdiction
to interfere with the management of the corporation by the board of directors,
and the enactment of a resolution by the defendants, as members of the
board of directors of the corporation, allowing the sale of the 823 shares of
stock to the defendants was purely a management concern which the courts
could not interfere with. When the trial court denied said motion and its
addendum, the defendants filed the instant petition for certiorari for the
review of said orders.
The petition is without merit. The questioned order denying the petitioners'
motion to dismiss the complaint is merely interlocutory and cannot be the
783
subject of a petition for certiorari. The proper procedure to be followed in
such a case is to continue with the trial of the case on the merits and, if the
decision is adverse, to reiterate the issue on appeal. It would be a breach of
orderly procedure to allow a party to come before this Court every time an
order is issued with which he does not agree.
Besides, the order denying the petitioners' motion to dismiss the complaint
was not capriciously, arbitrarily, or whimsically issued, or that the respondent
court lacked jurisdiction over the cause as to warrant the issuance of the writ
prayed for. As found by the respondent judge, the petitioners have not
waived their cause of action against the petitioners by entering into a
compromise agreement with the other defendants in view of the express
provision of the compromise agreement that the same "shall not in any way
constitute or be considered a waiver or abandonment of any claim or cause
of action against the other defendants." There is also no estoppel because
there is nothing in the agreement which could be construed as an affirmative
admission by the plaintiff of the validity of the resolution of the defendants
which is now sought to be judicially declared null and void. The foregoing
circumstances and the fact that no consideration was mentioned in the
agreement for the transfer of rights to the said shares of stock to the plaintiffs
are sufficient to show that the agreement was merely an admission by the
defendants Ramon de la Rama, Paz de la Rama Battistuzzi and Enzo
Battistuzzi of the validity of the claim of the plaintiffs.
The petitioners further contend that the proper remedy of the plaintiffs would
be to institute a derivative suit against the petitioners in the name of the
corporation in order to secure a binding relief after exhausting all the possible
remedies available within the corporation.
An individual stockholder is permitted to institute a derivative suit on behalf of
the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to sue, or
are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest. 12 In the case at bar, however, the
plaintiffs are alleging and vindicating their own individual interests or
prejudice, and not that of the corporation. At any rate, it is yet too early in the
proceedings since the issues have not been joined. Besides, misjoinder of
parties is not a ground to dismiss an action. 13
WHEREFORE, the petition should be, as it is hereby DISMISSED for lack of
merit. With costs against the petitioners.
SO ORDERED.
Antonio, Aquino, Santos and Abad Santos JJ., concur.

The claim of the petitioners, in their Addendum to the motion for

reconsideration of the order denying the motion to dismiss the complaint,
questioning the trial court's jurisdiction on matters affecting the management
of the corporation, is without merit. The well-known rule is that courts cannot
undertake to control the discretion of the board of directors about
administrative matters as to which they have legitimate power of, 10 action
and contracts intra vires entered into by the board of directors are binding
upon the corporation and courts will not interfere unless such contracts are
so unconscionable and oppressive as to amount to a wanton destruction of
the rights of the minority. 11 In the instant case, the plaintiffs aver that the
defendants have concluded a transaction among themselves as will result to
serious injury to the interests of the plaintiffs, so that the trial court has
jurisdiction over the case.

784
785

G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO,
JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO
BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO
PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and
EDUARDO R. VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents
Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel
Corporation.
R. T Capulong for respondent Eduardo R. Visaya.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for
issuance of writ of preliminary injunction, arose out of two cases filed by
petitioner with the Securities and Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel
Corporation, filed with the Securities and Exchange Commission (SEC) a
petition for "declaration of nullity of amended by-laws, cancellation of
certificate of filing of amended by- laws, injunction and damages with prayer
for a preliminary injunction" against the majority of the members of the Board
of Directors and San Miguel Corporation as an unwilling petitioner. The
petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M.
Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B.
Conde, Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was
docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976,
individual respondents amended by bylaws of the corporation, basing their
authority to do so on a resolution of the stockholders adopted on March 13,
1961, when the outstanding capital stock of respondent corporation was only
P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share
and 150,000 preferred shares at P100.00 per share. At the time of the
amendment, the outstanding and paid up shares totalled 30,127,047 with a
total par value of P301,270,430.00. It was contended that according to
section 22 of the Corporation Law and Article VIII of the by-laws of the
corporation, the power to amend, modify, repeal or adopt new by-laws may
be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up
capital stock of the corporation, which 2/3 should have been computed on
the basis of the capitalization at the time of the amendment. Since the
amendment was based on the 1961 authorization, petitioner contended that
the Board acted without authority and in usurpation of the power of the
stockholders.
786
As a second cause of action, it was alleged that the authority granted in 1961
had already been exercised in 1962 and 1963, after which the authority of
the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the
Board of Directors had changed since the authority was given in 1961, there
being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned
amendment, petitioner had all the qualifications to be a director of
respondent corporation, being a Substantial stockholder thereof; that as a
stockholder, petitioner had acquired rights inherent in stock ownership, such
as the rights to vote and to be voted upon in the election of directors; and
that in amending the by-laws, respondents purposely provided for petitioner's
disqualification and deprived him of his vested right as afore-mentioned
hence the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no
inherent power to disqualify a stockholder from being elected as a director
and, therefore, the questioned act is ultra vires and void; that Andres M.
Soriano, Jr. and/or Jose M. Soriano, while representing other corporations,
entered into contracts (specifically a management contract) with respondent
corporation, which was allowed because the questioned amendment gave
the Board itself the prerogative of determining whether they or other persons
are engaged in competitive or antagonistic business; that the portion of the
amended bylaws which states that in determining whether or not a person is
engaged in competitive business, the Board may consider such factors as
business and family relationship, is unreasonable and oppressive and,
therefore, void; and that the portion of the amended by-laws which requires
that "all nominations for election of directors ... shall be submitted in writing to
the Board of Directors at least five (5) working days before the date of the
Annual Meeting" is likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void
and the certificate of filing thereof be cancelled, and that individual
respondents be made to pay damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with
the Securities and Exchange Commission an "Urgent Motion for Production
and Inspection of Documents", alleging that the Secretary of respondent
corporation refused to allow him to inspect its records despite request made
by petitioner for production of certain documents enumerated in the request,
and that respondent corporation had been attempting to suppress
information from its stockholders despite a negative reply by the SEC to its
query regarding their authority to do so. Among the documents requested to
be copied were (a) minutes of the stockholder's meeting field on March 13,
1961, (b) copy of the management contract between San Miguel Corporation
and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San
Miguel International, Inc.; (d) authority of the stockholders to invest the funds
of respondent corporation in San Miguel International, Inc.; and (e) lists of
salaries, allowances, bonuses, and other compensation, if any, received by
Andres M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was
opposed by respondents, alleging, among others that the motion has no legal
basis; that the demand is not based on good faith; that the motion is
premature since the materiality or relevance of the evidence sought cannot
be determined until the issues are joined, that it fails to show good cause and
constitutes continued harrasment, and that some of the information sought
are not part of the records of the corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel
Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their
answer to the petition, denying the substantial allegations therein and stating,
by way of affirmative defenses that "the action taken by the Board of
Directors on September 18, 1976 resulting in the ... amendments is valid and
legal because the power to "amend, modify, repeal or adopt new By-laws"
delegated to said Board on March 13, 1961 and long prior thereto has never
been revoked of SMC"; that contrary to petitioner's claim, "the vote
requirement for a valid delegation of the power to amend, repeal or adopt
new by-laws is determined in relation to the total subscribed capital stock at
the time the delegation of said power is made, not when the Board opts to
exercise said delegated power"; that petitioner has not availed of his intra-
corporate remedy for the nullification of the amendment, which is to secure
787
its repeal by vote of the stockholders representing a majority of the
subscribed capital stock at any regular or special meeting, as provided in
Article VIII, section I of the by-laws and section 22 of the Corporation law,
hence the, petition is premature; that petitioner is estopped from questioning
the amendments on the ground of lack of authority of the Board. since he
failed, to object to other amendments made on the basis of the same 1961
authorization: that the power of the corporation to amend its by-laws is broad,
subject only to the condition that the by-laws adopted should not be
respondent corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective measures to
minimize or eliminate situations where its directors might be tempted to put
their personal interests over t I hat of the corporation; that the questioned
amended by-laws is a matter of internal policy and the judgment of the board
should not be interfered with: That the by-laws, as amended, are valid and
binding and are intended to prevent the possibility of violation of criminal and
civil laws prohibiting combinations in restraint of trade; and that the petition
states no cause of action. It was, therefore, prayed that the petition be
dismissed and that petitioner be ordered to pay damages and attorney's fees
to respondents. The application for writ of preliminary injunction was likewise
on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their
opposition to the petition, denying the material averments thereof and stating,
as part of their affirmative defenses, that in August 1972, the Universal
Robina Corporation (Robina), a corporation engaged in business competitive
to that of respondent corporation, began acquiring shares therein. until
September 1976 when its total holding amounted to 622,987 shares: that in
October 1972, the Consolidated Foods Corporation (CFC) likewise began
acquiring shares in respondent (corporation. until its total holdings amounted
to P543,959.00 in September 1976; that on January 12, 1976, petitioner, who
is president and controlling shareholder of Robina and CFC (both closed
corporations) purchased 5,000 shares of stock of respondent corporation,
and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent
and malicious publicity campaign against SMC" to generate support from the
stockholder "in his effort to secure for himself and in representation of Robina
and CFC interests, a seat in the Board of Directors of SMC", that in the
stockholders' meeting of March 18, 1976, petitioner was rejected by the
stockholders in his bid to secure a seat in the Board of Directors on the basic
issue that petitioner was engaged in a competitive business and his securing
a seat would have subjected respondent corporation to grave disadvantages;
that "petitioner nevertheless vowed to secure a seat in the Board of Directors
at the next annual meeting; that thereafter the Board of Directors amended
the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages,
expenses of litigation and attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for
production and inspection of documents was filed by all the respondents.
This was duly opposed by petitioner. At this juncture, respondents Emigdio
Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as
oppositors and they accordingly filed their oppositions-intervention to the
petition.
On December 29, 1976, the Securities and Exchange Commission resolved
the motion for production and inspection of documents by issuing Order No.
26, Series of 1977, stating, in part as follows:
Considering the evidence submitted before the Commission
by the petitioner and respondents in the above-entitled case,
it is hereby ordered:
1. That respondents produce and permit the inspection,
copying and photographing, by or on behalf of the petitioner-
movant, John Gokongwei, Jr., of the minutes of the
stockholders' meeting of the respondent San Miguel
Corporation held on March 13, 1961, which are in the
possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the
issues involved in the main case. Accordingly, the
respondents should allow petitioner-movant entry in the
principal office of the respondent Corporation, San Miguel
Corporation on January 14, 1977, at 9:30 o'clock in the
788
 morning for purposes of enforcing the rights herein granted;
it being understood that the inspection, copying and
photographing of the said documents shall be undertaken
under the direct and strict supervision of this Commission.
Provided, however, that other documents and/or papers not
heretofore included are not covered by this Order and any
inspection thereof shall require the prior permission of this
Commission;
2. As to the Balance Sheet of San Miguel International, Inc.
as well as the list of salaries, allowances, bonuses,
compensation and/or remuneration received by respondent
Jose M. Soriano, Jr. and Andres Soriano from San Miguel
International, Inc. and/or its successors-in- interest, the
Petition to produce and inspect the same is hereby DENIED,
as petitioner-movant is not a stockholder of San Miguel
International, Inc. and has, therefore, no inherent right to
inspect said documents;
3. In view of the Manifestation of petitioner-movant dated
November 29, 1976, withdrawing his request to copy and
inspect the management contract between San Miguel
Corporation and A. Soriano Corporation and the renewal and
amendments thereof for the reason that he had already
obtained the same, the Commission takes note thereof; and
4. Finally, the Commission holds in abeyance the resolution
on the matter of production and inspection of the authority of
the stockholders of San Miguel Corporation to invest the
funds of respondent corporation in San Miguel International,
Inc., until after the hearing on the merits of the principal
issues in the above-entitled case.
This Order is immediately executory upon its approval. 2 respondent Commission a Manifestation stating that he intended to run for
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard,
respondent corporation issued a notice of special stockholders' meeting for
the purpose of "ratification and confirmation of the amendment to the By-
laws", setting such meeting for February 10, 1977. This prompted petitioner
to ask respondent Commission for a summary judgment insofar as the first
cause of action is concerned, for the alleged reason that by calling a special
stockholders' meeting for the aforesaid purpose, private respondents
admitted the invalidity of the amendments of September 18, 1976. The
motion for summary judgment was opposed by private respondents. Pending
action on the motion, petitioner filed an "Urgent Motion for the Issuance of a
Temporary Restraining Order", praying that pending the determination of
petitioner's application for the issuance of a preliminary injunction and/or
petitioner's motion for summary judgment, a temporary restraining order be
issued, restraining respondents from holding the special stockholder's
meeting as scheduled. This motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the
motion for issuance of temporary restraining order. After receipt of the order
of denial, respondents conducted the special stockholders' meeting wherein
the amendments to the by-laws were ratified. On February 14, 1977,
petitioner filed a consolidated motion for contempt and for nullification of the
special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for
summary judgment was filed by petitioner before respondent Commission on
March 10, 1977. Petitioner alleges that up to the time of the filing of the
instant petition, the said motion had not yet been scheduled for hearing.
Likewise, the motion for reconsideration of the order granting in part and
denying in part petitioner's motion for production of record had not yet been
resolved.
In view of the fact that the annul stockholders' meeting of respondent
corporation had been scheduled for May 10, 1977, petitioner filed with
the position of director of respondent corporation. Thereafter, respondents
filed a Manifestation with respondent Commission, submitting a Resolution of
the Board of Directors of respondent corporation disqualifying and precluding
789
petitioner from being a candidate for director unless he could submit
evidence on May 3, 1977 that he does not come within the disqualifications
specified in the amendment to the by-laws, subject matter of SEC Case No.
1375. By reason thereof, petitioner filed a manifestation and motion to
resolve pending incidents in the case and to issue a writ of injunction,
alleging that private respondents were seeking to nullify and render
ineffectual the exercise of jurisdiction by the respondent Commission, to
petitioner's irreparable damage and prejudice, Allegedly despite a
subsequent Manifestation to prod respondent Commission to act, petitioner
was not heard prior to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on
the part of the SEC to act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent
corporation has been investing corporate funds in other corporations and
businesses outside of the primary purpose clause of the corporation, in
violation of section 17 1/2 of the Corporation Law, he filed with respondent
Commission, on January 20, 1977, a petition seeking to have private
respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the
respondent corporation declared guilty of such violation, and ordered to
account for such investments and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents,
to which a consolidated motion to strike and to declare individual
respondents in default and an opposition ad abundantiorem cautelam were
filed by petitioner. Despite the fact that said motions were filed as early as
February 4, 1977, the commission acted thereon only on April 25, 1977,
when it denied respondents' motion to dismiss and gave them two (2) days
within which to file their answer, and set the case for hearing on April 29 and
May 3, 1977.
Respondents issued notices of the annual stockholders' meeting, including in
the Agenda thereof, the following:
6. Re-affirmation of the authorization to the Board of
Directors by the stockholders at the meeting on March 20,
1972 to invest corporate funds in other companies or
businesses or for purposes other than the main purpose for
which the Corporation has been organized, and ratification of
the investments thereafter made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an
urgent motion for the issuance of a writ of preliminary injunction to restrain
private respondents from taking up Item 6 of the Agenda at the annual
stockholders' meeting, requesting that the same be set for hearing on May 3,
1977, the date set for the second hearing of the case on the merits.
Respondent Commission, however, cancelled the dates of hearing originally
scheduled and reset the same to May 16 and 17, 1977, or after the
scheduled annual stockholders' meeting. For the purpose of urging the
Commission to act, petitioner filed an urgent manifestation on May 3, 1977,
but this notwithstanding, no action has been taken up to the date of the filing
of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention
before this Court that respondent Commission gravely abused its discretion
when it failed to act with deliberate dispatch on the motions of petitioner
seeking to prevent illegal and/or arbitrary impositions or limitations upon his
rights as stockholder of respondent corporation, and that respondent are
acting oppressively against petitioner, in gross derogation of petitioner's
rights to property and due process. He prayed that this Court direct
respondent SEC to act on collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining
private respondents from disqualifying or preventing petitioner from running
or from being voted as director of respondent corporation and from
submitting for ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual stockholders' meeting on
May 10, 1977, or from Making effective the amended by-laws of respondent
corporation, until further orders from this Court or until the Securities and Ex-
change Commission acts on the matters complained of in the instant petition.
790
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after
a restraining order had been issued by this Court, or on May 9, 1977, the
respondent Commission served upon petitioner copies of the following
orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's
motion for reconsideration, with its supplement, of the order of the
Commission denying in part petitioner's motion for production of documents,
petitioner's motion for reconsideration of the order denying the issuance of a
temporary restraining order denying the issuance of a temporary restraining
order, and petitioner's consolidated motion to declare respondents in
contempt and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner
to run as a director of respondent corporation but stating that he should not
sit as such if elected, until such time that the Commission has decided the
validity of the bylaws in dispute, and denying deferment of Item 6 of the
Agenda for the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's
motion for reconsideration of the order of respondent Commission denying
petitioner's motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent
Commission acted with indecent haste and without circumspection in issuing
the aforesaid orders to petitioner's irreparable damage and injury; (2) that it
acted without jurisdiction and in violation of petitioner's right to due process
when it decided en banc an issue not raised before it and still pending before
one of its Commissioners, and without hearing petitioner thereon despite
petitioner's request to have the same calendared for hearing , and (3) that
the respondents acted oppressively against the petitioner in violation of his
rights as a stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of
be declared null and void and that respondent Commission be ordered to
allow petitioner to undertake discovery proceedings relative to San Miguel
International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on
the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M.
Soriano filed their comment, alleging that the petition is without merit for the
following reasons:
(1) that the petitioner the interest he represents are engaged in business
competitive and antagonistic to that of respondent San Miguel Corporation, it
appearing that the owns and controls a greater portion of his SMC stock thru
the Universal Robina Corporation and the Consolidated Foods Corporation,
which corporations are engaged in business directly and substantially
competing with the allied businesses of respondent SMC and of corporations
in which SMC has substantial investments. Further, when CFC and Robina
had accumulated investments. Further, when CFC and Robina had
accumulated shares in SMC, the Board of Directors of SMC realized the
clear and present danger that competitors or antagonistic parties may be
elected directors and thereby have easy and direct access to SMC's
business and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect
respondent SMC from the clear and present danger that business
competitors, if allowed to become directors, will illegally and unfairly utilize
their direct access to its business secrets and plans for their own private gain
to the irreparable prejudice of respondent SMC, and, ultimately, its
stockholders. Further, it is asserted that membership of a competitor in the
Board of Directors is a blatant disregard of no less that the Constitution and
pertinent laws against combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent
right and duty to preserve and protect itself by excluding competitors and
antogonistic parties, under the law of self-preservation, and it should be
allowed a wide latitude in the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375
and 1423 was due to petitioner's own acts or omissions, since he failed to
791
have the petition to suspend, pendente lite the amended by-laws calendared
for hearing. It was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension (preliminary
injunction) for hearing on May 3, 1977. The instant petition being dated May
4, 1977, it is apparent that respondent Commission was not given a chance
to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become
moot and academic because respondent Commission has acted on the
pending incidents, complained of. It was, therefore, prayed that the petition
be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment,
alleging that the petition has become moot and academic for the reason,
among others that the acts of private respondent sought to be enjoined have
reference to the annual meeting of the stockholders of respondent San
Miguel Corporation, which was held on may 10, 1977; that in said meeting, in
compliance with the order of respondent Commission, petitioner was allowed
to run and be voted for as director; and that in the same meeting, Item 6 of
the Agenda was discussed, voted upon, ratified and confirmed. Further it was
averred that the questions and issues raised by petitioner are pending in the
Securities and Exchange Commission which has acquired jurisdiction over
the case, and no hearing on the merits has been had; hence the elevation of
these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition
presents justiciable questions for the determination of this Court because (1)
the respondent Commission acted without circumspection, unfairly and
oppresively against petitioner, warranting the intervention of this Court; (2) a
derivative suit, such as the instant case, is not rendered academic by the act
of a majority of stockholders, such that the discussion, ratification and
confirmation of Item 6 of the Agenda of the annual stockholders' meeting of
May 10, 1977 did not render the case moot; that the amendment to the
bylaws which specifically bars petitioner from being a director is void since it
deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate
comment, alleging that after receiving a copy of the restraining order issued
by this Court and noting that the restraining order did not foreclose action by
it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC
Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order
No. 450 which denied deferment of Item 6 of the Agenda of the annual
stockholders' meeting of respondent corporation, took into consideration an
urgent manifestation filed with the Commission by petitioner on May 3, 1977
which prayed, among others, that the discussion of Item 6 of the Agenda be
deferred. The reason given for denial of deferment was that "such action is
within the authority of the corporation as well as falling within the sphere of
stockholders' right to know, deliberate upon and/or to express their wishes
regarding disposition of corporate funds considering that their investments
are the ones directly affected." It was alleged that the main petition has,
therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with
prayer for preliminary injunction, alleging that the actuations of respondent
SEC tended to deprive him of his right to due process, and "that all possible
questions on the facts now pending before the respondent Commission are
now before this Honorable Court which has the authority and the
competence to act on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent
corporation, disqualifying a competitor from nomination or election to the
Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying
petitioner's request for an examination of the records of San Miguel
International, Inc., a fully owned subsidiary of San Miguel Corporation; and
792
(3) whether or not respondent SEC committed grave abuse of discretion in
allowing discussion of Item 6 of the Agenda of the Annual Stockholders'
Meeting on May 10, 1977, and the ratification of the investment in a foreign
corporation of the corporate funds, allegedly in violation of section 17-1/2 of
the Corporation Law.
I validity of its amended by laws and the rights and obligations of the parties
Whether or not amended by-laws are valid is purely a legal question which
public interest requires to be resolved
It is the position of the petitioner that "it is not necessary to remand the case
to respondent SEC for an appropriate ruling on the intrinsic validity of the
amended by-laws in compliance with the principle of exhaustion of
administrative remedies", considering that: first: "whether or not the
provisions of the amended by-laws are intrinsically valid ... is purely a legal
question. There is no factual dispute as to what the provisions are and
evidence is not necessary to determine whether such amended by-laws are
valid as framed and approved ... "; second: "it is for the interest and guidance
of the public that an immediate and final ruling on the question be made ... ";
third: "petitioner was denied due process by SEC" when "Commissioner de
Guzman had openly shown prejudice against petitioner ... ", and
"Commissioner Sulit ... approved the amended by-laws ex-parte and
obviously found the same intrinsically valid; and finally: "to remand the case
to SEC would only entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that
this Court resolve the legal issues raised by the parties in keeping with the
"cherished rules of procedure" that "a court should always strive to settle the
entire controversy in a single proceeding leaving no root or branch to bear
the seeds of future ligiation", citing Gayong v. Gayos. 3 To the same effect is
the prayer of San Miguel Corporation that this Court resolve on the merits the
thereunder, otherwise "the time spent and effort exerted by the parties
concerned and, more importantly, by this Honorable Court, would have been
for naught because the main question will come back to this Honorable Court
for final resolution." Respondent Eduardo R. Visaya submits a similar appeal.
It is only the Solicitor General who contends that the case should be
remanded to the SEC for hearing and decision of the issues involved,
invoking the latter's primary jurisdiction to hear and decide case involving
intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always
strive to settle the entire controversy in a single proceeding, leaving nor root
or branch to bear the seeds of future litigation. 4 Thus, in Francisco v. City of
Davao, 5 this Court resolved to decide the case on the merits instead of
remanding it to the trial court for further proceedings since the ends of justice
would not be subserved by the remand of the case. In Republic v. Security
Credit and Acceptance Corporation, et al., 6 this Court, finding that the main
issue is one of law, resolved to decide the case on the merits "because public
interest demands an early disposition of the case", and in Republic v. Central
Surety and Insurance Company, 7 this Court denied remand of the third-party
complaint to the trial court for further proceedings, citing precedent where
this Court, in similar situations resolved to decide the cases on the merits,
instead of remanding them to the trial court where (a) the ends of justice
would not be subserved by the remand of the case; or (b) where public
interest demand an early disposition of the case; or (c) where the trial court
had already received all the evidence presented by both parties and the
Supreme Court is now in a position, based upon said evidence, to decide the
case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no
application where only a question of law is involved. 8a Because uniformity
may be secured through review by a single Supreme Court, questions of law
793
may appropriately be determined in the first instance by courts. 8b In the
case at bar, there are facts which cannot be denied, viz.: that the amended
by-laws were adopted by the Board of Directors of the San Miguel
Corporation in the exercise of the power delegated by the stockholders
ostensibly pursuant to section 22 of the Corporation Law; that in a special
meeting on February 10, 1977 held specially for that purpose, the amended
by-laws were ratified by more than 80% of the stockholders of record; that
the foreign investment in the Hongkong Brewery and Distellery, a beer
manufacturing company in Hongkong, was made by the San Miguel
Corporation in 1948; and that in the stockholders' annual meeting held in
1972 and 1977, all foreign investments and operations of San Miguel
Corporation were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a competitor
from nomination or election to the Board of Directors of SMC are valid and
reasonable
The validity or reasonableness of a by-law of a corporation in purely a
question of law. 9 Whether the by-law is in conflict with the law of the land, or
with the charter of the corporation, or is in a legal sense unreasonable and
therefore unlawful is a question of law. 10 This rule is subject, however, to the
limitation that where the reasonableness of a by-law is a mere matter of
judgment, and one upon which reasonable minds must necessarily differ, a
court would not be warranted in substituting its judgment instead of the
judgment of those who are authorized to make by-laws and who have
exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable
because they were tailored to suppress the minority and prevent them from
having representation in the Board", at the same time depriving petitioner of
his "vested right" to be voted for and to vote for a person of his choice as
director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano
and San Miguel Corporation content that ex. conclusion of a competitor from
the Board is legitimate corporate purpose, considering that being a
competitor, petitioner cannot devote an unselfish and undivided Loyalty to the
corporation; that it is essentially a preventive measure to assure stockholders
of San Miguel Corporation of reasonable protective from the unrestrained
self-interest of those charged with the promotion of the corporate enterprise;
that access to confidential information by a competitor may result either in
the promotion of the interest of the competitor at the expense of the San
Miguel Corporation, or the promotion of both the interests of petitioner and
respondent San Miguel Corporation, which may, therefore, result in a
combination or agreement in violation of Article 186 of the Revised Penal
Code by destroying free competition to the detriment of the consuming
public. It is further argued that there is not vested right of any stockholder
under Philippine Law to be voted as director of a corporation. It is alleged
that petitioner, as of May 6, 1978, has exercised, personally or thru two
corporations owned or controlled by him, control over the following
shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr.
6,325 shares; (b) Universal Robina Corporation 738,647 shares; (c) CFC
Corporation 658,313 shares, or a total of 1,403,285 shares. Since the
outstanding capital stock of San Miguel Corporation, as of the present date,
is represented by 33,139,749 shares with a par value of P10.00, the total
shares owned or controlled by petitioner represents 4.2344% of the total
outstanding capital stock of San Miguel Corporation. It is also contended that
petitioner is the president and substantial stockholder of Universal Robina
Corporation and CFC Corporation, both of which are allegedly controlled by
petitioner and members of his family. It is also claimed that both the
Universal Robina Corporation and the CFC Corporation are engaged in
businesses directly and substantially competing with the alleged businesses
of San Miguel Corporation, and of corporations in which SMC has substantial
investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S
CORPORATIONS AND SAN MIGUEL CORPORATION
794
According to respondent San Miguel Corporation, the areas of, competition 23,436,754 shares in SMC, or more than 90% of the total outstanding shares
are enumerated in its Board the areas of competition are enumerated in its of SMC, rejected petitioner's candidacy for the Board of Directors because
Board Resolution dated April 28, 1978, thus: they "realized the grave dangers to the corporation in the event a competitor
gets a board seat in SMC." On September 18, 1978, the Board of Directors
Product Line Estimated Market Share Total of SMC, by "virtue of powers delegated to it by the stockholders," approved
1977 SMC Robina-CFC the amendment to ' he by-laws in question. At the meeting of February 10,
1977, these amendments were confirmed and ratified by 5,716 shareholders
Table Eggs 0.6% 10.0% 10.6% owning 24,283,945 shares, or more than 80% of the total outstanding shares.
Layer Pullets 33.0% 24.0% 57.0% Only 12 shareholders, representing 7,005 shares, opposed the confirmation
Dressed Chicken 35.0% 14.0% 49.0% and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349
Poultry & Hog Feeds 40.0% 12.0% 52.0% shareholders, owning 27,257.014 shares, or more than 90% of the
Ice Cream 70.0% 13.0% 83.0% outstanding shares, rejected petitioner's candidacy, while 946 stockholders,
Instant Coffee 45.0% 40.0% 85.0% representing 1,648,801 shares voted for him. On the May 9, 1978 Annual
Woven Fabrics 17.5% 9.1% 26.6% Stockholders' Meeting, 12,480 shareholders, owning more than 30 million
shares, or more than 90% of the total outstanding shares. voted against
petitioner.
Thus, according to respondent SMC, in 1976, the areas of competition
affecting SMC involved product sales of over P400 million or more than 20%
of the P2 billion total product sales of SMC. Significantly, the combined AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF
market shares of SMC and CFC-Robina in layer pullets dressed chicken, DIRECTORS EXPRESSLY CONFERRED BY LAW
poultry and hog feeds ice cream, instant coffee and woven fabrics would
result in a position of such dominance as to affect the prevailing market Private respondents contend that the disputed amended by laws were
factors. adopted by the Board of Directors of San Miguel Corporation a-, a measure
of self-defense to protect the corporation from the clear and present danger
It is further asserted that in 1977, the CFC-Robina group was in direct that the election of a business competitor to the Board may cause upon the
competition on product lines which, for SMC, represented sales amounting to corporation and the other stockholders inseparable prejudice. Submitted for
more than ?478 million. In addition, CFC-Robina was directly competing in resolution, therefore, is the issue whether or not respondent San Miguel
the sale of coffee with Filipro, a subsidiary of SMC, which product line Corporation could, as a measure of self- protection, disqualify a competitor
represented sales for SMC amounting to more than P275 million. The CFC- from nomination and election to its Board of Directors.
Robina group (Robitex, excluding Litton Mills recently acquired by petitioner)
is purportedly also in direct competition with Ramie Textile, Inc., subsidiary of It is recognized by an authorities that 'every corporation has the inherent
SMC, in product sales amounting to more than P95 million. The areas of power to adopt by-laws 'for its internal government, and to regulate the
competition between SMC and CFC-Robina in 1977 represented, therefore, conduct and prescribe the rights and duties of its members towards itself and
for SMC, product sales of more than P849 million. among themselves in reference to the management of its affairs. 12 At
common law, the rule was "that the power to make and adopt by-laws
According to private respondents, at the Annual Stockholders' Meeting of was inherent in every corporation as one of its necessary and inseparable
March 18, 1976, 9,894 stockholders, in person or by proxy, owning legal incidents. And it is settled throughout the United States that in the
absence of positive legislative provisions limiting it, every private corporation

795
has this inherent power as one of its necessary and inseparable legal
incidents, independent of any specific enabling provision in its charter or in
general law, such power of self-government being essential to enable the
corporation to accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation
may prescribe in its by-laws "the qualifications, duties and compensation of
directors, officers and employees ... " This must necessarily refer to a
qualification in addition to that specified by section 30 of the Corporation Law,
which provides that "every director must own in his right at least one share of
the capital stock of the stock corporation of which he is a director ... "
In Government v. El Hogar, 14 the Court sustained the validity of a provision in
the corporate by-law requiring that persons elected to the Board of Directors
must be holders of shares of the paid up value of P5,000.00, which shall be
held as security for their action, on the ground that section 21 of the
Corporation Law expressly gives the power to the corporation to provide in its
by-laws for the qualifications of directors and is "highly prudent and in
conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that
its affairs are dominated by a majority of the stockholders and that he
impliedly contracts that the will of the majority shall govern in all matters
within the limits of the act of incorporation and lawfully enacted by-laws and
not forbidden by law." 15 To this extent, therefore, the stockholder may be
considered to have "parted with his personal right or privilege to regulate the
disposition of his property which he has invested in the capital stock of the
corporation, and surrendered it to the will of the majority of his fellow
incorporators. ... It cannot therefore be justly said that the contract, express
or implied, between the corporation and the stockholders is infringed ... by
any act of the former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend
its articles of incorporation by a vote or written assent of the stockholders
representing at least two-thirds of the subscribed capital stock of the
corporation If the amendment changes, diminishes or restricts the rights of
the existing shareholders then the disenting minority has only one right,
viz.: "to object thereto in writing and demand payment for his share." Under
section 22 of the same law, the owners of the majority of the subscribed
capital stock may amend or repeal any by-law or adopt new by-laws. It
cannot be said, therefore, that petitioner has a vested right to be elected
director, in the face of the fact that the law at the time such right as
stockholder was acquired contained the prescription that the corporate
charter and the by-law shall be subject to amendment, alteration and
modification. 17
It being settled that the corporation has the power to provide for the
qualifications of its directors, the next question that must be considered is
whether the disqualification of a competitor from being elected to the Board
of Directors is a reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE
CORPORATION AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation
are not regarded as trustees, there cannot be any doubt that their character
is that of a fiduciary insofar as the corporation and the stockholders as a
body are concerned. As agents entrusted with the management of the
corporation for the collective benefit of the stockholders, "they occupy a
fiduciary relation, and in this sense the relation is one of trust." 18 "The
ordinary trust relationship of directors of a corporation and stockholders",
according to Ashaman v. Miller, 19 "is not a matter of statutory or technical
law. It springs from the fact that directors have the control and guidance of
corporate affairs and property and hence of the property interests of the
stockholders. Equity recognizes that stockholders are the proprietors of the
corporate interests and are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of
fiduciary obligation of the directors of corporations, thus:
796
 A director is a fiduciary. ... Their powers are powers in
trust. ... He who is in such fiduciary position cannot serve
himself first and his cestuis second. ... He cannot manipulate
the affairs of his corporation to their detriment and in
disregard of the standards of common decency. He cannot
by the intervention of a corporate entity violate the ancient
precept against serving two masters ... He cannot utilize his
inside information and strategic position for his own
preferment. He cannot violate rules of fair play by doing
indirectly through the corporation what he could not do so
directly. He cannot violate rules of fair play by doing indirectly
though the corporation what he could not do so directly. He
cannot use his power for his personal advantage and to the
detriment of the stockholders and creditors no matter how
absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it
may not be exercised for the aggrandizement, preference or
advantage of the fiduciary to the exclusion or detriment of
the cestuis.
21
And in Cross v. West Virginia Cent, & P. R. R. Co., it was said:
... A person cannot serve two hostile and adverse master,
without detriment to one of them. A judge cannot be impartial
if personally interested in the cause. No more can a director.
Human nature is too weak -for this. Take whatever statute
provision you please giving power to stockholders to choose
directors, and in none will you find any express prohibition
against a discretion to select directors having the company's
interest at heart, and it would simply be going far to deny by
mere implication the existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a
competing company from being a director, the same reasoning would apply
to disqualify the wife and immediate member of the family of such
stockholder, on account of the supposed interest of the wife in her husband's
affairs, and his suppose influence over her. It is perhaps true that such
stockholders ought not to be condemned as selfish and dangerous to the
best interest of the corporation until tried and tested. So it is also true that we
cannot condemn as selfish and dangerous and unreasonable the action of
the board in passing the by-law. The strife over the matter of control in this
corporation as in many others is perhaps carried on not altogether in the
spirit of brotherly love and affection. The only test that we can apply is as to
whether or not the action of the Board is authorized and sanctioned by law. ...
. 22
These principles have been applied by this Court in previous cases. 23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A
STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO
DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN
COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN
SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that
corporations have the power to make by-laws declaring a person employed
in the service of a rival company to be ineligible for the corporation's Board of
Directors. ... (A)n amendment which renders ineligible, or if elected, subjects
to removal, a director if he be also a director in a corporation whose business
is in competition with or is antagonistic to the other corporation is
valid." 24 This is based upon the principle that where the director is so
employed in the service of a rival company, he cannot serve both, but must
betray one or the other. Such an amendment "advances the benefit of the
corporation and is good." An exception exists in New Jersey, where the
Supreme Court held that the Corporation Law in New Jersey prescribed the
only qualification, and therefore the corporation was not empowered to add
additional qualifications. 25 This is the exact opposite of the situation in the
Philippines because as stated heretofore, section 21 of the Corporation Law
expressly provides that a corporation may make by-laws for the qualifications
of directors. Thus, it has been held that an officer of a corporation cannot
engage in a business in direct competition with that of the corporation where
he is a director by utilizing information he has received as such officer, under
"the established law that a director or officer of a corporation may not enter
797
into a competing enterprise which cripples or injures the business of the
corporation of which he is an officer or director. 26
It is also well established that corporate officers "are not permitted to use
their position of trust and confidence to further their private interests." 27 In a
case where directors of a corporation cancelled a contract of the corporation
for exclusive sale of a foreign firm's products, and after establishing a rival
business, the directors entered into a new contract themselves with the
foreign firm for exclusive sale of its products, the court held that equity would
regard the new contract as an offshoot of the old contract and, therefore, for
the benefit of the corporation, as a "faultless fiduciary may not reap the fruits
of his misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the
courts that the fiduciary standards could not be upheld where the fiduciary
was acting for two entities with competing interests. This doctrine rests
fundamentally on the unfairness, in particular circumstances, of an officer or
director taking advantage of an opportunity for his own personal profit when
the interest of the corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information, such
as: (a) marketing strategies and pricing structure; (b) budget for expansion
and diversification; (c) research and development; and (d) sources of
funding, availability of personnel, proposals of mergers or tie-ups with other
firms.
It is obviously to prevent the creation of an opportunity for an officer or
director of San Miguel Corporation, who is also the officer or owner of a
competing corporation, from taking advantage of the information which he
acquires as director to promote his individual or corporate interests to the
prejudice of San Miguel Corporation and its stockholders, that the questioned
amendment of the by-laws was made. Certainly, where two corporations are
competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to
satisfy his loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court
sustained as valid and reasonable an amendment to the by-laws of a bank,
requiring that its directors should not be directors, officers, employees,
agents, nominees or attorneys of any other banking corporation, affiliate or
subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of
the court, thus:
... A bank director has access to a great deal of information
concerning the business and plans of a bank which would
likely be injurious to the bank if known to another bank, and
it was reasonable and prudent to enlarge this minimum
disqualification to include any director, officer, employee,
agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection
against rivals and others who might acquire information
which might be used against the interests of the corporation
as a legitimate object of by-law protection. With respect to
attorneys or persons associated with a firm which is attorney
for another bank, in addition to the direct conflict or potential
conflict of interest, there is also the danger of inadvertent
leakage of confidential information through casual office
discussions or accessibility of files. Defendant's directors
determined that its welfare was best protected if this
opportunity for conflicting loyalties and potential misuse and
leakage of confidential information was foreclosed.
798
In McKee the Court further listed qualificational by-laws upheld by the courts,
as follows:
(1) A director shall not be directly or indirectly interested as a
stockholder in any other firm, company, or association which
competes with the subject corporation.
(2) A director shall not be the immediate member of the
family of any stockholder in any other firm, company, or
association which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee,
attorney, or trustee in any other firm, company, or
association which compete with the subject corporation.
(4) A director shall be of good moral character as an
essential qualification to holding office.
(5) No person who is an attorney against the corporation in a
law suit is eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience
that a person cannot serve two hostile masters without detriment to one of
them.
The offer and assurance of petitioner that to avoid any possibility of his taking
unfair advantage of his position as director of San Miguel Corporation, he
would absent himself from meetings at which confidential matters would be
discussed, would not detract from the validity and reasonableness of the by-
laws here involved. Apart from the impractical results that would ensue from
such arrangement, it would be inconsistent with petitioner's primary motive in
running for board membership which is to protect his investments in San
Miguel Corporation. More important, such a proposed norm of conduct would
be against all accepted principles underlying a director's duty of fidelity to the
corporation, for the policy of the law is to encourage and enforce responsible
corporate management. As explained by Oleck: 31 "The law win not tolerate
the passive attitude of directors ... without active and conscientious
participation in the managerial functions of the company. As directors, it is
their duty to control and supervise the day to day business activities of the
company or to promulgate definite policies and rules of guidance with a
vigilant eye toward seeing to it that these policies are carried out. It is only
then that directors may be said to have fulfilled their duty of fealty to the
corporation."
Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require
that he disclose this information to a competitive arrival. These dangers are
enhanced considerably where the common director such as the petitioner is
a controlling stockholder of two of the competing corporations. It would seem
manifest that in such situations, the director has an economic incentive to
appropriate for the benefit of his own corporation the corporate plans and
policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding
marketing strategies and pricing policies of San Miguel Corporation would
subject the latter to a competitive disadvantage and unjustly enrich the
competitor, for advance knowledge by the competitor of the strategies for the
development of existing or new markets of existing or new products could
enable said competitor to utilize such knowledge to his advantage. 32
There is another important consideration in determining whether or not the
amended by-laws are reasonable. The Constitution and the law prohibit
combinations in restraint of trade or unfair competition. Thus, section 2 of
Article XIV of the Constitution provides: "The State shall regulate or prohibit
private monopolies when the public interest so requires. No combinations in
restraint of trade or unfair competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade.
The penalty of prision correccional in its minimum period
799
 or a fine ranging from two hundred to six thousand pesos, or
both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement
or shall take part in any conspiracy or combination in the
form of a trust or otherwise, in restraint of trade or commerce
or to prevent by artificial means free competition in the
market.
2. Any person who shag monopolize any merchandise or
object of trade or commerce, or shall combine with any other
person or persons to monopolize said merchandise or object
in order to alter the price thereof by spreading false rumors
or making use of any other artifice to restrain free
competition in the market.
3. Any person who, being a manufacturer, producer, or
processor of any merchandise or object of commerce or an
importer of any merchandise or object of commerce from
any foreign country, either as principal or agent, wholesale or
retailer, shall combine, conspire or agree in any manner with
any person likewise engaged in the manufacture, production,
processing, assembling or importation of such merchandise
or object of commerce or with any other persons not so
similarly engaged for the purpose of making transactions
prejudicial to lawful commerce, or of increasing the market
price in any part of the Philippines, or any such merchandise
or object of commerce manufactured, produced, processed,
assembled in or imported into the Philippines, or of any
article in the manufacture of which such manufactured,
produced, processed, or imported merchandise or object of
commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and
combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in
restraint of trade are aimed at raising levels of competition by improving the
consumers' effectiveness as the final arbiter in free markets. These laws are
designed to preserve free and unfettered competition as the rule of trade. "It
rests on the premise that the unrestrained interaction of competitive forces
will yield the best allocation of our economic resources, the lowest prices and
the highest quality ... ." 34 they operate to forestall concentration of economic
power. 35 The law against monopolies and combinations in restraint of trade
is aimed at contracts and combinations that, by reason of the inherent nature
of the contemplated acts, prejudice the public interest by unduly restraining
competition or unduly obstructing the course of trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair
competition" appear to have a well defined meaning in other jurisdictions. A
"monopoly" embraces any combination the tendency of which is to prevent
competition in the broad and general sense, or to control prices to the
detriment of the public. 37 In short, it is the concentration of business in the
hands of a few. The material consideration in determining its existence is not
that prices are raised and competition actually excluded, but
that power exists to raise prices or exclude competition when
desired. 38Further, it must be considered that the Idea of monopoly is now
understood to include a condition produced by the mere act of individuals. Its
dominant thought is the notion of exclusiveness or unity, or the suppression
of competition by the qualification of interest or management, or it may be
thru agreement and concert of action. It is, in brief, unified tactics with regard
to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner
are not in accord with reality. The election of petitioner to the Board of
respondent Corporation can bring about an illegal situation. This is because
an express agreement is not necessary for the existence of a combination or
conspiracy in restraint of trade. 40 It is enough that a concert of action is
contemplated and that the defendants conformed to the arrangements, 41 and
what is to be considered is what the parties actually did and not the words
they used. For instance, the Clayton Act prohibits a person from serving at
the same time as a director in any two or more corporations, if such
corporations are, by virtue of their business and location of
800
operation, competitors so that the elimination of competition between them
would constitute violation of any provision of the anti-trust laws. 42 There is
here a statutory recognition of the anti-competitive dangers which may arise
when an individual simultaneously acts as a director of two or more
competing corporations. A common director of two or more competing
corporations would have access to confidential sales, pricing and marketing
information and would be in a position to coordinate policies or to aid one
corporation at the expense of another, thereby stifling competition. This
situation has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from
sharing even one director is that theinterlock permits the
coordination of policies between nominally independent
firms to an extent that competition between them may be
completely eliminated. Indeed, if a director, for example, is to
be faithful to both corporations, some accommodation must
result. Suppose X is a director of both Corporation A and
Corporation B. X could hardly vote for a policy by A that
would injure B without violating his duty of loyalty to B at the
same time he could hardly abstain from voting without
depriving A of his best judgment. If the firms really do
compete in the sense of vying for economic advantage at
the expense of the other there can hardly be any
reason for an interlock between competitors other than the
suppression of competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S.
Congress on section 9 of the Clayton Act, it was established that: "By means
of the interlocking directorates one man or group of men have been able to
dominate and control a great number of corporations ... to the detriment of
the small ones dependent upon them and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly,
shared information on production, orders, shipments, capacity and
inventories may lead to control of production for the purpose of controlling
prices.
Obviously, if a competitor has access to the pricing policy and cost conditions
of the products of San Miguel Corporation, the essence of competition in a
free market for the purpose of serving the lowest priced goods to the
consuming public would be frustrated, The competitor could so manipulate
the prices of his products or vary its marketing strategies by region or by
brand in order to get the most out of the consumers. Where the two
competing firms control a substantial segment of the market this could lead
to collusion and combination in restraint of trade. Reason and experience
point to the inevitable conclusion that the inherent tendency of interlocking
directorates between companies that are related to each other as
competitors is to blunt the edge of rivalry between the corporations, to seek
out ways of compromising opposing interests, and thus eliminate
competition. As respondent SMC aptly observes, knowledge by CFC-Robina
of SMC's costs in various industries and regions in the country win enable
the former to practice price discrimination. CFC-Robina can segment the
entire consuming population by geographical areas or income groups and
change varying prices in order to maximize profits from every market
segment. CFC-Robina could determine the most profitable volume at which it
could produce for every product line in which it competes with SMC. Access
to SMC pricing policy by CFC-Robina would in effect destroy free competition
and deprive the consuming public of opportunity to buy goods of the highest
possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent,
engaged in agriculture, then the election of petitioner to the Board of SMC
may constitute a violation of the prohibition contained in section 13(5) of the
Corporation Law. Said section provides in part that "any stockholder of more
than one corporation organized for the purpose of engaging in agriculture
may hold his stock in such corporations solely for investment and not for the
purpose of bringing about or attempting to bring about a combination to
exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to
prevent the candidacy of petitioner for election to the Board. If the by-law
were to be applied in the case of one stockholder but waived in the case of
another, then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner. However, the by law, by its terms, applies
801
to all stockholders. The equal protection clause of the Constitution requires
only that the by-law operate equally upon all persons of a class. Besides,
before petitioner can be declared ineligible to run for director, there must be
hearing and evidence must be submitted to bring his case within the ambit of
the disqualification. Sound principles of public policy and management,
therefore, support the view that a by-law which disqualifies a competition
from election to the Board of Directors of another corporation is valid and
reasonable.
In the absence of any legal prohibition or overriding public policy, wide
latitude may be accorded to the corporation in adopting measures to protect
legitimate corporation interests. Thus, "where the reasonableness of a by-law
is a mere matter of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment
instead of the judgment of those who are authorized to make by-laws and
who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present
Board powers to perpetua themselves in power such fears appear to be
misplaced. This power, but is very nature, is subject to certain well
established limitations. One of these is inherent in the very convert and
definition of the terms "competition" and "competitor". "Competition" implies a
struggle for advantage between two or more forces, each possessing, in
substantially similar if not Identical degree, certain characteristics essential to
the business sought. It means an independent endeavor of two or more
persons to obtain the business patronage of a third by offering more
advantageous terms as an inducement to secure trade. 46 The test must be
whether the business does in fact compete, not whether it is capable of an
indirect and highly unsubstantial duplication of an isolated or non-
characteristics activity. 47 It is, therefore, obvious that not every person or
entity engaged in business of the same kind is a competitor. Such factors as
quantum and place of business, Identity of products and area of competition
should be taken into consideration. It is, therefore, necessary to show that
petitioner's business covers a substantial portion of the same markets for
similar products to the extent of not less than 10% of respondent
corporation's market for competing products. While We here sustain the
validity of the amended by-laws, it does not follow as a necessary
consequence that petitioner is ipso facto disqualified. Consonant with the
requirement of due process, there must be due hearing at which the
petitioner must be given the fullest opportunity to show that he is not covered
by the disqualification. As trustees of the corporation and of the stockholders,
it is the responsibility of directors to act with fairness to the
stockholders. 48 Pursuant to this obligation and to remove any suspicion that
this power may be utilized by the incumbent members of the Board to
perpetuate themselves in power, any decision of the Board to disqualify a
candidate for the Board of Directors should be reviewed by the Securities
behind Exchange Commission en banc and its decision shall be final unless
reversed by this Court on certiorari. 49 Indeed, it is a settled principle that
where the action of a Board of Directors is an abuse of discretion, or
forbidden by statute, or is against public policy, or is ultra vires, or is a fraud
upon minority stockholders or creditors, or will result in waste, dissipation or
misapplication of the corporation assets, a court of equity has the power to
grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying
petitioner's request for an examination of the records of San Miguel
International Inc., a fully owned subsidiary of San Miguel Corporation
Respondent San Miguel Corporation stated in its memorandum that
petitioner's claim that he was denied inspection rights as stockholder of SMC
"was made in the teeth of undisputed facts that, over a specific period,
petitioner had been furnished numerous documents and information," to wit:
(1) a complete list of stockholders and their stockholdings; (2) a complete list
of proxies given by the stockholders for use at the annual stockholders'
meeting of May 18, 1975; (3) a copy of the minutes of the stockholders'
meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million
investment in associated companies and other companies as of December
31, 1975; (5) a listing of the salaries, allowances, bonuses and other
compensation or remunerations received by the directors and corporate
officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan
Agreement of SMC; and (7) copies of the minutes of all meetings of the
802
Board of Directors from January 1975 to May 1976, with deletions of
sensitive data, which deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing
on September 18, 1976; (1) that SMC's foreign investments are handled by
San Miguel International, Inc., incorporated in Bermuda and wholly owned by
SMC; this was SMC's first venture abroad, having started in 1948 with an
initial outlay of ?500,000.00, augmented by a loan of Hongkong $6 million
from a foreign bank under the personal guaranty of SMC's former President,
the late Col. Andres Soriano; (2) that as of December 31, 1975, the
estimated value of SMI would amount to almost P400 million (3) that the total
cash dividends received by SMC from SMI since 1953 has amount to US $
9.4 million; and (4) that from 1972-1975, SMI did not declare cash or stock
dividends, all earnings having been used in line with a program for the setting
up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary,
enclosing photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law,
"(t)he record of all business transactions of the corporation and minutes of
any meeting shall be open to the inspection of any director, member or
stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is
based upon their ownership of the assets and property of the corporation. It
is, therefore, an incident of ownership of the corporate property, whether this
ownership or interest be termed an equitable ownership, a beneficial
ownership, or a ownership. 52 This right is predicated upon the necessity of
self-protection. It is generally held by majority of the courts that where the
right is granted by statute to the stockholder, it is given to him as such and
must be exercised by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the corporation. 53 In
other words, the inspection has to be germane to the petitioner's interest as a
stockholder, and has to be proper and lawful in character and not inimical to
the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held
that "the right to examine the books of the corporation must be exercised in
good faith, for specific and honest purpose, and not to gratify curiosity, or for
specific and honest purpose, and not to gratify curiosity, or for speculative or
vexatious purposes. The weight of judicial opinion appears to be, that on
application for mandamus to enforce the right, it is proper for the court to
inquire into and consider the stockholder's good faith and his purpose and
motives in seeking inspection. 56 Thus, it was held that "the right given by
statute is not absolute and may be refused when the information is not
sought in good faith or is used to the detriment of the corporation." 57 But the
"impropriety of purpose such as will defeat enforcement must be set up the
corporation defensively if the Court is to take cognizance of it as a
qualification. In other words, the specific provisions take from the stockholder
the burden of showing propriety of purpose and place upon the corporation
the burden of showing impropriety of purpose or motive. 58 It appears to be
the general rule that stockholders are entitled to full information as to the
management of the corporation and the manner of expenditure of its funds,
and to inspection to obtain such information, especially where it appears that
the company is being mismanaged or that it is being managed for the
personal benefit of officers or directors or certain of the stockholders to the
exclusion of others." 59
While the right of a stockholder to examine the books and records of a
corporation for a lawful purpose is a matter of law, the right of such
stockholder to examine the books and records of a wholly-owned subsidiary
of the corporation in which he is a stockholder is a different thing.
803
Some state courts recognize the right under certain conditions, while others
do not. Thus, it has been held that where a corporation owns approximately
no property except the shares of stock of subsidiary corporations which are
merely agents or instrumentalities of the holding company, the legal fiction of
distinct corporate entities may be disregarded and the books, papers and
documents of all the corporations may be required to be produced for
examination, 60 and that a writ of mandamus, may be granted, as the records
of the subsidiary were, to all incontents and purposes, the records of the
parent even though subsidiary was not named as a party. 61 mandamus was
likewise held proper to inspect both the subsidiary's and the parent
corporation's books upon proof of sufficient control or dominion by the parent
showing the relation of principal or agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where
the subsidiary corporation is a separate and distinct corporation domiciled
and with its books and records in another jurisdiction, and is not legally
subject to the control of the parent company, although it owned a vast
majority of the stock of the subsidiary. 63 Likewise, inspection of the books of
an allied corporation by stockholder of the parent company which owns all
the stock of the subsidiary has been refused on the ground that the
stockholder was not within the class of "persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the
contractual right of former stockholders to inspect books and records of the
corporation included the right to inspect corporation's subsidiaries' books and
records which were in corporation's possession and control in its office in
New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to
inspect the records of a controlled subsidiary corporation which used the
same offices and had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before
respondent SEC, petitioner contended that respondent corporation "had
been attempting to suppress information for the stockholders" and that
petitioner, "as stockholder of respondent corporation, is entitled to copies of
some documents which for some reason or another, respondent corporation
is very reluctant in revealing to the petitioner notwithstanding the fact that no
harm would be caused thereby to the corporation." 67 There is no question
that stockholders are entitled to inspect the books and records of a
corporation in order to investigate the conduct of the management, determine
the financial condition of the corporation, and generally take an account of
the stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would
be more in accord with equity, good faith and fair dealing to construe the
statutory right of petitioner as stockholder to inspect the books and records of
the corporation as extending to books and records of such wholly subsidiary
which are in respondent corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the
stockholders of respondent corporation to ratify the investment of corporate
funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent
corporation invested corporate funds in SMI without prior authority of the
stockholders, thus violating section 17-1/2 of the Corporation Law, and
alleges that respondent SEC should have investigated the charge, being a
statutory offense, instead of allowing ratification of the investment by the
stockholders.
Respondent SEC's position is that submission of the investment to the
stockholders for ratification is a sound corporate practice and should not be
thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its
funds in any other corporation or business or for any purpose other than the
main purpose for which it was organized" provided that its Board of Directors
has been so authorized by the affirmative vote of stockholders holding
804
shares entitling them to exercise at least two-thirds of the voting power. If the
investment is made in pursuance of the corporate purpose, it does not need
the approval of the stockholders. It is only when the purchase of shares is
done solely for investment and not to accomplish the purpose of its
incorporation that the vote of approval of the stockholders holding shares
entitling them to exercise at least two-thirds of the voting power is
necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing
facilities by SMC was an investment in the same business stated as its main
purpose in its Articles of Incorporation, which is to manufacture and market
beer. It appears that the original investment was made in 1947-1948, when
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong
(Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of
San Miguel beer thereat. Restructuring of the investment was made in 1970-
1971 thru the organization of SMI in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar
Central Co., Inc., supra, appears relevant. In said case, one of the issues
was the legality of an investment made by Manao Sugar Central Co., Inc.,
without prior resolution approved by the affirmative vote of 2/3 of the
stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a
company engaged in the manufacture of sugar bags. The lower court said
that "there is more logic in the stand that if the investment is made in a
corporation whose business is important to the investing corporation and
would aid it in its purpose, to require authority of the stockholders would be to
unduly curtail the power of the Board of Directors." This Court affirmed the
ruling of the court a quo on the matter and, quoting Prof. Sulpicio S.
Guevara, said:
"j. Power to acquire or dispose of shares or securities. A
private corporation, in order to accomplish is purpose as
stated in its articles of incorporation, and subject to the
limitations imposed by the Corporation Law, has the power
to acquire, hold, mortgage, pledge or dispose of shares,
bonds, securities, and other evidence of indebtedness of any
domestic or foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not need the
approval of stockholders; but when the purchase of shares
of another corporation is done solely for investment and not
to accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary. In any case, the
purchase of such shares or securities must be subject to the
limitations established by the Corporations law; namely, (a)
that no agricultural or mining corporation shall be restricted
to own not more than 15% of the voting stock of nay
agricultural or mining corporation; and (c) that such holdings
shall be solely for investment and not for the purpose of
bringing about a monopoly in any line of commerce of
combination in restraint of trade." The Philippine Corporation
Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis
supplied.)
40. Power to invest corporate funds. A private corporation
has the power to invest its corporate funds "in any other
corporation or business, or for any purpose other than the
main purpose for which it was organized, provide that 'its
board of directors has been so authorized in a resolution by
the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of
the voting power on such a propose at a stockholders'
meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining
corporation. When the investment is necessary to
accomplish its purpose or purposes as stated in its articles
of incorporation the approval of the stockholders is not
necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority to
make the assailed investment, there is no question that a corporation, like an
individual, may ratify and thereby render binding upon it the originally
unauthorized acts of its officers or other agents. 70 This is true because the
questioned investment is neither contrary to law, morals, public order or
805
public policy. It is a corporate transaction or contract which is within the
corporate powers, but which is defective from a supported failure to observe
in its execution the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding two-thirds of
the voting power. This requirement is for the benefit of the stockholders. The
stockholders for whose benefit the requirement was enacted may, therefore,
ratify the investment and its ratification by said stockholders obliterates any
defect which it may have had at the outset. "Mere ultra vires acts", said this
Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are
not merely within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by the
stockholders.
Besides, the investment was for the purchase of beer manufacturing and
marketing facilities which is apparently relevant to the corporate purpose.
The mere fact that respondent corporation submitted the assailed investment
to the stockholders for ratification at the annual meeting of May 10, 1977
cannot be construed as an admission that respondent corporation had
committed an ultra vires act, considering the common practice of
corporations of periodically submitting for the gratification of their
stockholders the acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that
petitioner be allowed to examine the books and records of San Miguel
International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent San
Miguel Corporation, six (6) Justices, namely, Justices Barredo, Makasiar,
Antonio, Santos, Abad Santos and De Castro, voted to sustain the validity
per se of the amended by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of petitioner John
Gokongwei, Jr. to run and if elected to sit as director of respondent San
Miguel Corporation being decided, after a new and proper hearing by the
Board of Directors of said corporation, whose decision shall be appealable to
the respondent Securities and Exchange Commission deliberating and
acting en banc and ultimately to this Court. Unless disqualified in the manner
herein provided, the prohibition in the afore-mentioned amended by-laws
shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted
to declare the issue on the validity of the foreign investment of respondent
corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the
amended by-laws, pending hearing by this Court on the applicability of
section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to
the by-laws but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez
and Guerrero filed a separate opinion, wherein they voted against the validity
of the questioned amended bylaws and that this question should properly be
resolved first by the SEC as the agency of primary jurisdiction. They concur
in the result that petitioner may be allowed to run for and sit as director of
respondent SMC in the scheduled May 6, 1979 election and subsequent
elections until disqualified after proper hearing by the respondent's Board of
Directors and petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby
rendered GRANTING the petition by allowing petitioner to examine the books
and records of San Miguel International, Inc. as specified in the petition. The
petition, insofar as it assails the validity of the amended by- laws and the
ratification of the foreign investment of respondent corporation, for lack of
necessary votes, is hereby DISMISSED. No costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
Aquino, and Melencio Herrera JJ., took no part.
806

G.R. No. 11897 September 24, 1918
J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-
appellants.
Jose Moreno Lacalle for appellant Fernandez.
Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."
No appearance for appellee.
STREET, J.:
The Orientalist Company is a corporation, duly organized under the laws of
the Philippine Islands, and in 1913 and 1914, the time of the occurrences
which gave rise to this lawsuit, was engaged in the business of maintaining
and conducting a theatre in the city of Manila for the exhibition of
cinematographic films. Under the articles of incorporation the company is
authorized to manufacture, buy, or otherwise obtain all accessories
necessary for conducting such a business. The plaintiff J. F. Ramirez was, at
the same time, a resident of the city of Paris, France, and was engaged in
the business of marketing films for a manufacturer or manufacturers, there
engaged in the production or distribution of cinematographic material. In this
enterprise the plaintiff was represented in the city of Manila by his son, Jose
Ramirez.
In the month of July, 1913, certain of the directors of the Orientalist Company,
in Manila, became apprised of the fact that the plaintiff in Paris had control of
the agencies for two different marks of films, namely, the "Eclair Films" and
the "Milano Films;" and negotiations were begun with said officials of the
Orientalist Company by Jose Ramirez, as agent of the plaintiff, for the
purpose of placing the exclusive agency of these films in the hands of the
Orientalist Company. The defendant Ramon J. Fernandez, one of the
directors of the Orientalist Company and also its treasure, was chiefly active
in this matter, being moved by the suggestions and representations of
Vicente Ocampo, manage of the Oriental Theater, to the effect that the
securing of the said films was necessary to the success of the corporation.
Near the end of July of the year aforesaid, Jose Ramirez, as representative
of his father, placed in the hands of Ramon J. Fernandez an offer, dated July
4, 1913, stating detail the terms upon which the plaintiff would undertake to
supply from Paris the aforesaid films. This officer was declared to be good
until the end of July; and as only about for the Orientalist Company to act on
the matter speedily, if it desired to take advantage of said offer. Accordingly,
Ramon J. Fernandez, on July 30, had an informal conference with all the
members of the company's board of directors except one, and with approval
of those with whom he had communicated, addressed a letter to Jose
Ramirez, in Manila, accepting the offer contained in the memorandum of July
4th for the exclusive agency of the Eclair films. A few days later, on August 5,
he addressed another letter couched in the same terms, likewise accepting
the office of the exclusive agency for the Milano Films.
The memorandum offer contained a statement of the price at which the films
would be sold, the quantity which the representative of each was required to
take and information concerning the manner and intervals of time for the
respective shipments. The expenses of packing, transportation and other
incidentals were to be at the cost of the purchaser. There was added a
clause in which J. F. Ramirez described his function in such transactions as
that of a commission agent and stated that he would see to the prompt
shipment of the films, would pay the manufacturer, and take care that the
films were insured his commission for such services being fixed at 5 per
cent.
What we consider to be the most portion of the two letters of acceptance
written by R. J. Fernandez to Jose Ramirez is in the following terms:
We willingly accepted the officer under the terms communicated by
your father in his letter dated at Paris on July 4th of the present year.
807
These communications were signed in the following form, in which it will be
noted the separate signature of R. J. Fernandez, as an individual, is placed
somewhat below and to the left of the signature of the Orientalist Company
as singed by R. J. Fernandez, in the capacity of treasurer:
THE ORIENTALIST COMPANY,
By R. J. FERNANDEZ,
Treasurer,
R. J. FERNANDEZ.
Both of these letters also contained a request that Jose Ramirez should at
once telegraph to his father in Paris that his offer had been accepted by the
Orientalist Company and instruct him to make a contract with the film
companies, according to the tenor of the offer, and in the capacity of
attorney-in-fact for the Orientalist Company. The idea behind the latter
suggestion apparently was that the contract for the films would have to be
made directly between the film-producing companies and the Orientalist
Company; and it seemed convenient, in order to save time, that the
Orientalist Company should clothed J. F. Ramirez with full authority as its
attorney-in-fact. This idea was never given effect; and so far as the record
shows, J. F. Ramirez himself procured the films upon his own responsibility,
as he indicated in the officer of July 4 that he would do, with the result that
the only contracting parties in this case are J. F. Ramirez of the one part, and
the Orientalist Company, with Ramon J. Fernandez of the other.
In due time the films began to arrive in Manila, a draft for the cost and
expenses incident to each shipment being attached to the proper bill of
lading. It appears that the Orientalist Company was without funds to meet
these obligations and the first few drafts were dealt with in the following
manner: The drafts, upon presented through the bank, were accepted in the
name of the Orientalist Company by its president B. Hernandez, and were
taken up by the latter with his own funds. As the drafts had thus been paid by
B. Hernandez, the films which had been procured by he payment of said
drafts were treated by him as his own property; and they in fact never came
into the actual possession of the Orientalist Company as owner at all, though
it is true Hernandez rented the films to the Orientalist Company and they
were exhibited by it in the Oriental Theater under an arrangement which was
made between him and the theater's manager.
During the period between February 27, 1914, and April 30, 1914, there
arrived in the city of Manila several remittances of films from Paris, and it is
these shipments which have given occasion for the present action. All of the
drafts accompanying these films were drawn, as on former occasions, upon
the Orientalist Company; and all were accepted in the name of B.
Hernandez, except the last, which was accepted by B. Hernandez
individually. None of the drafts thus accepted were taken up by the drawee or
by B. Hernandez when they fell due; and it was finally necessary for the
plaintiff himself to take them up as dishonored by non-payment.
Thereupon this action was instituted by the plaintiff on May 19, 1914, against
the Orientalist Company, and Ramon J. Fernandez. As the films which
accompanied the dishonored were liable to deteriorate, the court, upon
application of the plaintiff, and apparently without opposition on the part of
the defendants, appointed a receiver who took charge of the films and sold
them. The amount realized from this sale was applied to the satisfaction of
the plaintiff's claim and was accordingly delivered to him in part payment
thereof. At trial judgment was given for the balance due to the plaintiff,
namely P6,018.93, with interest from May 19, 1914, the date of the institution
of the action. In the judgment of the trial court the Orientalist Company was
declared to be a principal debtor and Ramon J. Fernandez was declared to
be liable subsidiarily as guarantor. From this judgment both of the parties
defendant appealed.
In this Court neither of the parties appellant make any question with respect
to the right of the plaintiff to recover from somebody the amount awarded by
the lower court; but each of the defendants insists the other is liable for the
whole. It results that the real contention upon this appeal is between the two
defendants.
808
It is stated in the brief of the appellant Ramon J. Fernandez and the
statement is not challenged by the Orientalist Company that the judgment
has already been executed as against the company is exclusively and
primarily liable the entire indebtedness, the question as to the liability of
Ramon J. Fernandez would be academic. But if the latter is liable as principal
obligor for the whole or any part of the debt, it will be necessary to modify the
judgment in order to adjust the rights of the defendants in accordance with
such finding.
It will be noted that the action is primarily founded upon the liability created
by the letters dated July 30th and August 5, 1913, in connection with the
plaintiff's offer of July 4, 1913; and both of the letters mentioned are copied
into the complaint as the foundation of the action. The action is not based
upon the dishonored drafts which were accepted by B. Hernandez in the
name of the Orientalist Company; and although these drafts, as well as the
last draft, which was accepted by B. Hernandez individually, have been
introduced in evidence, this was evidently done for the purpose of proving
the amount of damages which the plaintiff was entitled to recover.
In the discussion which is to follow we shall consider, first, the question of the
liability of the corporation upon the contracts contained in the letters of July
30 and August 5, 1913, and, secondly the question of the liability of Ramon J.
Fernandez, based upon his personal signature to the same documents.
As to the liability of the corporation a preliminary point of importance arises
upon the pleadings. The action, as already stated, is based upon documents
purporting to be signed by the Orientalist Company, and copies of the
documents are set out in the complaint. It was therefore incumbent upon the
corporation, if it desired to question the authority of Fernandez to bind it, to
deny the due execution of said contracts under oath, as prescribed in section
103 of the Code of Civil procedure. Said section, in the part pertinent to the
situation now under consideration, reads as follows:
When an action is brought upon a written instrument and the
complaint contains or has annexed or has annexed a copy of such
instrument, the genuineness and due execution of the instrument
shall be deemed admitted, unless specifically denied under oath in
the answer.
No sworn answer denying the genuineness and due execution of the
contracts in question or questioning the authority of Ramon J. Fernandez to
bind the Orientalist Company was filed in this case; but evidence was
admitted without objection from the plaintiff, tending to show that Ramon J.
Fernandez had no such authority. This evidence consisted of extracts from
the minutes of the proceedings of the company's board of directors and also
of extracts from the minutes of the proceedings of the company's
stockholders, showing that the making of this contract had been under
consideration in both bodies and that the authority to make the same had
been withheld by the stockholders. It therefore becomes necessary for us to
consider whether the administration resulting from the failure of the
defendant company to deny the execution of the contracts under oath is
binding upon it for all purposes of this lawsuit, or whether such failure should
be considered a mere irregularity of procedure which was waived when the
evidence referred to was admitted without objection from the plaintiff. The
proper solution of this problem makes it necessary to consider carefully the
principle underlying the provision above quoted.
That the situation was one in which an answer under oath denying the
authority of the agent should have been interposed, supposing that the
company desired to contest this point, is not open to question. In the case of
Merchant vs. International Banking Corporation, (6 Phil. Rep., 314), it
appeared that one Brown has signed the name of the defendant bank as
guarantor of a promissory note. The bank was sued upon this guaranty and
at the hearing attempted to prove that Brown had no authority to bind the
bank by such contract. It was held that buy failing to deny the contract under
oath, the bank had admitted the genuineness and due execution thereof, and
that this admission extended not only to the authenticity of the signature of
Brown but also to his authority. Said Justice Willard: "The failure of the
defendant to deny the genuineness and due execution of this guaranty under
oath was an admission not only of the signature of Brown, but also his
809
authority to make the contract in behalf of the defendant and of the power the
contract in behalf of the defendant and of the power of the defendant to enter
into such a contract.
The rule thus stated is in entire accord with the doctrine prevailing in the
United States, as will be seen by reference to the following, among other
authorities:
The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action
against a mining corporation upon an appeal bond. The name of the
company had been affixed to the obligation by an agent, and no sufficient
affidavit was filed by the corporation questioning its signature or the authority
of the agent to bind the company. It was held that the plaintiff did not have to
prove the due execution of the bond and that the corporation as to be taken
as admitting the authority of the agent to make the signature. Among other
things the court said: "But it is said that the authority of Barrett to execute the
bond is distinguishable from the signing and, although the signature must be
denied under oath, the authority of the agent need not be. Upon this we
observe that the statute manifestly refers to the legal effect of the signature,
rather than the manual act of singing. If the name of the obligor, in a bond, is
subscribed by one in his presence, and by his direction, the effect is the
same as if his name should be signed with his own hand, and under such
circumstances we do not doubt that the obligor must deny his signature
under oath, in order to put the obligee to proof of the fact. Quit facit per aliam
facit per se, and when the name is signed by one thereunto authorized, it is
as much as the signature of the principal as if written with his own hand.
Therefore, if the principal would deny the authority of the agent, as the
validity of the signature is thereby directly attacked, the denial must be under
oath.
In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a
promissory note purporting to have been given by on A. B., as the treasurer
of the defendant company. Said the court: "Under the Judiciary Act of 1799,
requiring the defendant to deny on oath an instrument of writing, upon which
he is sued, the plea in this case should have been verified.
If the person who signed this note for the company, and upon which they are
sued, was not authorized to make it, let them say so upon oath, and
the onus is then on the plaintiff to overcome the plea."
It should be noted that the provision contained in section 103 of our Code of
Civil Procedure is embodied in some form or other in the statutes of probably
all of the American States, and it is not by any means peculiar to the laws of
California, though it appears to have been taken immediately from the
statutes of that State. (Secs. 447, 448, California Code of Civil Procedure.)
There is really a broader question here involved than that which relates
merely to the formality of verifying the answer with an affidavit. This question
arises from the circumstance that the answer of the corporation does not in
any was challenge the authority of Ramon J. Fernandez to bind it by the
contracts in question and does not set forth, as a special defense, any such
lack of authority in him. Upon well-established principles of pleading lack of
authority in an officer of a corporation to bind it by a contract executed by him
in its name is a defense which should be specially pleaded and this quite
apart from the requirement, contained in section 103, that the answer setting
up such defense should be verified by oath. But is should not here escape
observation that section 103 also requires in denial contemplated in that
section shall be specific. An attack on the instrument in general terms is
insufficient, even though the answer is under oath. (Songco vs. Sellner, 37
Phil. Rep., 254.)
In the first edition of a well-known treatise on the laws of corporations we find
the following proposition:
If an action is brought against a corporation upon a contract alleged
to be its contract, if it desires to set up the defense that the contract
was executed by one not authorized as its agent, it must plead non
est factum. (Thompson on Corporations, 1st ed., vol. 6, sec. 7631.)
Again, says the same author:
810
 A corporation can not avail itself of the defense that it had no power
to enter into the obligation to enforce which the suit is brought,
unless it pleads that defense. This principle applies equally where
the defendant intends to challenge the power of its officer or agent to
execute in its behalf the contract upon which the action brought and
where it intends to defend on the ground of total want of power in the
corporation to make such a contract. (Opus citat. sec. 7619.)
In Simon vs. Calfee (80 Ark., 65), it was said:
Though the power of the officers of a business corporation to issue
negotiable paper in its name is not presumed, such corporation can
not avail itself of a want of power in its officers to bind it unless the
defense was made on such ground.
The rule has been applied where the question was whether corporate officer,
having admitted power to make a contract, had in the particular instance
exceeded that authority, (Merill vs. Consumers' Coal Co., 114 N.Y., 216); and
it has been held that where the answer in a suit against a corporation on its
note relies simply on the want of power of the corporation to issue notes, the
defendant can not afterwards object that the plaintiff has not shown that the
officer executing the note were empowered to do so. (Smith vs. Eureka Flour
Mills Co., 6 Cal., 1.)
The reason for the rule enunciated in the foregoing authorities will, we think,
be readily appreciated. In dealing with corporations the public at large is
bound to rely to a large extent upon outward appearances. If a man is found
acting for a corporation with the external indicia of authority, any person, not
having notice of want of authority, may usually rely upon those appearances;
and if it be found that the directors had permitted the agent to exercise that
authority and thereby held him out as a person competent to bind the
corporation, or had acquiesced in a contract and retained the benefit
supposed to have been conferred by it, the corporation will be bound,
notwithstanding the actual authority may never have been granted. The
public is not supposed nor required to know the transactions which happen
around the table where the corporate board of directors or the stockholders
are from time to time convoked. Whether a particular officer actually
possesses the authority which he assumes to exercise is frequently known to
very few, and the proof of it usually is not readily accessible to the stranger
who deals with the corporation on the faith of the ostensible authority
exercised by some of the corporate officers. It is therefore reasonable, in a
case where an officer of a corporation has made a contract in its name, that
the corporation should be required, if it denies his authority, to state such
defense in its answer. By this means the plaintiff is apprised of the fact that
the agent's authority is contested; and he is given an opportunity to adduce
evidence showing either that the authority existed or that the contract was
ratified and approved.
We are of the opinion that the failure of the defendant corporation to make
any issue in its answer with regard to the authority of Ramon J. Fernandez to
bind it, and particularly its failure to deny specifically under oath the
genuineness and due execution of the contracts sued upon, have the effect
of elimination the question of his authority from the case, considered as a
matter of mere pleading. The statute (sec. 103) plainly says that if a written
instrument, the foundation of the suit, is not denied upon oath, it shall be
deemed to be admitted. It is familiar doctrine that an admission made in a
pleading can not be controverted by the party making such admission; and
all proof submitted by him contrary thereto or inconsistent therewith should
simply be ignored by the court, whether objection is interposed by the
opposite party or not. We can see no reason why a constructive admission,
created by the express words of the statute, should be considered to have
less effect than any other admission.
The parties to an action are required to submit their respective contentions to
the court in their complaint and answer. These documents supply the
materials which the court must use in order to discover the points of
contention between the parties; and where the statute says that the due
execution of a document which supplies the foundation of an action is to be
taken as admitted unless denied under oath, the failure of the defendant to
make such denial must be taken to operate as a conclusive admission, so
long as the pleadings remain that form.
811
It is true that it is declared in section 109 of the Code of Civil Procedure that
immaterial variances between the allegations of a pleading and the proof
shall be disregarded and the facts shall be found according to the evidence.
The same section, however, recognizes the necessity for an amendment of
the pleadings. And judgment must be in conformity with the case made in
conformity with the case made in the pleadings and established by the proof,
and relief can not be granted that is substantially inconsistent with either. A
party can no more succeed upon a case proved but not alleged than upon a
case alleged but nor proved. This rule of course operates with like effect
upon both parties, and applies equality to the defendants special defense as
to the plaintiffs cause of action.
Of course this Court, under section 109 of the Code of Civil Procedure, has
authority even now to permit the answer of the defendant to be amended;
and if we believed that the interests of justice so required, we would either
exercise that authority or remand the cause for a new trial in court below. As
will appear further on in this opinion, however, we think that the interests of
justice will best be promoted by deciding the case, without more ado, upon
the issues presented in the record as it now stands.
That we may not appear to have overlooked the matter, we will observe that
two cases are cited from California in which the Supreme Court of the State
has held that where a release is pleaded by way of defense and evidence
tending to destroy its effect is introduced without objection, the circumstance
that it was not denied under oath is immaterial. In the earlier of these cases,
Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought against a
railroad company to recover damages for the death of the plaintiff's minor
son, alleged to have been killed by the negligence of the defendant. The
defendant company pleaded by way of defense a release purporting to be
signed by the plaintiff, and in its answer inserted a copy of the release. The
execution of the release was not denied under oath; but at the trial evidence
was submitted on behalf of the plaintiff tending to show that at the time he
signed the release, he was incompetent by reason of drunkenness to bind
himself thereby. It was held that inasmuch as this evidence had been
submitted by the plaintiff without objection, it was proper for the court to
consider it. We do not question the propriety of that decision, especially as
the issue had been passed upon by a jury; but we believe that the decision
would have been more soundly planted if it had been said that the incapacity
of the plaintiff, due to his drunken condition, was a matter which did not
involve either the genuineness or due execution of the release. Like the
defenses of fraud, coercion, imbecility, and mistake, it was a matter which
could be proved under the general issue and did not have to be set up in a
sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432, 433.) A somewhat
similar explanation can, we think, be given of the case of Clark vs. Child in
which the rule declared in the earlier case was followed. With respect to both
decisions which we merely observe that upon point of procedure which they
are supposed to maintain, the reasoning of the court is in our opinion
unconvincing.
We shall now consider the liability of the defendant company on the merits
just as if that liability had been properly put in issue by a specific answer
under oath denying the authority of Fernandez go to bind it. Upon this
question it must at the outset be premised that Ramon J. Fernandez, as
treasurer, had no independent authority to bind the company by signing its
name to the letters in question. It is declared by signing its name to the
letters in question. It is declared in section 28 of the Corporation Law that
corporate power shall be exercised, and all corporate business conducted by
the board of directors; and this principle is recognized in the by-laws of the
corporation in question which contain a provision declaring that the power to
make contracts shall be vested in the board of directors. It is true that it is
also declared in the same by-laws that the president shall have the power,
and it shall be his duty, to sign contract; but this has reference rather to the
formality of reducing to proper form the contract which are authorized by the
board and is not intended to confer an independent power to make contract
binding on the corporation.
The fact that the power to make corporate contract is thus vested in the
board of directors does not signify that a formal vote of the board must
always be taken before contractual liability can be fixed upon a
corporation; for the board can create liability, like an individual, by
other means than by a formal expression of its will. In this connection the
case of Robert Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is
instructive. If there appeared that the secretary of the defendant corporation
had signed an obligation on its behalf binding it as guarantor of the
812
performance of an important contract upon which the name of another
corporation appeared as principal. The defendant company set up by way of
defense that is secretary had no authority to bind it by such an engagement.
The court found that the guaranty was given with the knowledge and consent
of the president and directors, and that this consent of the president and
directors, and that this consent was given with as much observance of
formality as was customary in the transaction of the business of the
company. It was held that, so far as the authority of the secretary was
concerned, the contract was binding. In discussing this point, the court
quoted with approval the following language form one of its prior decisions:
The authority of the subordinate agent of a corporation often
depends upon the course of dealings which the company or its
director have sanctioned. It may be established sometimes without
reference to official record of the proceedings of the board, by proof
of the usage which the company had permitted to grow up in
business, and of the acquiescence of the board charged with the
duty of supervising and controlling the company's business.
It appears in evidence, in the case now before us, that on July 30, the date
upon which the letter accepting the offer of the Eclair films was dispatched
the board of directors of the Orientalist Company convened in special
session in the office of Ramon J. Fernandez at the request of the latter.
There were present the four members, including the president, who had
already signified their consent to the making of the contract. At this meeting,
as appears from the minutes, Fernandez informed the board of the offer
which had been received from the plaintiff with reference to the importation of
films. The minutes add that terms of this offer were approved; but at the
suggestion of Fernandez it was decided to call a special meeting of the
stockholders to consider the matter and definite action was postponed.
The stockholders meeting was convoked upon September 18, 1913, upon
which occasion Fernandez informed those present of the offer in question
and of the terms upon which the films could be procured. He estimated that
the company would have to make an outlay of about P5,500 per month, if the
offer for the two films should be accepted by it.
The following extracts from the minutes of this meeting are here pertinent:
Mr. Fernandez informed the stockholders that, in view of the urgency
of the matter and for the purpose of avoiding that other importers
should get ahead of the corporation in this regard, he and Messrs. B.
Hernandez, Leon Monroy, and Dr. Papa met for the purpose of
considering the acceptance of the offer together with the
responsibilities attached thereto, made to the corporation by the film
manufacturers of Eclair and Milano of Paris and Italy respectively,
inasmuch as the first shipment of films was then expected to arrive.
At the same time he informed the said stockholders that he had
already made arrangements with respect to renting said films after
they have been once exhibited in the Cine Oriental, and that the
corporation could very well meet the expenditure involved and net a
certain profit, but that, if we could enter into a contract with about
nine cinematographs, big gains would be obtained through such a
step.
The possibility that the corporation might not see fit to authorize the contract,
or might for lack of funds be unable to make the necessary outlay, was
foreseen; and in such contingency the stockholders were informed, that the
four gentlemen above mentioned (Hernandez, Fernandez, Monroy, and
Papa) "would continue importing said films at their own account and risk, and
shall be entitled only to a compensation of 10 per cent of their outlay in
importing the films, said payment to be made in shares of said corporation,
inasmuch as the corporation is lacking available funds for the purpose, and
also because there are 88 shares of stock remaining still unsold."
In view of this statement, the stockholders adopted a resolution to the effect
that the agencies of the Eclair and Milano films should be accepted, if the
corporation could obtain the money with which to meet the expenditure
involved, and to this end appointed a committee to apply to the bank for a
credit. The evidence shows that an attempt was made, on behalf of the
corporation, to obtain a credit of P10,000 from the Bank of the Philippine
Islands for the purpose indicated, but the bank declined to grant his credit.
813
Thereafter another special meeting of the shareholders of the defendant
corporation was called at which the failure of their committee to obtain a
credit from the bank was made known. A resolution was thereupon passed to
the effect that the company should pay to Hernandez, Fernandez, Monroy,
and Papa an amount equal to 10 per cent of their outlay in importing the
films, said payment to be made in shares of the company in accordance with
the suggestion made at the previous meeting. At the time this meeting was
held three shipment of the films had already been received in Manila.
We believe it is a fair inference from the recitals of the minutes of the
stockholders meeting of September 18, and especially from the first
paragraph above quoted, that this body was then cognizant that the officer
had already been accepted in the name of the Orientalist Company and that
the films which were then expected to arrive were being imported by virtue of
such acceptance. Certainly four members of the board of directors there
present were aware of this fact, as the letter accepting the offer had been
sent with their knowledge and consent. In view of this circumstance, a certain
doubt arises whether they meant to utilize the financial assistance of the four
so-called importers in order that the corporation might bet the benefit of the
contract for the films, just as it would have utilized the credit of the bank if
such credit had been extended. If such was the intention of the stockholders
their action amounted to a virtual, though indirect, approval of the contract. It
is not however, necessary to found the judgment on this interpretation of the
stockholders proceedings, inasmuch as we think for reasons presently to be
stated, that the corporation is bound, and we will here assume that in the end
the contract were not approved by the stockholders.
It will be observed that Ramon J. Fernandez was the particular officer and
member of the board of directors who was most active in the effort to secure
the films for the corporation. The negotiations were conducted by him with
the knowledge and consent of other members of the board; and the contract
was made with their prior approval. As appears from the papers in this
record, Fernandez was the person to who keeping was confided the printed
stationery bearing the official style of the corporation, as well as rubber
stencil with which the name of the corporation could be signed to documents
bearing its name.
Ignoring now, for a moment, the transactions of the stockholders, and
reverting to the proceedings of the board of directors of the Orientalist
Company, we find that upon October 27, 1913, after Fernandez had departed
from the Philippine Islands, to be absent for many months, said board
adopted a resolution conferring the following among other powers on Vicente
Ocampo, the manager of the Oriental theater, namely:
(1) To rent a box for the films in the "Kneeler Building."
(4) To be in charge of the films and of the renting of the same.
(5) To advertise in the different newspapers that we are importing
films to be exhibited in the Cine Oriental.
(6) Not to deliver any film for rent without first receiving the rental
therefor or the guaranty for the payment thereof.
(7) To buy a book and cards for indexing the names of the films.
(10) Upon the motion of Mr. Ocampo, it was decided to give ample
powers to the Hon. R. Acua to enter into agreements with
cinematograph proprietors in the provinces for the purpose of renting
films from us.
It thus appears that the board of directors, before the financial inability of the
corporation to proceed with the project was revealed, had already recognized
the contract as being in existence and had proceeded to take the steps
necessary to utilize the films. Particularly suggestive is the direction given at
this meeting for the publication of announcements in the newspapers to the
effect that the company was engaged in importing films. In the light of all the
circumstances of the case, we are of the opinion that the contracts in
question were thus inferentially approved by the company's board of
directors and that the company is bound unless the subsequent failure of the
stockholders to approve said contracts had the effect of abrogating the
liability thus created.
814
Both upon principle and authority it is clear that the action of the
stockholders, whatever its character, must be ignored. The functions of
the stockholders of a corporation are, it must be remembered, of a
limited nature. The theory of a corporation is that the stockholders may
have all the profits but shall turn over the complete management of the
enterprise to their representatives and agents, called directors.
Accordingly, there is little for the stockholders to do beyond electing
directors, making by-laws, and exercising certain other special powers
defined by-law. In conformity with this idea it is settled that contract
between a corporation and third person must be made by the director
and not by the stockholders. The corporation, in such matters, is
represented by the former and not by the latter. (Cook on Corporations,
sixth ed., secs. 708, 709.) This conclusion is entirely accordant with the
provisions of section 28 of our Corporation Law already referred to. It
results that where a meeting of the stockholders is called for the
purpose of passing on the propriety of making a corporate contract, its
resolutions are at most advisory and not in any wise binding on the
board.
In passing upon the liability of a corporation in cases of this kind it is always
well to keep in mind the situation as it presents itself to the third party with
whom the contract is made. Naturally he can have little or no information as
to what occurs in corporate meetings; and he must necessarily rely upon the
external manifestations of corporate consent. The integrity of commercial
transactions can only be maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with law, and we would be
sorry to announce a doctrine which would permit the property of a man in the
city of Paris to be whisked out of his hands and carried into a remote quarter
of the earth without recourse against the corporations whose name and
authority had been used in the manner disclosed in this case. As already
observed, it is familiar doctrine that if a corporation knowingly permits
one of its officer, or any other agent, to do acts within the scope of an
apparent authority, and thus hold him out to the public as possessing
power to do those acts, the corporation will as against any one who has
in good faith dealt with the corporation through such agent, be
estopped from denying his authority; and where it is said "if the
corporation permits" this means the same as "if the thing is permitted
by the directing power of the corporation."
It being determined that the corporation is bound by the contract in question,
it remains to consider the character of the liability assumed by R. J.
Fernandez, in affixing his personal signature to said contract. The question
here is whether Fernandez is liable jointly with the Orientalists Company as a
principal obligor, or whether his liability is that of a guarantor merely.
As appears upon the face of the contracts, the signature of Fernandez, in his
individual capacity, is not in line with the signature of the Orientalist
Company, but is set off to the left of the company's signature and somewhat
who sign contracts in some capacity other than that of principal obligor to
place their signature alone would justify a court in holding that Fernandez
here took upon himself the responsibility of a guarantor rather than that of a
principal obligor. We do, however, think, that the form in which the contract is
signed raises a doubt as to what the real intention was; and we feel justified,
in looking to the evidence to discover that intention. In this connection it is
entirely clear, from the testimony of both Ramirez and Ramon J. Fernandez,
that the responsibility of the latter was intended to be that of guarantor. There
815
is, to be sure, a certain difference between these witnesses as to the nature
of this guaranty, inasmuch as Fernandez would have us believe that his
name was signed as a guaranty that the contract would be approved by the
corporation, while Ramirez says that the name was put on the contract for
the purpose of guaranteeing, not the approval of the contract, but its
performance. We are convinced that the latter was the real intention of the
contracting parties.

We are not unmindful of the force of that rule of law which declares that oral
evidence is admissible to show the character in which the signature was
affixed. This conclusion is perhaps supported by the language of the second
paragraph of article 1281 of the Civil Code, which declares that if the words
of a contract should appear contrary to the evident intention of the parties,
the intention shall prevail. But the conclusion reached is, we think, deducible
from the general principle that in case of ambiguity parol evidence is
admissible to show the intention of the contracting parties.

It should be stated in conclusion that as the issues in this case have been
framed, the only question presented to this court is: To what extent are the
signatory parties to the contract liable to the plaintiff J. F. Ramirez? No
contentious issue is raised directly between the defendants, the Orientalist
Company and Ramon H. Fernandez; nor does the present the present action
involve any question as to the undertaking of Fernandez and his three
associates to effect the importation of the films upon their own account and
risk. Whether they may be bound to hold the company harmless is a matter
upon which we express no opinion.

The judgment appealed from is affirmed, with costs equally against the two
appellant. So ordered.

Torres, Johnson, Malcolm, Avancea and Fisher, JJ., concur.

816
 SANCHEZ, J.:

The National Coconut Corporation (NACOCO, for short) was chartered as a

non-profit governmental organization on May 7, 1940 by Commonwealth Act
518 avowedly for the protection, preservation and development of the
coconut industry in the Philippines. On August 1, 1946, NACOCO's charter
was amended [Republic Act 5] to grant that corporation the express power
"to buy, sell, barter, export, and in any other manner deal in, coconut, copra,
and dessicated coconut, as well as their by-products, and to act as agent,
broker or commission merchant of the producers, dealers or merchants"
thereof. The charter amendment was enacted to stabilize copra prices, to
serve coconut producers by securing advantageous prices for them, to cut
down to a minimum, if not altogether eliminate, the margin of middlemen,
mostly aliens.4

General manager and board chairman was Maximo M. Kalaw; defendants

Juan Bocar and Casimiro Garcia were members of the Board; defendant
Leonor Moll became director only on December 22, 1947.

NACOCO, after the passage of Republic Act 5, embarked on copra trading

activities. Amongst the scores of contracts executed by general manager
Kalaw are the disputed contracts, for the delivery of copra, viz:

G.R. No. L-18805 August 14, 1967 (a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons,
$167.00: per ton, f. o. b., delivery: August and September, 1947. This
THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF contract was later assigned to Louis Dreyfus & Co. (Overseas) Ltd.
THE REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs. (b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE $145.00 per long ton, f.o.b., Philippine ports, to be shipped:
DECEASED CASIMIRO GARCIA, 3 and LEONOR MOLL, defendants- September-October, 1947. This contract was also assigned to Louis
appellees. Dreyfus & Co. (Overseas) Ltd.

Simeon M. Gopengco and Solicitor General for plaintiff-appellant. (c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50
L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce per ton, delivery: September, 1947.
Enrile, Siguion Reyna, Montecillo and Belo for defendants-appellees.

817
 (d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons,
$160.00 per ton, c.i.f., Los Angeles, California, delivery: November,
1947.
(e) September 9, 1947: Franklin Baker Division of General Foods
Corporation, for 1,500 long tons, $164,00 per ton, c.i.f., New York, to
be shipped in November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for
3,000 long tons, $154.00 per ton, f.o.b., 3 Philippine ports, delivery:
November, 1947.
(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00
per ton, delivery: November and December, 1947. This contract was
assigned to Pacific Vegetable Co.
(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per
short ton, c.i.f., Pacific ports, delivery: December, 1947 and January,
1948. This contract was assigned to Pacific Vegetable Co.
date. A meeting was then held. Kalaw made a full disclosure of the situation,
apprised the board of the impending heavy losses. No action was taken on
the contracts. Neither did the board vote thereon at the meeting of January 7,
1948 following. Then, on January 11, 1948, President Roxas made a
statement that the NACOCO head did his best to avert the losses,
emphasized that government concerns faced the same risks that confronted
private companies, that NACOCO was recouping its losses, and that Kalaw
was to remain in his post. Not long thereafter, that is, on January 30, 1948,
the board met again with Kalaw, Bocar, Garcia and Moll in attendance. They
unanimously approved the contracts hereinbefore enumerated.
As was to be expected, NACOCO but partially performed the contracts, as
follows:
Tons
Buyers Undelivered
Delivered

(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per Pacific Vegetable Oil 2,386.45 4,613.55
short ton, c.i.f., Pacific ports, delivery: January, 1948. This contract
was assigned to Pacific Vegetable Co.

An unhappy chain of events conspired to deter NACOCO from fulfilling these Spencer Kellog None 1,000
contracts. Nature supervened. Four devastating typhoons visited the
Philippines: the first in October, the second and third in November, and the
fourth in December, 1947. Coconut trees throughout the country suffered
extensive damage. Copra production decreased. Prices spiralled. Franklin Baker 1,000 500
Warehouses were destroyed. Cash requirements doubled. Deprivation of
export facilities increased the time necessary to accumulate shiploads of
copra. Quick turnovers became impossible, financing a problem.
Louis Dreyfus 800 2,200
When it became clear that the contracts would be unprofitable, Kalaw
submitted them to the board for approval. It was not until December 22, 1947
when the membership was completed. Defendant Moll took her oath on that

818

Louis Dreyfus (Adamson contract of July 30,
1,150 850
1947)
Louis Dreyfus (Adamson Contract of August
1,755 245
14, 1947)
T O TALS 7,091.45 9,408.55
The buyers threatened damage suits. Some of the claims were settled, viz:
Pacific Vegetable Oil Co., in copra delivered by NACOCO, P539,000.00;
Franklin Baker Corporation, P78,210.00; Spencer Kellog & Sons,
P159,040.00.
But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before
the Court of First Instance of Manila, upon claims as follows: For the
undelivered copra under the July 30 contract (Civil Case 4459); P287,028.00;
for the balance on the August 14 contract (Civil Case 4398), P75,098.63; for
that per the September 12 contract reduced to judgment (Civil Case 4322,
appealed to this Court in L-2829), P447,908.40. These cases culminated in
an out-of-court amicable settlement when the Kalaw management was
already out. The corporation thereunder paid Dreyfus P567,024.52
representing 70% of the total claims. With particular reference to the Dreyfus
claims, NACOCO put up the defenses that: (1) the contracts were void
because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do
business here; and (2) failure to deliver was due to force majeure, the
typhoons. To project the utter unreasonableness of this compromise, we
reproduce in haec verba this finding below:
x x x However, in similar cases brought by the same claimant [Louis
Dreyfus & Co. (Overseas) Ltd.] against Santiago Syjuco for non-
delivery of copra also involving a claim of P345,654.68 wherein
defendant set up same defenses as above, plaintiff accepted
a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the
same proportion, the claim of Dreyfus against NACOCO should have
been compromised for only P10,000.00, if at all. Now, why should
defendants be held liable for the large sum paid as compromise by
the Board of Liquidators? This is just a sample to show how unjust it
would be to hold defendants liable for the readiness with which the
Board of Liquidators disposed of the NACOCO funds, although there
was much possibility of successfully resisting the claims, or at least
settlement for nominal sums like what happened in the Syjuco case.5
All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to recover the above
sum of P1,343,274.52 from general manager and board chairman Maximo
M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It
charges Kalaw with negligence under Article 1902 of the old Civil Code (now
Article 2176, new Civil Code); and defendant board members, including
Kalaw, with bad faith and/or breach of trust for having approved the
contracts. The fifth amended complaint, on which this case was tried, was
filed on July 2, 1959. Defendants resisted the action upon defenses
hereinafter in this opinion to be discussed.
The lower court came out with a judgment dismissing the complaint without
costs as well as defendants' counterclaims, except that plaintiff was ordered
to pay the heirs of Maximo Kalaw the sum of P2,601.94 for unpaid salaries
and cash deposit due the deceased Kalaw from NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the
sum of P2,601.94.
819
Right at the outset, two preliminary questions raised before, but adversely
decided by, the court below, arrest our attention. On appeal, defendants
renew their bid. And this, upon established jurisprudence that an appellate
court may base its decision of affirmance of the judgment below on a point or
points ignored by the trial court or in which said court was in error.6
1. First of the threshold questions is that advanced by defendants that
plaintiff Board of Liquidators has lost its legal personality to continue with this
suit.
Accepted in this jurisdiction are three methods by which a corporation may
wind up its affairs: (1) under Section 3, Rule 104, of the Rules of Court [which
superseded Section 66 of the Corporation Law] 7 whereby, upon voluntary
dissolution of a corporation, the court may direct "such disposition of its
assets as justice requires, and may appoint a receiver to collect such
assets and pay the debts of the corporation;"
(2) under Section 77 of the Corporation Law, whereby a corporation whose
corporate existence is terminated, "shall nevertheless be continued as a
body corporate for three years after the time when it would have been
so dissolved, for the purpose of prosecuting and defending suits by or
against it and of enabling it gradually to settle and close its affairs, to
dispose of and convey its property and to divide its capital stock, but
not for the purpose of continuing the business for which it was
established;" and
(3) under Section 78 of the Corporation Law, by virtue of which the
corporation, within the three year period just mentioned, "is authorized and
empowered to convey all of its property to trustees for the benefit of
members, stockholders, creditors, and others interested."8
It is defendants' pose that their case comes within the coverage of the
second method. They reason out that suit was commenced in February,
1949; that by Executive Order 372, dated November 24, 1950, NACOCO,
together with other government-owned corporations, was abolished, and the
Board of Liquidators was entrusted with the function of settling and closing its
affairs; and that, since the three year period has elapsed, the Board of
Liquidators may not now continue with, and prosecute, the present case to its
conclusion, because Executive Order 372 provides in Section 1 thereof that
Sec.1. The National Abaca and Other Fibers Corporation, the
National Coconut Corporation, the National Tobacco Corporation, the
National Food Producer Corporation and the former enemy-owned or
controlled corporations or associations, . . . are hereby abolished.
The said corporations shall be liquidated in accordance with law, the
provisions of this Order, and/or in such manner as the President of
the Philippines may direct; Provided, however, That each of the said
corporations shall nevertheless be continued as a body corporate for
a period of three (3) years from the effective date of this Executive
Order for the purpose of prosecuting and defending suits by or
against it and of enabling the Board of Liquidators gradually to settle
and close its affairs, to dispose of and, convey its property in the
manner hereinafter provided.
Citing Mr. Justice Fisher, defendants proceed to argue that even where it
may be found impossible within the 3 year period to reduce disputed claims
to judgment, nonetheless, "suits by or against a corporation abate when it
ceases to be an entity capable of suing or being sued" (Fisher, The Philippine
Law of Stock Corporations, pp. 390-391). Corpus Juris Secundum likewise is
authority for the statement that "[t]he dissolution of a corporation ends its
existence so that there must be statutory authority for prolongation of its
life even for purposes of pending litigation"9 and that suit "cannot be
continued or revived; nor can a valid judgment be rendered therein, and a
judgment, if rendered, is not only erroneous, but void and subject to collateral
attack." 10 So it is, that abatement of pending actions follows as a matter of
course upon the expiration of the legal period for liquidation, 11 unless the
statute merely requires a commencement of suit within the added
time. 12 For, the court cannot extend the time alloted by statute. 13
We, however, express the view that the executive order abolishing NACOCO
and creating the Board of Liquidators should be examined in context. The
proviso in Section 1 of Executive Order 372, whereby the corporate
820
existence of NACOCO was continued for a period of three years from the
effectivity of the order for "the purpose of prosecuting and defending suits by
or against it and of enabling the Board of Liquidators gradually to settle and
close its affairs, to dispose of and convey its property in the manner
hereinafter provided", is to be read not as an isolated provision but in
conjunction with the whole. So reading, it will be readily observed that no
time limit has been tacked to the existence of the Board of Liquidators and its
function of closing the affairs of the various government owned corporations,
including NACOCO.
By Section 2 of the executive order, while the boards of directors of the
various corporations were abolished, their powers and functions and duties
under existing laws were to be assumed and exercised by the Board of
Liquidators. The President thought it best to do away with the boards of
directors of the defunct corporations; at the same time, however, the
President had chosen to see to it that the Board of Liquidators step into the
vacuum. And nowhere in the executive order was there any mention of the
lifespan of the Board of Liquidators. A glance at the other provisions of the
executive order buttresses our conclusion. Thus, liquidation by the Board of
Liquidators may, under section 1, proceed in accordance with law, the
provisions of the executive order, "and/or in such manner as the President of
the Philippines may direct." By Section 4, when any property, fund, or project
is transferred to any governmental instrumentality "for administration or
continuance of any project," the necessary funds therefor shall be taken from
the corresponding special fund created in Section 5. Section 5, in turn, talks
of special funds established from the "net proceeds of the liquidation" of the
various corporations abolished. And by Section, 7, fifty per centum of the
fees collected from the copra standardization and inspection service shall
accrue "to the special fund created in section 5 hereof for the rehabilitation
and development of the coconut industry." Implicit in all these, is that the term
of life of the Board of Liquidators is without time limit. Contemporary history
gives us the fact that the Board of Liquidators still exists as an office with
officials and numerous employees continuing the job of liquidation and
prosecution of several court actions.
Not that our views on the power of the Board of Liquidators to proceed to the
final determination of the present case is without jurisprudential support. The
first judicial test before this Court is National Abaca and Other Fibers
Corporation vs. Pore, L-16779, August 16, 1961. In that case, the
corporation, already dissolved, commenced suit within the three-year
extended period for liquidation. That suit was for recovery of money
advanced to defendant for the purchase of hemp in behalf of the corporation.
She failed to account for that money. Defendant moved to dismiss,
questioned the corporation's capacity to sue. The lower court ordered plaintiff
to include as co-party plaintiff, The Board of Liquidators, to which the
corporation's liquidation was entrusted by Executive Order 372. Plaintiff failed
to effect inclusion. The lower court dismissed the suit. Plaintiff moved to
reconsider. Ground: excusable negligence, in that its counsel prepared the
amended complaint, as directed, and instructed the board's incoming and
outgoing correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail the
original thereof to the court and a copy of the same to defendant's counsel.
She mailed the copy to the latter but failed to send the original to the court.
This motion was rejected below. Plaintiff came to this Court on appeal. We
there said that "the rule appears to be well settled that, in the absence of
statutory provision to the contrary, pending actions by or against a
corporation are abated upon expiration of the period allowed by law for the
liquidation of its affairs." We there said that "[o]ur Corporation Law contains
no provision authorizing a corporation, after three (3) years from the
expiration of its lifetime, to continue in its corporate name actions instituted
by it within said period of three (3) years." 14 However, these precepts
notwithstanding, we, in effect, held in that case that the Board of Liquidators
escapes from the operation thereof for the reason that "[o]bviously, the
complete loss of plaintiff's corporate existence after the expiration of the
period of three (3) years for the settlement of its affairs is what impelled the
President to create a Board of Liquidators, to continue the management of
such matters as may then be pending." 15 We accordingly directed the record
of said case to be returned to the lower court, with instructions to admit
plaintiff's amended complaint to include, as party plaintiff, the Board of
Liquidators.
Defendants' position is vulnerable to attack from another direction.
By Executive Order 372, the government, the sole stockholder, abolished
NACOCO, and placed its assets in the hands of the Board of Liquidators.
821
The Board of Liquidators thus became the trustee on behalf of the
government. It was an express trust. The legal interest became vested in the
trustee the Board of Liquidators. The beneficial interest remained with the
sole stockholder the government. At no time had the government
withdrawn the property, or the authority to continue the present suit, from the
Board of Liquidators. If for this reason alone, we cannot stay the hand of the
Board of Liquidators from prosecuting this case to its final conclusion. 16 The
provisions of Section 78 of the Corporation Law the third method of
winding up corporate affairs find application.
We, accordingly, rule that the Board of Liquidators has personality to proceed
as: party-plaintiff in this case.
2. Defendants' second poser is that the action is unenforceable against the
heirs of Kalaw.
Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was
overruled, and in their nineteenth special defense, that plaintiff's action is
personal to the deceased Maximo M. Kalaw, and may not be deemed to
have survived after his death. 18 They say that the controlling statute is
Section 5, Rule 87, of the 1940 Rules of Court. 19 which provides that "[a]ll
claims for money against the decedent, arising from contract, express or
implied", must be filed in the estate proceedings of the deceased. We
disagree.
The suit here revolves around the alleged negligent acts of Kalaw for having
entered into the questioned contracts without prior approval of the board of
directors, to the damage and prejudice of plaintiff; and is against Kalaw and
the other directors for having subsequently approved the said contracts in
bad faith and/or breach of trust." Clearly then, the present case is not a mere
action for the recovery of money nor a claim for money arising from contract.
The suit involves alleged tortious acts. And the action is embraced in suits
filed "to recover damages for an injury to person or property, real or
personal", which survive. 20
The leading expositor of the law on this point is Aguas vs. Llemos, L-18107,
August 30, 1962. There, plaintiffs sought to recover damages from defendant
Llemos. The complaint averred that Llemos had served plaintiff by registered
mail with a copy of a petition for a writ of possession in Civil Case 4824 of the
Court of First Instance at Catbalogan, Samar, with notice that the same
would be submitted to the Samar court on February 23, 1960 at 8:00 a.m.;
that in view of the copy and notice served, plaintiffs proceeded to the said
court of Samar from their residence in Manila accompanied by their lawyers,
only to discover that no such petition had been filed; and that defendant
Llemos maliciously failed to appear in court, so that plaintiffs' expenditure
and trouble turned out to be in vain, causing them mental anguish and undue
embarrassment. Defendant died before he could answer the complaint. Upon
leave of court, plaintiffs amended their complaint to include the heirs of the
deceased. The heirs moved to dismiss. The court dismissed the complaint on
the ground that the legal representative, and not the heirs, should have been
made the party defendant; and that, anyway, the action being for recovery of
money, testate or intestate proceedings should be initiated and the claim filed
therein. This Court, thru Mr. Justice Jose B. L. Reyes, there declared:
Plaintiffs argue with considerable cogency that contrasting the
correlated provisions of the Rules of Court, those concerning claims
that are barred if not filed in the estate settlement proceedings (Rule
87, sec. 5) and those defining actions that survive and may be
prosecuted against the executor or administrator (Rule 88, sec. 1), it
is apparent that actions for damages caused by tortious conduct of a
defendant (as in the case at bar) survive the death of the latter.
Under Rule 87, section 5, the actions that are abated by death are:
(1) claims for funeral expenses and those for the last sickness of the
decedent; (2) judgments for money; and (3) "all claims for money
against the decedent, arising from contract express or implied." None
of these includes that of the plaintiffs-appellants; for it is not enough
that the claim against the deceased party be for money, but it must
arise from "contract express or implied", and these words (also used
by the Rules in connection with attachments and derived from the
common law) were construed in Leung Ben vs. O'Brien, 38 Phil. 182,
189-194,
822
 "to include all purely personal obligations other than those
which have their source in delict or tort."
Upon the other hand, Rule 88, section 1, enumerates actions that
survive against a decedent's executors or administrators, and they
are: (1) actions to recover real and personal property from the estate;
(2) actions to enforce a lien thereon; and (3) actions to recover
damages for an injury to person or property. The present suit is one
for damages under the last class, it having been held that "injury to
property" is not limited to injuries to specific property, but extends to
other wrongs by which personal estate is injured or diminished
(Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To
maliciously cause a party to incur unnecessary expenses, as
charged in this case, is certainly injury to that party's property (Javier
vs. Araneta, L-4369, Aug. 31, 1953).
The ruling in the preceding case was hammered out of facts comparable to
those of the present. No cogent reason exists why we should break away
from the views just expressed. And, the conclusion remains: Action against
the Kalaw heirs and, for the matter, against the Estate of Casimiro Garcia
survives.
The preliminaries out of the way, we now go to the core of the controversy.
3. Plaintiff levelled a major attack on the lower court's holding that Kalaw
justifiedly entered into the controverted contracts without the prior approval of
the corporation's directorate. Plaintiff leans heavily on NACOCO's corporate
by-laws. Article IV (b), Chapter III thereof, recites, as amongst the duties
of the general manager, the obligation: "(b) To perform or execute on
behalf of the Corporation upon prior approval of the Board, all
contracts necessary and essential to the proper accomplishment for
which the Corporation was organized."
Not of de minimis importance in a proper approach to the problem at hand, is
the nature of a general manager's position in the corporate structure. A rule
that has gained acceptance through the years is that a corporate officer
"intrusted with the general management and control of its business,
has implied authority to make any contract or do any other act which is
necessary or appropriate to the conduct of the ordinary business of the
corporation. 21As such officer, "he may, without any special authority
from the Board of Directors perform all acts of an ordinary nature,
which by usage or necessity are incident to his office, and may bind the
corporation by contracts in matters arising in the usual course of
business. 22
The problem, therefore, is whether the case at bar is to be taken out of the
general concept of the powers of a general manager, given the cited
provision of the NACOCO by-laws requiring prior directorate approval of
NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves express
articulation. Ordinary in this enterprise are copra sales for future delivery. The
movement of the market requires that sales agreements be entered into,
even though the goods are not yet in the hands of the seller. Known in
business parlance as forward sales, it is concededly the practice of the trade.
A certain amount of speculation is inherent in the undertaking. NACOCO was
much more conservative than the exporters with big capital. This short-selling
was inevitable at the time in the light of other factors such as availability of
vessels, the quantity required before being accepted for loading, the labor
needed to prepare and sack the copra for market. To NACOCO, forward
sales were a necessity. Copra could not stay long in its hands; it would lose
weight, its value decrease. Above all, NACOCO's limited funds necessitated
a quick turnover. Copra contracts then had to be executed on short notice
at times within twenty-four hours. To be appreciated then is the difficulty of
calling a formal meeting of the board.
Such were the environmental circumstances when Kalaw went into copra
trading.
Long before the disputed contracts came into being, Kalaw contracted by
himself alone as general manager for forward sales of copra. For
the fiscal year ending June 30, 1947, Kalaw signed some 60 such contracts
823
for the sale of copra to divers parties. During that period, from those copra
sales, NACOCO reaped a gross profit of P3,631,181.48. So pleased was
NACOCO's board of directors that, on December 5, 1946, in Kalaw's
absence, it voted to grant him a special bonus "in recognition of the signal
achievement rendered by him in putting the Corporation's business on a self-
sufficient basis within a few months after assuming office, despite numerous
handicaps and difficulties."
These previous contract it should be stressed, were signed by Kalaw without
prior authority from the board. Said contracts were known all along to
the board members. Nothing was said by them. The aforesaid contracts
stand to prove one thing: Obviously, NACOCO board met the
difficulties attendant to forward sales by leaving the adoption of means
to end, to the sound discretion of NACOCO's general manager Maximo
M. Kalaw.
Liberally spread on the record are instances of contracts executed by
NACOCO's general manager and submitted to the board after their
consummation, not before. These agreements were not Kalaw's alone. One
at least was executed by a predecessor way back in 1940, soon after
NACOCO was chartered. It was a contract of lease executed on November
16, 1940 by the then general manager and board chairman, Maximo
Rodriguez, and A. Soriano y Cia., for the lease of a space in Soriano Building
On November 14, 1946, NACOCO, thru its general manager Kalaw, sold
3,000 tons of copra to the Food Ministry, London, thru Sebastian Palanca.
On December 22, 1947, when the controversy over the present contract
cropped up, the board voted to approve a lease contract previously executed
between Kalaw and Fidel Isberto and Ulpiana Isberto covering a warehouse
of the latter. On the same date, the board gave its nod to a contract for
renewal of the services of Dr. Manuel L. Roxas. In fact, also on that date, the
board requested Kalaw to report for action all copra contracts signed by him
"at the meeting immediately following the signing of the contracts." This
practice was observed in a later instance when, on January 7, 1948, the
board approved two previous contracts for the sale of 1,000 tons of copra
each to a certain "SCAP" and a certain "GNAPO".
And more. On December 19, 1946, the board resolved to ratify the brokerage
commission of 2% of Smith, Bell and Co., Ltd., in the sale of 4,300 long tons
of copra to the French Government. Such ratification was necessary
because, as stated by Kalaw in that same meeting, "under an existing
resolution he is authorized to give a brokerage fee of only 1% on sales of
copra made through brokers." On January 15, 1947, the brokerage fee
agreements of 1-1/2% on three export contracts, and 2% on three others, for
the sale of copra were approved by the board with a proviso authorizing the
general manager to pay a commission up to the amount of 1-1/2% "without
further action by the Board." On February 5, 1947, the brokerage fee of 2%
of J. Cojuangco & Co. on the sale of 2,000 tons of copra was favorably acted
upon by the board. On March 19, 1947, a 2% brokerage commission was
similarly approved by the board for Pacific Trading Corporation on the sale of
2,000 tons of copra.
It is to be noted in the foregoing cases that only the brokerage fee
agreements were passed upon by the board, not the sales contracts
themselves. And even those fee agreements were submitted only when the
commission exceeded the ceiling fixed by the board.
Knowledge by the board is also discernible from other recorded
instances.1wph1.t
When the board met on May 10, 1947, the directors discussed the copra
situation: There was a slow downward trend but belief was entertained that
the nadir might have already been reached and an improvement in prices
was expected. In view thereof, Kalaw informed the board that "he intends to
wait until he has signed contracts to sell before starting to buy copra."23
In the board meeting of July 29, 1947, Kalaw reported on the copra price
conditions then current: The copra market appeared to have become fairly
steady; it was not expected that copra prices would again rise very high as in
the unprecedented boom during January-April, 1947; the prices seemed to
oscillate between $140 to $150 per ton; a radical rise or decrease was not
indicated by the trends. Kalaw continued to say that "the Corporation has
824
been closing contracts for the sale of copra generally with a margin of P5.00
to P7.00 per hundred kilos." 24
We now lift the following excerpts from the minutes of that same board
meeting of July 29, 1947:
521. In connection with the buying and selling of copra the Board
inquired whether it is the practice of the management to close
contracts of sale first before buying. The General Manager replied
that this practice is generally followed but that it is not always
possible to do so for two reasons:
(1) The role of the Nacoco to stabilize the prices of copra requires
that it should not cease buying even when it does not have actual
contracts of sale since the suspension of buying by the Nacoco will
result in middlemen taking advantage of the temporary inactivity of
the Corporation to lower the prices to the detriment of the producers.
(2) The movement of the market is such that it may not be practical
always to wait for the consummation of contracts of sale before
beginning to buy copra.
The General Manager explained that in this connection a certain
amount of speculation is unavoidable. However, he said that the
Nacoco is much more conservative than the other big exporters in
this respect.25
Settled jurisprudence has it that where similar acts have been approved
by the directors as a matter of general practice, custom, and policy, the
general manager may bind the company without formal authorization of
the board of directors. 26 In varying language, existence of such
authority is established, by proof of the course of business, the usage
and practices of the company and by the knowledge which the board of
directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. 27So also,
x x x authority to act for and bind a corporation may be
presumed from acts of recognition in other instances where the
power was in fact exercised. 28
x x x Thus, when, in the usual course of business of a
corporation, an officer has been allowed in his official capacity
to manage its affairs, his authority to represent the corporation
may be implied from the manner in which he has been permitted
by the directors to manage its business.29
In the case at bar, the practice of the corporation has been to allow its
general manager to negotiate and execute contracts in its copra trading
activities for and in NACOCO's behalf without prior board approval. If the by-
laws were to be literally followed, the board should give its stamp of prior
approval on all corporate contracts. But that board itself, by its acts and
through acquiescence, practically laid aside the by-law requirement of prior
approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts.
4. But if more were required, we need but turn to the board's ratification of
the contracts in dispute on January 30, 1948, though it is our (and the lower
court's) belief that ratification here is nothing more than a mere formality.
Authorities, great in number, are one in the idea that "ratification by a
corporation of an unauthorized act or contract by its officers or others relates
back to the time of the act or contract ratified, and is equivalent to original
authority;" and that " [t]he corporation and the other party to the transaction
are in precisely the same position as if the act or contract had been
authorized at the time." 30 The language of one case is expressive: "The
adoption or ratification of a contract by a corporation is nothing more or less
than the making of an original contract. The theory of corporate ratification
is predicated on the right of a corporation to contract, and any ratification or
adoption is equivalent to a grant of prior authority." 31
825
Indeed, our law pronounces that "[r]atification cleanses the contract from all
its defects from the moment it was constituted." 32 By corporate confirmation,
the contracts executed by Kalaw are thus purged of whatever vice or defect
they may have. 33
In sum, a case is here presented whereunder, even in the face of an express
by-law requirement of prior approval, the law on corporations is not to be
held so rigid and inflexible as to fail to recognize equitable considerations.
And, the conclusion inevitably is that the embattled contracts remain valid.
5. It would be difficult, even with hostile eyes, to read the record in terms of
"bad faith and/or breach of trust" in the board's ratification of the contracts
without prior approval of the board. For, in reality, all that we have on the
government's side of the scale is that the board knew that the contracts so
confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute the contracts
without need of prior approval. Everybody, including Kalaw himself, thought
so, and for a long time. Doubts were first thrown on the way only when the
contracts turned out to be unprofitable for NACOCO.
Rightfully had it been said that bad faith does not simply connote bad
judgment or negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of wrong; it means breach of a known duty thru
some motive or interest or ill will; it partakes of the nature of fraud. 34 Applying
this precept to the given facts herein, we find that there was no "dishonest
purpose," or "some moral obliquity," or "conscious doing of wrong," or
"breach of a known duty," or "Some motive or interest or ill will" that "partakes
of the nature of fraud."
Nor was it even intimated here that the NACOCO directors acted for personal
reasons, or to serve their own private interests, or to pocket money at the
expense of the corporation. 35 We have had occasion to affirm that bad faith
contemplates a "state of mind affirmatively operating with furtive design or
with some motive of self-interest or ill will or for ulterior purposes." 36 Briggs
vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with
approval from Judge Sharswood (in Spering's App., 71 Pa. 11), the following:
"Upon a close examination of all the reported cases, although there are many
dicta not easily reconcilable, yet I have found no judgment or decree which
has held directors to account, except when they have themselves been
personally guilty of some fraud on the corporation, or have known and
connived at some fraud in others, or where such fraud might have been
prevented had they given ordinary attention to their duties. . . ." Plaintiff did
not even dare charge its defendant-directors with any of these malevolent
acts.
Obviously, the board thought that to jettison Kalaw's contracts would
contravene basic dictates of fairness. They did not think of raising their voice
in protest against past contracts which brought in enormous profits to the
corporation. By the same token, fair dealing disagrees with the idea that
similar contracts, when unprofitable, should not merit the same treatment.
Profit or loss resulting from business ventures is no justification for turning
one's back on contracts entered into. The truth, then, of the matter is that
in the words of the trial court the ratification of the contracts was "an act of
simple justice and fairness to the general manager and the best interest of
the corporation whose prestige would have been seriously impaired by a
rejection by the board of those contracts which proved disadvantageous." 37
38
The directors are not liable."
6. To what then may we trace the damage suffered by NACOCO.
The facts yield the answer. Four typhoons wreaked havoc then on our copra-
producing regions. Result: Copra production was impaired, prices spiralled,
warehouses destroyed. Quick turnovers could not be expected. NACOCO
was not alone in this misfortune. The record discloses that private traders,
old, experienced, with bigger facilities, were not spared; also suffered
tremendous losses. Roughly estimated, eleven principal trading concerns did
run losses to about P10,300,000.00. Plaintiff's witness Sisenando Barretto,
head of the copra marketing department of NACOCO, observed that from
late 1947 to early 1948 "there were many who lost money in the
trade." 39 NACOCO was not immune from such usual business risk.
826
The typhoons were known to plaintiff. In fact, NACOCO resisted the suits
filed by Louis Dreyfus & Co. by pleading in its answers force majeure as an
affirmative defense and there vehemently asserted that "as a result of the
said typhoons, extensive damage was caused to the coconut trees in the
copra producing regions of the Philippines and according to estimates of
competent authorities, it will take about one year until the coconut producing
regions will be able to produce their normal coconut yield and it will take
some time until the price of copra will reach normal levels;" and that "it had
never been the intention of the contracting parties in entering into the
contract in question that, in the event of a sharp rise in the price of copra in
the Philippine market produce byforce majeure or by caused beyond
defendant's control, the defendant should buy the copra contracted for at
exorbitant prices far beyond the buying price of the plaintiff under the
contract." 40
A high regard for formal judicial admissions made in court pleadings would
suffice to deter us from permitting plaintiff to stray away therefrom, to charge
now that the damage suffered was because of Kalaw's negligence, or for that
matter, by reason of the board's ratification of the contracts. 41
Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met
its contractual obligations. Stock accessibility was no problem. NACOCO had
90 buying agencies spread throughout the islands. It could purchase 2,000
tons of copra a day. The various contracts involved delivery of but 16,500
tons over a five-month period. Despite the typhoons, NACOCO was still able
to deliver a little short of 50% of the tonnage required under the contracts.
As the trial court correctly observed, this is a case of damnum absque injuria.
Conjunction of damage and wrong is here absent. There cannot be an
actionable wrong if either one or the other is wanting. 43
7. On top of all these, is that no assertion is made and no proof is presented
which would link Kalaw's acts ratified by the board to a matrix for
defraudation of the government. Kalaw is clear of the stigma of bad faith.
Plaintiff's corporate counsel 44 concedes that Kalaw all along thought that he
had authority to enter into the contracts, that he did so in the best interests of
the corporation; that he entered into the contracts in pursuance of an overall
policy to stabilize prices, to free the producers from the clutches of the
middlemen. The prices for which NACOCO contracted in the disputed
agreements, were at a level calculated to produce profits and higher than
those prevailing in the local market. Plaintiff's witness, Barretto, categorically
stated that "it would be foolish to think that one would sign (a) contract when
you are going to lose money" and that no contract was executed "at a price
unsafe for the Nacoco." 45 Really, on the basis of prices then prevailing,
NACOCO envisioned a profit of around P752,440.00. 46
Kalaw's acts were not the result of haphazard decisions either. Kalaw
invariably consulted with NACOCO's Chief Buyer, Sisenando Barretto, or the
Assistant General Manager. The dailies and quotations from abroad were
guideposts to him.
Of course, Kalaw could not have been an insurer of profits. He could not be
expected to predict the coming of unpredictable typhoons. And even as
typhoons supervened Kalaw was not remissed in his duty. He exerted efforts
to stave off losses. He asked the Philippine National Bank to implement its
commitment to extend a P400,000.00 loan. The bank did not release the
loan, not even the sum of P200,000.00, which, in October, 1947, was
approved by the bank's board of directors. In frustration, on December 12,
1947, Kalaw turned to the President, complained about the bank's short-
sighted policy. In the end, nothing came out of the negotiations with the bank.
NACOCO eventually faltered in its contractual obligations.
That Kalaw cannot be tagged with crassa negligentia or as much as simple
negligence, would seem to be supported by the fact that even as the
contracts were being questioned in Congress and in the NACOCO board
itself, President Roxas defended the actuations of Kalaw. On December 27,
1947, President Roxas expressed his desire "that the Board of Directors
should reelect Hon. Maximo M. Kalaw as General Manager of the National
Coconut Corporation." 47 And, on January 7, 1948, at a time when the
contracts had already been openly disputed, the board, at its regular
meeting, appointed Maximo M. Kalaw as acting general manager of the
corporation.
827
Well may we profit from the following passage from Montelibano vs.
Bacolod-Murcia Milling Co., Inc., L-15092, May 18, 1962:

"They (the directors) hold such office charged with the duty to act for
the corporation according to their best judgment, and in so doing they
cannot be controlled in the reasonable exercise and performance of
such duty. Whether the business of a corporation should be operated
at a loss during a business depression, or closed down at a smaller
loss, is a purely business and economic problem to be determined by
the directors of the corporation, and not by the court. It is a well known
rule of law that questions of policy of management are left solely to the
honest decision of officers and directors of a corporation, and the court
is without authority to substitute its judgment for the judgment of the
board of directors; the board is the business manager of the 0G.R. No. L-20333 June 30, 1967
corporation, and solong as it acts in good faith its orders are not
reviewable by the courts." (Fletcher on Corporations, Vol. 2, p. 390.) 48 EMILIANO ACUA, plaintiff-appellant,
vs.
Kalaw's good faith, and that of the other directors, clinch the case for BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION, INC.,
defendants. 49 JUSTINO GALANO, TEODORO NARCISO, PABLO BACTIN, (DR.)
EMMANUEL BUMANGLAG, VENANCIO DIRIC, MARCOS ESQUIVEL,
Viewed in the light of the entire record, the judgment under review must be, EVARISTO CAOILI, FIDEL BATTULAYAN, DAMIAN ROSSINI,
as it is hereby, affirmed. RAYMUNDO BATALLONES, PLACIDO QUIAOIT, and LEON Q.
VERANO defendants-appellees.
Without costs. So ordered.
Marquez and Marquez for plaintiff-appellant.
Estanislao A. Fernandez for defendants-appellees.
Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Castro and Angeles, JJ.,
concur.
Fernando, J., took no part. MAKALINTAL, J.:
Concepcion, C.J. and Dizon, J., are on leave.
Appeal taken from the order dated September 10, 1962 of the Court of First
Instance of Rizal, Branch V (Quezon City) dismissing plaintiff's complaint on
the ground that it states no cause of action, and discharging the writ of
preliminary attachment issued therein.

On August 9, 1962, plaintiff Emiliano Acua filed a complaint, which was later
amended on August 13, against the defendant Batac Producers Cooperative

828
Marketing Association, Inc., hereinafter called the Batac Procoma, Inc., or
alternatively, against all the other defendants named in the caption. The
complaint alleged, inter alia, that on or about May 5, 1962 it was tentatively
agreed upon between plaintiff and defendant Leon Q. Verano, as Manager of
the defendant Batac Procoma, Inc., that the former would seek and obtain
the sum of not less, than P20,000.00 to be advanced to the defendant Batac
Procoma, Inc., to be utilized by it as additional funds for its Virginia tobacco
buying operations during the current redrying season; that plaintiff would be
constituted as the corporation's representative in Manila to assist in handling
and facilitating its continuous shipments of tobacco and their delivery to the
redrying plants and in speeding up the prompt payment and collection of all
amounts due to the corporation for such shipments; that for his services
plaintiff would be paid a remuneration at the rate of P0.50 per kilo of tobacco;
that said tentative agreement was favorably received by the Board of
Directors of the defendant Batac Procoma Inc., and on May 6, 1962 all the
defendants named above, who constituted the entire Board of Directors of
said corporation (except Leon Q. Verano, who was its Manager), together
with defendants Justino Galano and Teodoro Narciso, as President and Vice-
President, respectively, unanimously authorized defendant Leon Q. Verano,
by a formal resolution, "to execute any agreement with any person or entity,
on behalf of the corporation, for the purpose of securing additional funds for
the corporation, as well as to secure the services of such person or entity, in
the collection of all payments due to the corporation from the PVTA for any
tobacco sold and delivered to said administration; giving and conferring upon
the Manager, full and complete authority to bind the corporation with such
person or entity in any agreement, and under such considerations, which the
said Manager may deem expedient and necessary for that purpose; that
plaintiff was made to understand by all of said defendants that the original
understanding between him and defendant Leon Q. Verano was acceptable
to the corporation, except that the remuneration for the plaintiff's services
would be P0.30 per kilo of tobacco; that on May 10, 1962, the formal
"Agreement" was executed between plaintiff and defendant Leon Q. Verano,
as Manager of the defendant corporation, duly authorized by its Board of
Directors for such purpose, and signed by defendants Justino Galano and Dr.
Emmanuel Bumanglag as instrumental witnesses and acknowledged by Atty.
Fernando Alcantara, the Secretary and Legal Counsel of the defendant
corporation; that upon plaintiff's inquiry, he was assured by these defendants
that a formal approval of said "Agreement" by the Board was no longer
necessary, as it was a mere "formality" appended to its authorizing resolution
and as all the members of the Board had already agreed to the same; that on
the same date, May 10, 1962, plaintiff gave and turned over to the defendant
corporation, thru its treasurer, Dominador T. Cocson the sum of P20,000.00,
in the presence of defendants Leon Q. Verano, Justino Galano, Dr.
Emmanuel Bumanglag and Atty. Fernando Alcantara, for which said treasurer
issued to plaintiff its corresponding Official Receipt No. 130852; that from
then on, plaintiff diligently and religiously kept his part of the "Agreement;"
that plaintiff even furnished the defendant corporation, upon request of its
Manager Leon Q. Verano three thousand (3,000) sacks which it utilized in the
shipment of its tobacco costing P6,000.00 and that plaintiff had personally
advanced out of his own personal funds the total sum of P5,000.00 with the
full knowledge, acquiescence and consent of all the individual defendants;
that after the defendant corporation was enabled to replenish its funds with
continuous collections from the PVTA for tobacco delivered due to the help,
assistance and intervention of plaintiff, for which the said corporation
collected from the PVTA the total sum of P381,495.00, the "Agreement" was
disapproved by its Board of Directors on June 6, 1962. Upon the foregoing
allegations plaintiff prays: (a) that an order of attachment be issued against
the properties of defendant corporation; (b) that after due trial, judgment be
rendered condemning defendant corporation, or alternatively, all the other
individual defendants, jointly and severally, to comply with their contractual
obligations and to pay plaintiff the sum of P300,000.00 for his services, plus
P31,000.00 for cash advances made by him and P25,000.00 for attorney's
fees.
On August 14, 1962, the lower court ordered the issuance of a writ of
preliminary attachment against the properties of the defendants and on the
following day, after the plaintiff had posted the required bond, the writ was
accordingly issued by the Clerk of Court.1wph1.t
On August 22, 1962, the defendants filed a motion to dismiss the complaint
on the ground that it stated no cause of action and to discharge the
preliminary attachment on the ground that it was improperly or irregularly
issued. In support of the motion defendants alleged that the contract for
services was never perfected because it was not approved or ratified but was
829
instead disapproved by the Board of Directors of defendant Batac Procoma,
Inc., and that on the basis of plaintiff's pleadings the contract is void and
unenforceable. Defendants further denied the fact that plaintiff had performed
his part of the contract, alleging that he had not in any manner intervened in
the delivery and payment of tobacco pertaining to the defendant corporation.
On August 25, 1962, plaintiff filed a written opposition to the motion to
dismiss and to discharge the preliminary attachment.
On September 10, 1962, the trial court sustained defendants' motion and
issued the following order:
In resume the Court believes that the complaint states no cause of
action and that contract in question is void ab initio.
IN VIEW OF THE FOREGOING, the amended complaint filed in this
case is hereby ordered DISMISSED, without special pronouncement
as to costs. Consequently, the writ of preliminary attachment issued
herein is ordered discharged. However, it is of record that the
defendants has (sic) deposited the Court the amount of P20,400.00
representing the amount of money invested by the plaintiff plus the
corresponding interest thereon. Plaintiff, by virtue of this order, may
withdraw the same in due time, if he so desires, upon proper receipt
therefor.
From the foregoing order plaintiff interposed the present appeal.
Appellant has assigned four errors, which we shall consider seriatim:
The first assignment reads: "As the defendants' motion to dismiss the
complaint and to discharge the preliminary attachment was based on the
specific ground that the complaint states no cause of action (Sec. 1 [f], Rule
8, Rules of Court), the lower court should not have gone beyond, and it
should have limited itself, to the facts alleged in the complaint in considering
and resolving said motion to dismiss.
It is a settled principle that when a motion to dismiss is based on the ground
that the complaint does not state a cause of action (Rule 8, Section 1, par. 7
of the old Rules; Rule 16, Section 1., par. [g] of the Revised Rules) the
averments in the complaint are deemed hypothetically admitted and the
inquiry is limited to whether or not they make out a case on which relief can
be granted. If said motion assails directly or indirectly the veracity of the
allegations, it is improper to grant the motion upon the assumption that the
averments therein are true and those of the complaint are not (Carreon vs.
Prov. Board of Pampanga, 52 O.G. 6557.) The sufficiency of the motion
should be tested on the strength of the allegations of facts contained in the
complaint, and no other. If these allegations show a cause of action, or
furnish sufficient basis by which the complaint can be maintained, the
complaint should not be dismissed regardless of the defenses that may be
averred by the defendants. (Josefa de Jesus, et al. vs. Santos Belarmino, 50
O.G. 3004-3068; Verzosa vs. Rigonan, G.R. No. L-6459, April 23, 1954;
Dimayuga vs. Dimayuga, 51 O.G. 2397-2400.)
The first ground upon which the order of dismissal issued by the lower court
is predicated is that the Board of Directors of defendant corporation did not
approve, the agreement in question in fact disapproved it by a resolution
passed on June 6, 1962 and that as a consequence the "suspensive
condition" attached to the agreement was never fulfilled. The specific
stipulation referred to by the Court as a suspensive condition states:
"provided, however that the contract entered into by said manager to carry
out the purposes above-mentioned shall be subject to the approve by the
Board."
A perusal of the complaint reveals that it contains sufficient allegations
indicating such approval or at least subsequent ratification. On the first point
we note the following averments: that on May 9th the plaintiff met with each
and all of the individual defendants (who constituted the entire Board of
Directors) and discussed with them extensively the tentative agreement and
he was made to understand that it was acceptable to them, except as to
plaintiff's remuneration; that it was finally agreed between plaintiff and all said
Directors that his remuneration would be P0.30 per kilo (of tobacco); and that
after the agreement was formally executed he was assured by said Directors
that there would be no need of formal approval by the Board. It should be
830
noted in this connection that although the contract required such approval it
did not specify just in what manner the same should be given.
On the question of ratification the complaint alleges that plaintiff delivered to
the defendant corporation the sum of P20,000.00 as called for in the
contract; that he rendered the services he was required to do; that he
furnished said defendant 3,000 sacks at a cost of P6,000.00 and advanced
to it the further sum of P5,000.00; and that he did all of these things with the
full knowledge, acquiescence and consent of each and all of the individual
defendants who constitute the Board of Directors of the defendant
corporation. There is abundant authority in support of the proposition
that ratification may be express or implied, and that implied ratification
may take diverse forms, such as by silence or acquiescence; by acts
showing approval or adoption of the contract; or by acceptance and
retention of benefits flowing therefrom.
Significantly the very resolution of the Board of Directors relied upon by
defendants appears to militate against their contention. It refers to plaintiff's
failure to comply with certain promises he had made, as well as to his
interpretation of the contract with respect to his remuneration which,
according to the Board, was contrary to the intention of the parties. The
resolution then proceeds to "disapprove and/or rescind" the said contract.
The idea of conflicting interpretation, or rescission on the ground that one of
the parties has failed to fulfill his obligation under the contract, is certainly
incompatible with defendants' theory here that no contract had yet been
perfected for lack of approval by the Board of Directors.
Appellants' second assignment of error reads: "Assuming that in resolving
the defendants' motion to dismiss the lower court could consider the new
facts alleged therein and the documents annexed thereto it committed an
error in extending such consideration beyond ascertaining only if an issue of
fact has been presented and in actually deciding instead such fact in issue."
The assignment is well taken, and is the logical corollary of the rule that a
motion to dismiss on the ground that the complaint fails to state a cause of
action addresses itself to the averments in the complaint and, admitting their
veracity, merely questions their sufficiency to make out a case on which the
court can grant relief. Affidavits, such as those presented by defendants in
support of the motion, can only be considered for the purpose of ascertaining
whether an issue of fact is presented, but not as a basis for deciding the
factual issue itself. This should await the trial on the merits.
The third assignment of error assails the lower court's ruling that even
assuming that a contract had been perfected no action can be maintained
thereon because its object was illegal and therefore void. Specific reference
was made by said court to an affidavit executed by appellant on May 10,
1962 which reads:
That I, EMILIANO ACUA, the party of the Second Part in the contract
entered into with the Batac Procoma, Inc., the party of the First Part
in same contract declares that the amount of P0.30 per kilo is
referred to upgraded tobacco only as delivered. This supplements
paragraph three of the contract referred to. Deliveries downgraded or
maintained at the redrying plant are deemed not included.
The lower court, in its order of dismissal, held that "the upgrading of tobaccos
is clearly prohibited under our laws," and hence the contract cannot be validly
ratified. Evidently the court had in mind a fraudulent upgrading of tobacco by
appellant as part of the services called for under the contract. This
conclusion, however, is squarely traversed by appellant in another affidavit
attached to his reply and opposition to the motion to dismiss, in which he
explained the circumstances which led to the execution of the one relied
upon by the court, and the real meaning of the word "upgraded" therein. It is
therein stated:
That after the execution of the agreement (Annex "B" to the amended
complaint in said Civil Case No. Q-6547), Messrs. Verano, Galano and Dr.
Bumanglag of the defendant Corporation indicated to me that if the price of
P0.30 per kilo stipulated there to be paid to me were to be indiscriminately
applied to all deliveries of tobaccos, the Corporation would be placed in a
disadvantageous and losing position, and they proceeded to explain to me
the following,
831
 (a) that when the farmers sell their tobaccos to the Facoma, they do
so in bunches of assorted qualities which may belong either to Class
A, B, C, D and E, and upon such purchase they are initially given an
arbitrary classification of any of such classes as the case may be,
the tendency generally being to give them a lower classification to
equalize or average the assorted qualities as much as possible, and
this is what is termed "downgrading;"
(b) that after the tobaccos have been purchased by the Facoma from
the farmers, they are then reassorted and re-classified in accordance
with their actual quality or grade as found by the officials of the
Facoma, thus in a bunch which are purchased as Class C, D or E,
upon reclassification those found to belong to Class A are separated
from Class B, those belonging to Class B are separated from Class
C, and so on, and these bunches so reclassified necessarily have a
higher grade than the farmers, and this is what is termed "upgrading"
upon delivery original arbitrary classification given when purchased
from the which was used in the addendum;
(c) the Facoma, in turn, delivers these properly re-classified tobaccos
to the redrying plant, and there, a group of officials composed of a
representative of the redrying plant, the Bureau of Internal Revenue,
the General Auditing Office, the PVTA and the Facoma
representative, then examines and grades the tobaccos, and if the
classification given by the Facoma is found correct and not changed,
then and only then would or should be entitled to collect the P0.30
per kilo, and this they said is what is termed "grade maintained"
on the other hand, if these officials found the classification incorrect
and lowers the classification given by the Facoma, thus class A to B,
or from B to C, then the tobaccos are considered or said to be
"downgraded" and in that event I should not receive any centavo for
such deliveries, and it is in this sense that I was made to understand
the term;
Believing implicitly in the foregoing explanations of the defendants and in the
reasonableness of their proposal, I agreed readily and Atty. Fernando
Alcantara, Legal Counsel and Secretary of the defendant Corporation
forthwith prepared, drafted and typed the "addendum" in question in their
own typewriter of the Corporation; and as I am not a lawyer and was not well
versed with the usage, customs and phraseology usually used in tobacco
trading, I relied in absolute good faith that, as explained by the defendants,
there was nothing wrong nor illegal in the use of the words "upgrading" and
"downgrading" used in said addendum, which Atty. Alcantara unfortunately
used in the same;
Apart from the above, defendants knew the physical impossibility of
"upgrading" the tobaccos at the redrying plant, because at the time of the
transaction, only the PTFC & RC was allowed to accept tobacco for redrying
and under the existing regulations and practices the delivery area for
tobaccos at the redrying plant is enclosed by a high wire fence inaccessible
to the general public and the only ones who actually make the grading of
tobaccos delivered, are the (1) American representative of the redrying plant
(PTFC & RC), (2) the PVTA, (3) the BIR, and (4) the General Auditing Office
in the presence of the representative of the FACOMA, and since the redrying
plant is compelled to purchase 41% of all tobaccos delivered and redried
under their negotiated management contract, it is highly improbable that the
representative of the redrying plant (PTFC & RC) whose conformity to the
actual grading done must appear in the corresponding "guia" or tally sheet,
would allow the "upgrading" of tobaccos, aside from the fact that stringent
measures had been devised under the present administration to prevent the
"upgrading" of tobaccos by any party. Certainly, an impossible condition
could not have been contemplated by me and the defendants; (Record on
Appeal, pp. 171-175).
The foregoing explanation, on its face, is satisfactory and deprives the term
"upgraded" of the sinister and illegal connotation attributed to it by the lower
court. To be sure, whether the allegations in this subsequent affidavit are true
or not is a question of fact; but it is precisely for this reason that they can
neither be summarily admitted nor rejected for purposes of a motion to
dismiss. Due process demands that they be the subject of proof and
considered only after trial on the merits.
The other errors assigned by appellant are merely incidental to those already
discussed, and require no separate treatment.
832
Wherefore, the order appealed from is set aside and the case is remanded to
the court a quo for further proceedings, without prejudice to, the right of
plaintiff-appellant to ask for another writ of attachment in said court, as the
circumstances may warrant. Costs against defendants-appellees.
G.R. No. L-37281 November 10, 1933
Concepcion, C.J., Reyes, J.B.L., Bengzon, J.P., Zaldivar, Sanchez and
Castro, JJ., concur. W. S. PRICE and THE SULU DEVELOPMENT COMPANY, plaintiffs-
Dizon, J., took no part. appellants,
vs.
H. MARTIN, defendant-appellant.
THE AGUSAN COCONUT COMPANY, defendant-appellee.

J.W. Ferrier for plaintiff-appellants.

G.E. Campbell and W.A. Caldwell for defendant-appellant.
DeWitt, Perkins and Brady for appellee.

HULL, J.:

Plaintiffs brought suit in the Court of First Instance of Manila praying that a
mortgage executed by the Sulu Development Company on its properties in
favor of the Agusan Coconut Company be dissolved and declared null and
void, the principal contentions being that at the stockholders' meeting in
which the officers of the Sulu Development Company were elected and at
which the proposed mortgage was approved of, 97 shares of stock of the
Sulu Development Company were voted by the proxy of Mrs. Worcester , in
whose name the stock at that time stood upon the books of the company,
whereas defendant Martin claimed that he was the true owner and that he
should have voted the stock.

From the records of the Sulu Development Company it appears that at the
meeting of November 12, 1925, Martin presented evidence to the effect that
he, and not Mrs. Worcester, was the owner of the 97 shares of stock. Copies
of the documents relied upon by Martin were made a part of the record, but
apparently no action was taken by the stockholders or by the directors, and

833
at the meetings of November 12, 17, and 19, Mrs. Worcester's proxy The trial court, on timely objection, refused to receive the parol evidence as
apparently voted the stock without protest on the part of Martin or any other to the cultivation agreement, and after trial and a lengthy opinion, held that
stockholder. the mortgage in question was valid and refused to order its cancellation.

As far as the record shows, every formal action taken at those three From that decision plaintiff appeal and make the following assignments of
meetings was unanimous, and Martin at the last two meetings was error:
accompanied by two members of the Bar of the Philippine Islands as his
counsel. The trial court erred:

The Sulu Development Company from its inception up to the time of 1. In refusing appellants the right to introduce evidence as to the
executing the contract was virtually owned and controlled by Martin. Prince "cultivation agreement" extensively referred to by the parties herein.
purchased one share of stock about a month before the called meeting but
was not present at the meetings in question. 2. In refusing to reopen the case on motion filed in due form and
manner by the plaintiffs and appellants herein, on the ground of
Another ground relied upon by plaintiffs is a claim that the mortgage was newly discovered evidence, such motion having been filed the
without consideration. The evidence shows that for years the Agusan rendition of the judgment herein.
Coconut Company, through its general manager, had been advancing sums
through Martin in order that the Sulu Development Company might secure 3. In finding that the plaintiff, W.S. Price, did not appear here as a
good and sufficient title to a large tract of land situated near Siasi and plaintiff to depend his own right but for the purpose of giving aid to
thereon develop a coconut plantation. The amount of money so advanced the defendant, Harry Martin.
was in dispute, but between the meeting on November 12 and the final action
on November 19, the attorney of the Sulu Development Company, one of
4. In ruling that although the 97 shares voted by Mrs. Nanon L.
whom was also an accountant, and the attorneys of the Agusan Coconut
Worcester at the meetings in question thru her proxy belonged to
Company went over the mutual accounts with care and arrived at the sum
Harry Martin and were only held in trust by her late husband, Dean
set forth in the mortgaged. Had there been no agreement, suit would have
C. Worcester, yet such trusteeship was for the benefit of the Agusan
been instituted by the Agusan Company against the Sulu Development
Coconut Company, and that such company is the actual cestui que
Company.
trust thereunder, in violation of the express terms of the trust
agreement.
There is also a claim that there was a parol agreement between Martin and
Worcester, representing the two companies, that after the death of Mr.
5. In holding that Mrs. Nanon L. Worcester could legally vote the said
Worcester on May 2, 1924, the Agusan Coconut Company failed to comply
97 shares she actually voted at the meeting in question,
with the terms and conditions of the so-called cultivation agreement, and
notwithstanding the facts as found by said court, that said shares
Martin prayed in his special cross-complaint and counter-claim that the
belonged to H. Martin and were merely held in trust by her deceased
Defendant Agusan Coconut Company be required to make such further cash
husband.
advances to "carry out the full scale development of the tract of land in the
cultivation agreement and as contemplated therein."

834
6. In finding that the 97 shares of stock in question had been
adjudicated to Mrs. Nanon L. Worcester by the commissioners on
claims against the estate of her deceased husband; that such
adjudication had been approved by the Court of First Instance of the
City of Manila, and that the said Nanon L. Worcester had inherited
said shares by virtue of the will of her deceased husband.
7. In holding the effect that there was a quorum in the pretended
meetings of the stockholders of the Sulu Development Company
alleged to have taken place on November 12, 17 and 19, 1925,
particularly that one asserted to have been held on November 19,
1925, when in law and in fact there was no such quorum.
8. In finding in effect that the meetings pretended to be held by Sulu
Development on the dates aforementioned were validly and legally
held and that the action taken and proceedings had thereat were
valid and effective.
9. In finding that if the defendant H. Martin had had the 97 shares in
question in his own name at the alleged meetings of the Sulu
Development Company, he would have voted them in the same way
and to the same effect as the said Nanon L. Worcester voted them.
10. In not finding that there was attendant fraud, misrepresentation
and deceit in the execution and issuance of the mortgage contract,
Exhibit U.
11. In not holding that said mortgage is null and void for want of legal
consideration.
12. In finding that the plaintiffs and appellants herein are legally
bound by the said mortgage contract Exhibit U.
13. In holding that the plaintiffs and appellants herein are legally
estopped to contest the efficacy and validity of the mortgage
contract, Exhibit, U.
14. In dismissing plaintiffs' complaint herein.
15. In denying plaintiffs' motion for a new trial.
While defendant Martin appeals and assigns the following errors:
1. The trial court erred in refusing to find that the one hundred shares
of the capital stock of the appellant, the Sulu Development Company,
delivered on November 23, 1922, by the appellant, H. Martin, to the
late Dean C. Worcester, were so delivered in trust to be held and
used for the benefit of the said H. Martin.
2. The trial court erred in finding that the voting by Mrs. Nanon L.
Worcester, in the meeting held by the stockholders of the appellant,
the Sulu Development Company, on November 12, 17, and 19, 1925,
was legal.
3. The trial court erred in refusing to find that the mortgage involved
in this litigation, purported to have been executed by the appellant,
the Sulu Development Company, in favor of the appellee, the Agusan
Coconut Company, is null and void.
4. The trial court erred in excluding, as being within the statute of
frauds, testimony regarding a certain verbal agreement entered into
by and between the appellee, the Agusan Coconut Company, and
the appellant, H. Martin, which agreement had been fully performed
by the latter.
5. The trial court erred in excluding as "Hearsay Evidence",
testimony regarding statements made by certain officials of the
appellee, the Agusan Company.
6. The trial court erred in excluding the testimony of the appellant, H.
Martin, regarding matters of fact which occurred between him and
certain officials of the appellee, the Agusan Coconut Company, who
had died prior to the trial of this action.
835
An examination of the assignments of error will show that although this case
in its main aspects is a simple one and confined to the questions, first, as to
whether the mortgage was duly executed by the Sulu Development
Company and, second, whether it was given for a valuable consideration,
many side issues of no moment were urged upon the trial court, which
probably accounts for the voluminous record with which we are confronted
and numerous assignments of error which we do not deem it necessary to
discuss in detail.
Plaintiffs contend that the transference on the books of the company of 97
shares of stock in the name of Mrs. Worcester was fraudulent and illegal. The
evidence of record, however, under all the circumstances of the case, fails to
demonstrate the allegation of fraud, and this court believes that she acted in
good faith and in the honest belief that she had not only a legal right but a
duty to participate in the stockholders meeting.
As to whether the stock was rightfully the property of Martin, that is a
question for the courts and for a stockholder's meeting. Until challenged in a
proper proceeding, a stockholder according to the books of the company has
a right to participate in that meeting, and in the absence of fraud the action of
the stockholders' meeting cannot be collaterally attacked on account of such
participation. "A person who has purchased stock, and who desires to be
recognized as a stockholder, for the purpose of voting, must secure such a
standing by having the transfer recorder upon the books. If the transfer is not
duly made upon request, he has, as his remedy, to compel it to be made."
(Morrill vs. Little Falls Mfg. Co., 53 Minn., 371; 21 L.R.A., 175-178, citing
Cook, Stock & Stockholders, par. 611; People vs. Robinson, 64 Cal., 373;
Downing vs. Potts, 23 N.J.L., 66; State vs. Ferris, 42 Conn., 560; New York &
N.H.R. Co. vs. Schuyler, 34 N.Y., 80; Bank of Commerce's App., 73 Pa., 59;
Hoppin vs. Buffum, 9 R.I., 513; 11 Am. Rep., 219; Re St. Lawrence S.R. Co.,
44 N. J. L., 529.)
As to the question of lack of consideration for the mortgage, throughout the
brief for appellants it appears by the constant reiteration of the phrase that all
the advances were made "by the Agusan Coconut Company and/or its then
General Manager, the late Dean C. Worcester, to H. Martin and/or the Sulu
Development Company."
It must be remembered that there is no dispute between the Worcester
interests and the Agusan Coconut Company as to who advanced the money,
namely, the Agusan Coconut Company, nor is there any difficulty in
determining to whom the money was advanced. Although Martin was virtually
the owner of all the capital stock of the Sulu Development Company,
business was carried on in the name of the company, and the land and
properties were secured in the name of the company, and up to the time of
the execution of the mortgage and some time thereafter there was no claim
from anybody the money had been advanced to Martin instead of the
company. Even a repeated use of the questionable phrase "and/or" as to the
grantor "and/or" as to the grantee, will not fabricate a life-raft on which a
recalcitrant debtor can reach a safe harbor of repudiation.lawphil.net
We are therefore convinced that the contention that the mortgage was made
without consideration was a afterthought without foundation in fact and in a
vain attempt to avoid a legal and binding obligation.
We find no merit in the contention that the trial court should have concerned
itself with an alleged parol contract between Martin and Dean C. Worcester,
deceased. The alleged contract not being in writing or to be executed within
a year, it is within the statute of frauds. The value of the rule is shown in this
case as it was some time after Mr. Worcester's death before anything was
heard of such an alleged agreement. Even if such an agreement had been
made and it had been proper to receive proof thereof, it would not benefit
plaintiffs as the mortgage was executed pursuant to a compromise
agreement to settle the affairs between the two companies, and all the
transactions between the two companies were merged and settle by that
compromise.
The contention that a new trial should have been granted in order that
plaintiffs could present in evidence a letter from Mr. Worcester to the late
Governor-General Wood, is likewise without merit. The letter, even if
admitted, would not have changed the result of these proceedings, as a fair
reading of the letter is not repugnant to a single contention of defendant-
appellee.
836
The judgment appealed from is therefore affirmed. Costs against appellants.
So ordered.

Malcolm, Villa-Real, Abad Santos, and Imperial, JJ., concur.

G.R. No. 131394 March 28, 2005

JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL

REYES, Petitioner,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION,
DOLORES ONRUBIA, ELENITA NOLASCO, JUAN O. NOLASCO III,
ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE
SCHOOL, INC., Respondents.

DECISION

TINGA, J.:

837
Presented in the case at bar is the apparently straight-forward but
complicated question: What should be the basis of quorum for a
stockholders meetingthe outstanding capital stock as indicated in the
articles of incorporation or that contained in the companys stock and transfer
book?
Petitioners seek to nullify the Court of Appeals Decision in CAG.R. SP No.
414731 promulgated on 18 August 1997, affirming the SEC Order dated 20
June 1996, and the Resolution2 of the Court of Appeals dated 31 October
1997 which denied petitioners motion for reconsideration.
The antecedents are not disputed.
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was
incorporated, with seven hundred (700) founders shares and seventy-six
(76) common shares as its initial capital stock subscription reflected in the
articles of incorporation. However, private respondents and their
predecessors who were in control of PMMSI registered the companys stock
and transfer book for the first time in 1978, recording thirty-three (33)
common shares as the only issued and outstanding shares of PMMSI.
Sometime in 1979, a special stockholders meeting was called and held on
the basis of what was considered as a quorum of twenty-seven (27) common
shares, representing more than two-thirds (2/3) of the common shares issued
and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a
petition with the Securities and Exchange Commission (SEC) for the
registration of their property rights over one hundred (120) founders shares
and twelve (12) common shares owned by their father. The SEC hearing
officer held that the heirs of Acayan were entitled to the claimed shares and
called for a special stockholders meeting to elect a new set of officers. 3The
SEC En Banc affirmed the decision. As a result, the shares of Acayan were
recorded in the stock and transfer book.
On 06 May 1992, a special stockholders meeting was held to elect a new set
of directors. Private respondents thereafter filed a petition with the SEC
questioning the validity of the 06 May 1992 stockholders meeting, alleging
that the quorum for the said meeting should not be based on the 165 issued
and outstanding shares as per the stock and transfer book, but on the initial
subscribed capital stock of seven hundred seventy-six (776) shares, as
reflected in the 1952 Articles of Incorporation. The petition was
dismissed.4 Appeal was made to the SEC En Banc, which granted said
appeal, holding that the shares of the deceased incorporators should be duly
represented by their respective administrators or heirs concerned. The SEC
directed the parties to call for a stockholders meeting on the basis of the
stockholdings reflected in the articles of incorporation for the purpose of
electing a new set of officers for the corporation. 5
Petitioners, who are PMMSI stockholders, filed a petition for review with the
Court of Appeals.6 Rebecca Acayan, Jayne O. Abuid, Willie O. Abuid and
Renato Cervantes, stockholders and directors of PMMSI, earlier filed another
petition for review of the same SEC En Bancs orders. The petitions were
thereafter consolidated.7 The consolidated petitions essentially raised the
following issues, viz: (a) whether the basis the outstanding capital stock and
accordingly also for determining the quorum at stockholders meetings it
should be the 1978 stock and transfer book or if it should be the 1952 articles
of incorporation; and (b) whether the Court of Appeals "gravely erred in
applying the Espejo Decision to the benefit of respondents." 8 The "Espejo
Decision" is the decision of the SEC en banc in SEC Case No. 2289 which
ordered the recording of the shares of Jose Acayan in the stock and transfer
book.
The Court of Appeals held that for purposes of transacting business,
the quorum should be based on the outstanding capital stock as found
in the articles of incorporation.9 As to the second issue, the Court of
Appeals held that the ruling in the Acayan case would ipso facto benefit the
private respondents, since to require a separate judicial declaration to
recognize the shares of the original incorporators would entail unnecessary
delay and expense. Besides, the Court of Appeals added, the incorporators
have already proved their stockholdings through the provisions of the articles
of incorporation.10
838
In the instant petition, petitioners claim that the 1992 stockholders meeting
was valid and legal. They submit that reliance on the 1952 articles of
incorporation for determining the quorum negates the existence and validity
of the stock and transfer book which private respondents themselves
prepared. In addition, they posit that private respondents cannot avail of the
benefits secured by the heirs of Acayan, as private respondents must show
and prove entitlement to the founders and common shares in a separate and
independent action/proceeding.
In private respondents Memorandum11 dated 08 March 2000, they point out
that the instant petition raises the same facts and issues as those raised in
G.R. No. 13131512, which was denied by the First Division of this Court on 18
January 1999 for failure to show that the Court of Appeals committed any
reversible error. They add that as a logical consequence, the instant petition
should be dismissed on the ground of res judicata. Furthermore, private
respondents claim that in view of the applicability of the rule on res judicata,
petitioners counsel should be cited for contempt for violating the rule against
forum-shopping.13
For their part, petitioners claim that the principle of res judicata does not
apply to the instant case. They argue that the instant petition is separate and
distinct from G.R. No. 131315, there being no identity of parties, and more
importantly, the parties in the two petitions have their own distinct rights and
interests in relation to the subject matter in litigation. For the same reasons,
they claim that counsel for petitioners cannot be found guilty of forum-
shopping.14
In their Manifestation and Motion15 dated 22 September 2004, private
respondents moved for the dismissal of the instant petition in view of the
dismissal of G.R. No. 131315. Attached to the said manifestation is a copy of
the Entry of Judgment16 issued by the First Division dated 01 December
1999.
The petition must be denied, not on res judicata, but on the ground that like
the petition in G.R. No. 131315 it fails to impute reversible error to the
challenged Court of Appeals Decision.
Res judicata does not apply in
the case at bar.
Res judicata means a matter adjudged, a thing judicially acted upon or
decided; a thing or matter settled by judgment. 17 The doctrine
of res judicata provides that a final judgment, on the merits rendered by a
court of competent jurisdiction is conclusive as to the rights of the parties and
their privies and constitutes an absolute bar to subsequent actions involving
the same claim, demand, or cause of action. 18 The elements of res
judicata are (a) identity of parties or at least such as representing the same
interest in both actions; (b) identity of rights asserted and relief prayed for,
the relief being founded on the same facts; and (c) the identity in the two (2)
particulars is such that any judgment which may be rendered in the other
action will, regardless of which party is successful, amount to res judicata in
the action under consideration.19
There is no dispute as to the identity of subject matter since the crucial point
in both cases is the propriety of including the still unproven shares of
respondents for purposes of determining the quorum. Petitioners, however,
deny that there is identity of parties and causes of actions between the two
petitions.
The test often used in determining whether causes of action are identical is
to ascertain whether the same facts or evidence would support and establish
the former and present causes of action. 20 More significantly, there is identity
of causes of action when the judgment sought will be inconsistent with the
prior judgment.21 In both petitions, petitioners assert that the Court of
Appeals Decision effectively negates the existence and validity of the stock
and transfer book, as well as automatically grants private respondents
shares of stocks which they do not own, or the ownership of which remains
to be unproved. Petitioners in the two petitions rely on the entries in the stock
and transfer book as the proper basis for computing the quorum, and
consequently determine the degree of control one has over the company.
Essentially, the affirmance of the SEC Order had the effect of diminishing
their control and interests in the company, as it allowed the participation of
the individual private respondents in the election of officers of the
corporation.
839
Absolute identity of parties is not a condition sine qua non for res judicata to
applya shared identity of interest is sufficient to invoke the coverage of the
principle.22 However, there is no identity of parties between the two cases.
The parties in the two petitions have their own rights and interests in relation
to the subject matter in litigation. As stated by petitioners in their Reply to
Respondents Memorandum,23 there are no two separate actions filed, but
rather, two separate petitions for review on certiorari filed by two distinct
parties with the Court and represented by their own counsels, arising from an
adverse consolidated decision promulgated by the Court of Appeals in one
action or proceeding.24 As such, res judicata is not present in the instant
case.
Likewise, there is no basis for declaring petitioners or their counsel guilty of
violating the rules against forum-shopping.
the Verification/Certification25 portion of the petition, petitioners clearly stated
that there was then a pending motion for reconsideration of the 18 August
1997 Decision of the Court of Appeals in the consolidated cases (CA-G.R.
SP No. 41473 and CA-G.R. SP No. 41403) filed by the Abuids, as well as a
motion for clarification. Moreover, the records indicate that petitioners filed
their Manifestation26 dated 20 January 1998, informing the Court of their
receipt of the petition in G.R. No. 131315 in compliance with their duty to
inform the Court of the pendency of another similar petition. The Court finds
that petitioners substantially complied with the rules against forum-shopping.
The Decision of the Court
Appeals must be upheld.
The petition in this case involves the same facts and substantially the same
issues and arguments as those in G.R. No. 131315 which the First Division
has long denied with finality. The First Division found the petition before it
inadequate in failing to raise any reversible error on the part of the Court of
Appeals. We reach a similar conclusion as regards the present petition.
The crucial issue in this case is whether it is the companys stock and
transfer book, or its 1952 Articles of Incorporation, which determines
stockholders shareholdings, and provides the basis for computing the
quorum.
We agree with the Court of Appeals.
The articles of incorporation has been described as one that defines the
charter of the corporation and the contractual relationships between the State
and the corporation, the stockholders and the State, and between the
corporation and its stockholders. 27 When PMMSI was incorporated, the
prevailing law was Act No. 1459, otherwise known as "The Corporation Law."
Section 6 thereof states:
In
Sec. 6. Five or more persons, not exceeding fifteen, a majority of
whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes by filing with the
Securities and Exchange Commission articles of incorporation duly
executed and acknowledged before a notary public, setting forth:
....
(7) If it be a stock corporation, the amount of its capital stock, in
lawful money of the Philippines, and the number of shares into which
of
it is divided, and if such stock be in whole or in part without par value
then such fact shall be stated; Provided, however, That as to stock
without par value the articles of incorporation need only state the
number of shares into which said capital stock is divided.
(8) If it be a stock corporation, the amount of capital stock or number
of shares of no-par stock actually subscribed, the amount or number
of shares of no-par stock subscribed by each and the sum paid by
each on his subscription. . . .28
A review of PMMSIs articles of incorporation 29 shows that the corporation
complied with the requirements laid down by Act No. 1459. It provides in part:
840
7. That the capital stock of the said corporation is NINETY
THOUSAND PESOS (P90,000.00) divided into two classes, namely:
Martin P. Sagarbarria 100 " 2, 000.00
FOUNDERS STOCK - 1,000 shares at P20 par value- P 20,000.00

COMMON STOCK- 700 shares at P 100 par value P 70,000.00

Mauricio G. Gallaga 50 " 1, 000.00
TOTAL ---------------------1,700 shares----------------------------
P 90,000.00

.... Luis Renteria 50 " 1, 000.00

8. That the amount of the entire capital stock which has been
actually subscribed is TWENTY ONE THOUSAND SIX HUNDRED
PESOS (P21,600.00) and the following persons have subscribed for Faustina M. de Onrubia 140 " 2, 800.00
the number of shares and amount of capital stock set out after their
respective names:

Mrs. Ramon Araneta 40 " 800.00

SUBSCRIBER SUBSCRIBED AMOUNT

SUBSCRIBED

Carlos M. Onrubia 80 " 1,600.00

No. of Shares Par Value

700 P 14,000.00

Crispulo J. Onrubia 120 Founders P 2,400.00

Juan H. Acayan 120 " 2, 400.00

841
SUBSCRIBER SUBSCRIBED AMOUNT
SUBSCRIBED
No. of Shares
Par Value
Carlos M. Onrubia 8" 800.00

Crispulo J. Onrubia 12 Common P 1,200.00

76 P7,600.0030

Juan H. Acayan 12 " 1,200.00

There is no gainsaying that the contents of the articles of incorporation
are binding, not only on the corporation, but also on its shareholders.
In the instant case, the articles of incorporation indicate that at the time
of incorporation, the incorporators were bona fide stockholders of
Martin P. Sagarbarria 8" 800.00
seven hundred (700) founders shares and seventy-six (76) common
shares. Hence, at that time, the corporation had 776 issued and
outstanding shares.

Mauricio G. Gallaga 8" 800.00 On the other hand, a stock and transfer book is the book which records the
names and addresses of all stockholders arranged alphabetically, the
installments paid and unpaid on all stock for which subscription has been
made, and the date of payment thereof; a statement of every alienation, sale
Luis Renteria 8" 800.00 or transfer of stock made, the date thereof and by and to whom made; and
such other entries as may be prescribed by law. 31 A stock and transfer book
is necessary as a measure of precaution, expediency and convenience since
it provides the only certain and accurate method of establishing the various
Faustina M. de Onrubia 12 " 1,200.00 corporate acts and transactions and of showing the ownership of stock and
like matters.32 However, a stock and transfer book, like other corporate
books and records, is not in any sense a public record, and thus is not
exclusive evidence of the matters and things which ordinarily are or
should be written therein.33 In fact, it is generally held that the records
Mrs. Ramon Araneta 8" 800.00 and minutes of a corporation are not conclusive even against the
corporation but are prima facie evidence only,34 and may be impeached

842
or even contradicted by other competent evidence. 35 Thus, parol
evidence may be admitted to supply omissions in the records or explain
ambiguities, or to contradict such records.36
In 1980, Batas Pambansa Blg. 68, otherwise known as "The Corporation
Code of the Philippines" supplanted Act No. 1459. BP Blg. 68 provides:
Sec. 24. Election of directors or trustees.At all elections of
directors or trustees, there must be present, either in person or by
representative authorized to act by written proxy, the owners of a
majority of the outstanding capital stock, or if there be no capital
stock, a majority of the members entitled to vote. . . .
Sec. 52. Quorum in meetings.- Unless otherwise provided for in this
Code or in the by-laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or majority of
the members in the case of non-stock corporation.
Outstanding capital stock, on the other hand, is defined by the Code as:
Sec. 137. Outstanding capital stock defined. The term
"outstanding capital stock" as used in this code, means the total
shares of stock issued to subscribers or stockholders whether or not
fully or partially paid (as long as there is binding subscription
agreement) except treasury shares.
Thus, quorum is based on the totality of the shares which have been
subscribed and issued, whether it be founders shares or common
shares.37 In the instant case, two figures are being pitted against each
other those contained in the articles of incorporation, and those
listed in the stock and transfer book.
To base the computation of quorum solely on the obviously deficient, if not
inaccurate stock and transfer book, and completely disregarding the issued
and outstanding shares as indicated in the articles of incorporation would
work injustice to the owners and/or successors in interest of the said shares.
This case is one instance where resort to documents other than the stock
and transfer books is necessary. The stock and transfer book of PMMSI
cannot be used as the sole basis for determining the quorum as it does not
reflect the totality of shares which have been subscribed, more so when the
articles of incorporation show a significantly larger amount of shares issued
and outstanding as compared to that listed in the stock and transfer book. As
aptly stated by the SEC in its Order dated 15 July 1996:38
It is to be explained, that if at the onset of incorporation a corporation
has 771 shares subscribed, the Stock and Transfer Book should
likewise reflect 771 shares. Any sale, disposition or even
reacquisition of the company of its own shares, in which it becomes
treasury shares, would not affect the total number of shares in the
Stock and Transfer Book. All that will change are the entries as to the
owners of the shares but not as to the amount of shares already
subscribed.
This is precisely the reason why the Stock and Transfer Book was
not given probative value. Did the shares, which were not recorded
in the Stock and Transfer Book, but were recorded in the Articles of
Iincorporation just vanish into thin air? . . . . 39
As shown above, at the time the corporation was set-up, there were already
seven hundred seventy-six (776) issued and outstanding shares as reflected
in the articles of incorporation. No proof was adduced as to any transaction
effected on these shares from the time PMMSI was incorporated up to the
time the instant petition was filed, except for the thirty-three (33) shares
which were recorded in the stock and transfer book in 1978, and the
additional one hundred thirty-two (132) in 1982. But obviously, the shares so
ordered recorded in the stock and transfer book are among the shares
reflected in the articles of incorporation as the shares subscribed to by the
incorporators named therein.
One who is actually a stockholder cannot be denied his right to vote by
the corporation merely because the corporate officers failed to keep its
records accurately.40 A corporations records are not the only evidence
843
of the ownership of stock in a corporation. 41 In an American WHEREFORE, the petition is DENIED and the assailed Decision is
case,42 persons claiming shareholders status in a professional corporation AFFIRMED. Costs against petitioners.
were listed as stockholders in the amendment to the articles of incorporation.
On that basis, they were in all respects treated as shareholders. In fact, the SO ORDERED.
acts and conduct of the parties may even constitute sufficient evidence of
ones status as a shareholder or member.43 In the instant case, no less than Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario,
the articles of incorporation declare the incorporators to have in their name JJ., concur.
the founders and several common shares. Thus, to disregard the contents of
the articles of incorporation would be to pretend that the basic document
which legally triggered the creation of the corporation does not exist and
accordingly to allow great injustice to be caused to the incorporators and
their heirs.

Petitioners argue that the Court of Appeals "gravely erred in applying the
Espejo decision to the benefit of respondents." The Court believes that the
more precise statement of the issue is whether in its assailed Decision, the
Court of Appeals can declare private respondents as the heirs of the
incorporators, and consequently register the founders shares in their name.
However, this issue as recast is not actually determinative of the present
controversy as explained below.

Petitioners claim that the Decision of the Court of Appeals unilaterally

divested them of their shares in PMMSI as recorded in the stock and transfer
book and instantly created inexistent shares in favor of private respondents.
We do not agree.

The assailed Decision merely declared that a separate judicial declaration to

recognize the shares of the original incorporators would entail unnecessary
delay and expense on the part of the litigants, considering that the
incorporators had already proved ownership of such shares as shown in the
articles of incorporation.44 There was no declaration of who the individual
owners of these shares were on the date of the promulgation of the Decision.
As properly stated by the SEC in its Order dated 20 June 1996, to which the
appellate courts Decisionshould be related, "if at all, the ownership of these
shares should only be subjected to the proper judicial (probate) or
extrajudicial proceedings in order to determine the respective shares of the
legal heirs of the deceased incorporators."45

844
845
846

G.R. No. 93695 February 4, 1992
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP.,
PABLO GONZALES, JR. and THOMAS GONZALES, respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.
GUTIERREZ, JR., J.:
What is the nature of the voting trust agreement executed between two
parties in this case? Who owns the stocks of the corporation under the terms
of the voting trust agreement? How long can a voting trust agreement remain
valid and effective? Did a director of the corporation cease to be such upon
the creation of the voting trust agreement? These are the questions the
answers to which are necessary in resolving the principal issue in this
petition for certiorari whether or not there was proper service of summons
on Alfa Integrated Textile Mills (ALFA, for short) through the petitioners as
president and vice-president, allegedly, of the subject corporation after the
execution of a voting trust agreement between ALFA and the Development
Bank of the Philippines (DBP, for short).
From the records of the instant case, the following antecedent facts appear:
On November 15, 1985, a complaint for a sum of money was filed by the
International Corporate Bank, Inc. against the private respondents who, in
turn, filed a third party complaint against ALFA and the petitioners on March
17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the third
party complaint which the Regional Trial Court of Makati, Branch 58 denied in
an Order dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party
complaint.
Meanwhile, on July 12, 1988, the trial court issued an order requiring the
issuance of an alias summons upon ALFA through the DBP as a
consequence of the petitioner's letter informing the court that the summons
for ALFA was erroneously served upon them considering that the
management of ALFA had been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was not
authorized to receive summons on behalf of ALFA since the DBP had not
taken over the company which has a separate and distinct corporate
personality and existence.
On August 4, 1988, the trial court issued an order advising the private
respondents to take the appropriate steps to serve the summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation and
Motion for the Declaration of Proper Service of Summons which the trial
court granted on August 17, 1988.
On September 12, 1988, the petitioners filed a motion for reconsideration
submitting that Rule 14, section 13 of the Revised Rules of Court is not
applicable since they were no longer officers of ALFA and that the private
respondents should have availed of another mode of service under Rule 14,
Section 16 of the said Rules, i.e.,through publication to effect proper service
upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27,
1988, the private respondents argued that the voting trust agreement dated
March 11, 1981 did not divest the petitioners of their positions as president
847
and executive vice-president of ALFA so that service of summons upon ALFA
through the petitioners as corporate officers was proper.
On January 2, 1989, the trial court upheld the validity of the service of
summons on ALFA through the petitioners, thus, denying the latter's motion
for reconsideration and requiring ALFA to filed its answer through the
petitioners as its corporate officers.
On January 19, 1989, a second motion for reconsideration was filed by the
petitioners reiterating their stand that by virtue of the voting trust agreement
they ceased to be officers and directors of ALFA, hence, they could no longer
receive summons or any court processes for or on behalf of ALFA. In support
of their second motion for reconsideration, the petitioners attached thereto a
copy of the voting trust agreement between all the stockholders of ALFA (the
petitioners included), on the one hand, and the DBP, on the other hand,
whereby the management and control of ALFA became vested upon the
DBP.
On April 25, 1989, the trial court reversed itself by setting aside its previous
Order dated January 2, 1989 and declared that service upon the petitioners
who were no longer corporate officers of ALFA cannot be considered as
proper service of summons on ALFA.
On May 15, 1989, the private respondents moved for a reconsideration of the
above Order which was affirmed by the court in its Order dated August 14,
1989 denying the private respondent's motion for reconsideration.
On September 18, 1989, a petition for certiorari was belatedly submitted by
the private respondent before the public respondent which, nonetheless,
resolved to give due course thereto on September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the pending
petition for certiorari with public respondent issued an Order declaring as
final the Order dated April 25, 1989. The private respondents in the said
Order were required to take positive steps in prosecuting the third party
complaint in order that the court would not be constrained to dismiss the
same for failure to prosecute. Subsequently, on October 25, 1989 the private
respondents filed a motion for reconsideration on which the trial court took no
further action.
On March 19, 1990, after the petitioners filed their answer to the private
respondents' petition for certiorari, the public respondent rendered its
decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the orders of
respondent judge dated April 25, 1989 and August 14, 1989
are hereby SET ASIDE and respondent corporation is
ordered to file its answer within the reglementary period. (CA
Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the decision
of the public respondent which resolved to deny the same on May 10, 1990.
Hence, the petitioners filed this certiorari petition imputing grave abuse of
discretion amounting to lack of jurisdiction on the part of the public
respondent in reversing the questioned Orders dated April 25, 1989 and
August 14, 1989 of the court a quo, thus, holding that there was proper
service of summons on ALFA through the petitioners.
In the meantime, the public respondent inadvertently made an entry of
judgment on July 16, 1990 erroneously applying the rule that the period
during which a motion for reconsideration has been pending must be
deducted from the 15-day period to appeal. However, in its Resolution dated
January 3, 1991, the public respondent set aside the aforestated entry of
judgment after further considering that the rule it relied on applies to appeals
from decisions of the Regional Trial Courts to the Court of Appeals, not to
appeals from its decision to us pursuant to our ruling in the case
of Refractories Corporation of the Philippines v. Intermediate Appellate
Court, 176 SCRA 539 [1989]. (CA Rollo, pp. 249-250)
In their memorandum, the petitioners present the following arguments, to wit:
848
 (1) that the execution of the voting trust agreement by a
stockholders whereby all his shares to the corporation have
been transferred to the trustee deprives the stockholders of
his position as director of the corporation; to rule otherwise,
as the respondent Court of Appeals did, would be violative of
section 23 of the Corporation Code ( Rollo, pp. 270-3273);
and
(2) that the petitioners were no longer acting or holding any
of the positions provided under Rule 14, Section 13 of the
Rules of Court authorized to receive service of summons for
and in behalf of the private domestic corporation so that the
service of summons on ALFA effected through the petitioners
is not valid and ineffective; to maintain the respondent Court
of Appeals' position that ALFA was properly served its
summons through the petitioners would be contrary to the
general principle that a corporation can only be bound by
such acts which are within the scope of its officers' or agents'
authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the
instant case, we dwell first on the nature of a voting trust agreement and the
consequent effects upon its creation in the light of the provisions of the
Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the
stockholders of a corporation and the trustee or by a group
of identical agreements between individual stockholders and
a common trustee, whereby it is provided that for a term of
years, or for a period contingent upon a certain event, or
until the agreement is terminated, control over the stock
owned by such stockholders, either for certain purposes or
for all purposes, is to be lodged in the trustee, either with or
without a reservation to the owners, or persons designated
by them, of the power to direct how such control shall be
used. (98 ALR 2d. 379 sec. 1 [d]; 19 Am J 2d Corp. sec.
685).
Under Section 59 of the new Corporation Code which expressly recognizes
voting trust agreements, a more definitive meaning may be gathered. The
said provision partly reads:
Sec. 59. Voting Trusts One or more stockholders of a
stock corporation may create a voting trust for the purpose of
conferring upon a trustee or trustees the right to vote and
other rights pertaining to the share for a period rights
pertaining to the shares for a period not exceeding five (5)
years at any one time: Provided, that in the case of a voting
trust specifically required as a condition in a loan agreement,
said voting trust may be for a period exceeding (5) years but
shall automatically expire upon full payment of the loan. A
voting trust agreement must be in writing and notarized, and
shall specify the terms and conditions thereof. A certified
copy of such agreement shall be filed with the corporation
and with the Securities and Exchange Commission;
otherwise, said agreement is ineffective and unenforceable.
The certificate or certificates of stock covered by the voting
trust agreement shall be cancelled and new ones shall be
issued in the name of the trustee or trustees stating that they
are issued pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the name of
the trustee or trustees is made pursuant to said voting trust
agreement.
By its very nature, a voting trust agreement results in the separation of the
voting rights of a stockholder from his other rights such as the right to receive
dividends, the right to inspect the books of the corporation, the right to sell
certain interests in the assets of the corporation and other rights to which a
stockholder may be entitled until the liquidation of the corporation. However,
in order to distinguish a voting trust agreement from proxies and other voting
pools and agreements, it must pass three criteria or tests, namely: (1) that
849
the voting rights of the stock are separated from the other attributes of
ownership; (2) that the voting rights granted are intended to be irrevocable
for a definite period of time; and (3) that the principal purpose of the grant of
voting rights is to acquire voting control of the corporation. (5
Fletcher, Cyclopedia of the Law on Private Corporations, section 2075 [1976]
p. 331 citing Tankersly v. Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement
may confer upon a trustee not only the stockholder's voting rights but also
other rights pertaining to his shares as long as the voting trust agreement is
not entered "for the purpose of circumventing the law against monopolies
and illegal combinations in restraint of trade or used for purposes of fraud."
(section 59, 5th paragraph of the Corporation Code) Thus, the traditional
concept of a voting trust agreement primarily intended to single out a
stockholder's right to vote from his other rights as such and made irrevocable
for a limited duration may in practice become a legal device whereby a
transfer of the stockholder's shares is effected subject to the specific
provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy
between the equitable or beneficial ownership of the corporate shares of a
stockholders, on the one hand, and the legal title thereto on the other hand.
The law simply provides that a voting trust agreement is an agreement in
writing whereby one or more stockholders of a corporation consent to
transfer his or their shares to a trustee in order to vest in the latter voting or
other rights pertaining to said shares for a period not exceeding five years
upon the fulfillment of statutory conditions and such other terms and
conditions specified in the agreement. The five year-period may be extended
in cases where the voting trust is executed pursuant to a loan agreement
whereby the period is made contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of the
creation of the voting trust agreement. The petitioners maintain that with the
execution of the voting trust agreement between them and the other
stockholders of ALFA, as one party, and the DBP, as the other party, the
former assigned and transferred all their shares in ALFA to DBP, as trustee.
They argue that by virtue to of the voting trust agreement the petitioners can
no longer be considered directors of ALFA. In support of their contention, the
petitioners invoke section 23 of the Corporation Code which provides, in part,
that:
Every director must own at least one (1) share of the capital
stock of the corporation of which he is a director which share
shall stand in his name on the books of the corporation. Any
director who ceases to be the owner of at least one (1) share
of the capital stock of the corporation of which he is a
director shall thereby cease to be director . . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust
agreement between ALFA and the DBP had all the more safeguarded the
petitioners' continuance as officers and directors of ALFA inasmuch as the
general object of voting trust is to insure permanency of the tenure of the
directors of a corporation. They cited the commentaries by Prof. Aguedo
Agbayani on the right and status of the transferring stockholders, to wit:
The "transferring stockholder", also called the "depositing
stockholder", is equitable owner for the stocks represented
by the voting trust certificates and the stock reversible on
termination of the trust by surrender. It is said that the voting
trust agreement does not destroy the status of the
transferring stockholders as such, and thus render them
ineligible as directors. But a more accurate statement seems
to be that for some purposes the depositing stockholder
holding voting trust certificates in lieu of his stock and being
the beneficial owner thereof, remains and is treated as a
stockholder. It seems to be deducible from the case that he
may sue as a stockholder if the suit is in equity or is of an
equitable nature, such as, a technical stockholders' suit in
right of the corporation. [Commercial Laws of the Philippines
by Agbayani, Vol. 3 pp. 492-493, citing 5 Fletcher 326, 327]
(Rollo, p. 291)
850
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as to
the most immediate effect of a voting trust agreement on the status of a
stockholder who is a party to its execution from legal titleholder or owner
of the shares subject of the voting trust agreement, he becomes the
equitable or beneficial owner. (Salonga, Philippine Law on Private
Corporations, 1958 ed., p. 268; Pineda and Carlos, The Law on Private
Corporations and Corporate Practice, 1969 ed., p. 175; Campos and Lopez-
Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981,
ed., p. 386; Agbayani, Commentaries and Jurisprudence on the Commercial
Laws of the Philippines, Vol. 3, 1988 ed., p. 536). The penultimate question,
therefore, is whether the change in his status deprives the stockholder of the
right to qualify as a director under section 23 of the present Corporation
Code which deletes the phrase "in his own right." Section 30 of the old Code
states that:
Every director must own in his own right at least one share
of the capital stock of the stock corporation of which he is a
director, which stock shall stand in his name on the books of
the corporation. A director who ceases to be the owner of at
least one share of the capital stock of a stock corporation of
which is a director shall thereby cease to be a director . . .
(Emphasis supplied)
Under the old Corporation Code, the eligibility of a director, strictly speaking,
cannot be adversely affected by the simple act of such director being a party
to a voting trust agreement inasmuch as he remains owner (although
beneficial or equitable only) of the shares subject of the voting trust
agreement pursuant to which a transfer of the stockholder's shares in favor of
the trustee is required (section 36 of the old Corporation Code). No
disqualification arises by virtue of the phrase "in his own right" provided
under the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and
other persons who in fact are not beneficial owners of the shares registered
in their names on the books of the corporation becomes formally legalized
(see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear
indication that in order to be eligible as a director, what is material is the legal
title to, not beneficial ownership of, the stock as appearing on the books of
the corporation (2 Fletcher, Cyclopedia of the Law of Private Corporations,
section 300, p. 92 [1969] citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting trust
agreement executed in 1981 disposed of all their shares through assignment
and delivery in favor of the DBP, as trustee. Consequently, the petitioners
ceased to own at least one share standing in their names on the books of
ALFA as required under Section 23 of the new Corporation Code. They also
ceased to have anything to do with the management of the enterprise. The
petitioners ceased to be directors. Hence, the transfer of the petitioners'
shares to the DBP created vacancies in their respective positions as
directors of ALFA. The transfer of shares from the stockholder of ALFA to the
DBP is the essence of the subject voting trust agreement as evident from the
following stipulations:
1. The TRUSTORS hereby assign and deliver to the
TRUSTEE the certificate of the shares of the stocks owned
by them respectively and shall do all things necessary for the
transfer of their respective shares to the TRUSTEE on the
books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a
trust certificate for the number of shares transferred, which
shall be transferrable in the same manner and with the same
effect as certificates of stock subject to the provisions of this
agreement;
3. The TRUSTEE shall vote upon the shares of stock at all
meetings of ALFA, annual or special, upon any resolution,
matter or business that may be submitted to any such
meeting, and shall possess in that respect the same powers
851
 as owners of the equitable as well as the legal title to the
stock;
4. The TRUSTEE may cause to be transferred to any person
one share of stock for the purpose of qualifying such person
as director of ALFA, and cause a certificate of stock
evidencing the share so transferred to be issued in the name
of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may
transfer his shares to the same trustees without the need of
revising this agreement, and this agreement shall have the
same force and effect upon that said stockholder. (CA Rollo,
pp. 137-138; Emphasis supplied)
Considering that the voting trust agreement between ALFA and the DBP
transferred legal ownership of the stock covered by the agreement to the
DBP as trustee, the latter became the stockholder of record with respect to
the said shares of stocks. In the absence of a showing that the DBP had
caused to be transferred in their names one share of stock for the purpose of
qualifying as directors of ALFA, the petitioners can no longer be deemed to
have retained their status as officers of ALFA which was the case before the
execution of the subject voting trust agreement. There appears to be no
dispute from the records that DBP has taken over full control and
management of the firm.
Moreover, in the Certification dated January 24, 1989 issued by the DBP
through one Elsa A. Guevarra, Vice-President of its Special Accounts
Department II, Remedial Management Group, the petitioners were no longer
included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp. 140-
142)
Inasmuch as the private respondents in this case failed to substantiate their
claim that the subject voting trust agreement did not deprive the petitioners of
their position as directors of ALFA, the public respondent committed a
reversible error when it ruled that:
. . . while the individual respondents (petitioners Lee and
Lacdao) may have ceased to be president and vice-
president, respectively, of the corporation at the time of
service of summons on them on August 21, 1987, they were
at least up to that time, still directors . . .
The aforequoted statement is quite inaccurate in the light of the express
terms of Stipulation No. 4 of the subject voting trust agreement. Both parties,
ALFA and the DBP, were aware at the time of the execution of the agreement
that by virtue of the transfer of shares of ALFA to the DBP, all the directors of
ALFA were stripped of their positions as such.
There can be no reliance on the inference that the five-year period of the
voting trust agreement in question had lapsed in 1986 so that the legal title to
the stocks covered by the said voting trust agreement ipso facto reverted to
the petitioners as beneficial owners pursuant to the 6th paragraph of section
59 of the new Corporation Code which reads:
Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the
agreed period, and the voting trust certificate as well as the
certificates of stock in the name of the trustee or trustees
shall thereby be deemed cancelled and new certificates of
stock shall be reissued in the name of the transferors.
On the contrary, it is manifestly clear from the terms of the voting trust
agreement between ALFA and the DBP that the duration of the agreement is
contingent upon the fulfillment of certain obligations of ALFA with the DBP.
This is shown by the following portions of the agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA,
and its credit is secured by a first mortgage on the
manufacturing plant of said company;
852
WHEREAS, ALFA is also indebted to other creditors for
various financial accomodations and because of the burden
of these obligations is encountering very serious difficulties
in continuing with its operations.
WHEREAS, in consideration of additional accommodations
from the TRUSTEE, ALFA had offered and the TRUSTEE
has accepted participation in the management and control of
the company and to assure the aforesaid participation by the
TRUSTEE, the TRUSTORS have agreed to execute a voting
trust covering their shareholding in ALFA in favor of the
TRUSTEE;
AND WHEREAS, DBP is willing to accept the trust for the
purpose aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years,
and is renewable for as long as the obligations of ALFA with
DBP, or any portion thereof, remains outstanding; (CA Rollo,
pp. 137-138)
Had the five-year period of the voting trust agreement expired in 1986, the
DBP would not have transferred all its rights, titles and interests in ALFA
"effective June 30, 1986" to the national government through the Asset
Privatization Trust (APT) as attested to in a Certification dated January 24,
1989 of the Vice President of the DBP's Special Accounts Department II. In
the same certification, it is stated that the DBP, from 1987 until 1989, had
handled APT's account which included ALFA's assets pursuant to a
management agreement by and between the DBP and APT (CA Rollo, p.
142) Hence, there is evidence on record that at the time of the service of
summons on ALFA through the petitioners on August 21, 1987, the voting
trust agreement in question was not yet terminated so that the legal title to
the stocks of ALFA, then, still belonged to the DBP.
In view of the foregoing, the ultimate issue of whether or not there was
proper service of summons on ALFA through the petitioners is readily
answered in the negative.
Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
Sec. 13. Service upon private domestic corporation or
partnership. If the defendant is a corporation organized
under the laws of the Philippines or a partnership duly
registered, service may be made on the president, manager,
secretary, cashier, agent or any of its directors.
It is a basic principle in Corporation Law that a corporation has a personality
separate and distinct from the officers or members who compose it.
(See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias
Academy v. Department of Labor and Employment, et al., G.R. Nos. 83257-
58, December 21, 1990). Thus, the above rule on service of processes of a
corporation enumerates the representatives of a corporation who can validly
receive court processes on its behalf. Not every stockholder or officer can
bind the corporation considering the existence of a corporate entity separate
from those who compose it.
853
The rationale of the aforecited rule is that service must be made on a
representative so integrated with the corporation sued as to make it a
priori supposable that he will realize his responsibilities and know what he
should do with any legal papers served on him. (Far Corporation v.
Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far East
Motor Corp. 81 SCRA 303 [1978]).

The petitioners in this case do not fall under any of the enumerated officers.
The service of summons upon ALFA, through the petitioners, therefore, is not
valid. To rule otherwise, as correctly argued by the petitioners, will
contravene the general principle that a corporation can only be bound by
such acts which are within the scope of the officer's or agent's authority.
(see Vicente v. Geraldez, 52 SCRA 210 [1973]).

WHEREFORE, premises considered, the petition is hereby GRANTED. The

appealed decision dated March 19, 1990 and the Court of Appeals' resolution
of May 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and
October 17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are
REINSTATED.

SO ORDERED.

Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.

854
 Cruz, Palafox, Alfonso and Associates for petitioner NIDC in G.R. No. 34192.

The Chief Legal Counsel for petitioner PNB in G.R. No. 34213.

Reyes and Sundiam Law Office for respondent Batjak, Inc.

Duran, Chuanico Oebanda, Benemerito & Associates for private respondents

in G.R. Nos. 34192 & 34213.

Tolentino, Garcia, Cruz & Reyes for movant in G.R. No. L-34192.

PADILLA, J.:

These two (2) separate petitions for certiorari and prohibition, with
preliminary injunction, seek to annul and set aside the orders of respondent
judge, dated 16 August 1971 and 30 September 1971, in Civil Case No.
G.R. No. L-34192 June 30, 1988 14452 of the Court of First Instance of Rizal, entitled Batjak Inc. vs. NIDC et
al." The order of 16 August 1971 1 granted the alternative petition of private
respondent Batjak, Inc. Batjak for short) for the appointment of receiver and
NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION,
denied petitioners' motion to dismiss the complaint of said private
EUSEBIO VILLATUYA MARIO Y. CONSING and ROBERTO S.
respondent. The order dated 30 September 1971 2 denied petitioners' motion
BENEDICTO, petitioners,
for reconsideration of the order dated 16 August 1971.
vs.
HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge of
Branch VIII of the Court of First Instance of Rizal, BATJAK INC., The herein petitions likewise seek to prohibit the respondent judge from
GRACIANO A. GARCIA and MARCELINO CALINAWAN JR., respondents. hearing and/or conducting any further proceedings in Civil Case No. 14452 of
said court.
G.R. No. L-34213 June 30, 1988
Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan) is a
Filipino-American corporation organized under the laws of the Philippines,
PHILIPPINE NATIONAL BANK, petitioner,
primarily engaged in the manufacture of coconut oil and copra cake for
vs.
export. In 1965, Batjak's financial condition deteriorated to the point of
HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the
bankruptcy. As of that year, Batjak's indebtedness to some private banks and
Court of First Instance of Rizal, Branch VIII and BATJAK
to the Philippine National Bank (PNB) amounted to P11,915,000.00, shown
INCORPORATED, respondents.
as follows:

855
 Republic Bank P 2,324,000.00 PHILIPPINE NATIONAL BANK

Philippine Commercial and Manila, Philippines

Industrial Bank 1,346,000.00 International Department

Manila Banking Corporation 2,000,000.00 October 5, 1

Manufacturers Bank 440,000.00 BATJAK, INCORPORATED

Hongkong and Shanghai 3rd Floor, G. Puyat Bldg.

Banking Corporation 250,000.00 Escolta, Manila

Foreign Export Advances Attn.: Mr. CIRIACO B. MENDOZA

(against immediate shipment) 555,000.00 Vice-President & General Manager

PNB export advance line Gentlemen:

(against immediate shipment) 5,000,000.00
TOTAL 11,915,000.00
As security for the payment of its obligations and advances against
shipments, Batjak mortgaged its three (3) coco-processing oil mills in Sasa,
Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte to Manila
Banking Corporation (Manila Bank), Republic Bank (RB), and Philippine
Commercial and Industrial Bank (PCIB), respectively. In need for additional
operating capital to place the three (3) coco-processing mills at their optimum
capacity and maximum efficiency and to settle, pay or otherwise liquidate
pending financial obligations with the different private banks, Batjak applied
to PNB for additional financial assistance. On 5 October 1965, a Financial
Agreement was submitted by PNB to Batjak for acceptance. The Financial
Agreement reads:
We are pleased to advise that our Board of
Directors approved for you the following:
1) That NIDC shall invest P6,722,500.00 in the form of
preferred shares of stocks at 9% cumulative, participating
and convertible within 5 years at par into common stocks to
liquidate your accounts with the Republic Bank,
Manufacturers Bank & Trust Company and the PCIB which,
however, shall be applied to the latter three (3) banks
accounts with the Loans & Discounts Dept. NIDC shall
match your P 10 million subscription by an additional
investment of P3,277,500 within a period of one to two years
at NIDC's option;

856
2) That NIDC will guaranty for five (5) years your account
with the Manila Banking Corporation;
3) That the above banks (Republic Bank, PCIB, MBTC and
Manila Banking Corp.) shall release in favor of PNB the first
and any mortgage they hold on your properties;
4) That you shall exercise (execute) a first mortgage on all
your properties located at Sasa, Davao City; Jimenez,
Misamis Occidental; and Tanauan, Leyte and assign
leasehold rights on the property on which your plant at Sasa,
Davao City is erected in favor of PNB;
5) That a voting trust agreement for five (5) years over 60%
of the oustanding paid up and subscribed shares shall be
executed by your stockholders in favor of NIDC;
6) That this accomodation shall be secured by the joint and
several signatures of officers and directors;
7) That the number of the Board of Directors shall be
increased to seven (7), three (3) from your firm and the other
four (4) from the PNB-NIDC;
8) That a comptroller, at your expense, shall be appointed by
PNB-NIDC to supervise the financial management of your
firm;
9) That the past due accounts of P 5 million with the
International Department of the PNB shall be transferred to
the Loans & Discount Department and to be treated as a
Demand Loan;
10) That any excess of NIDC investment as required in
Condition 1 after payment of the obligations to three (3)
Banks (RB, MBTC, & PCIB) shall be applied to reduce the
above Demand Loan of P 5 million;
11) That we shall grant you an export advance of P3 million
to be used for copra purchases, subject to the following
conditions:
a) That the line shall expire on September
30, 1966 but revocable at the Bank(s)
option;
b) That drawings against the line shall be
allowed only when an irrevocable export L/C
for coconut products has been established
or assigned in your favor and you shall
assign to us all proceeds of negotiations to
be received from your letters of credit;
c) That drawings against the line be limited
to 60% of the peso value of the export
letters of credit computed at P3.50 per $1.00
but total drawings shall not in any event
exceed P3,000,000.00;
d) That release or releases against the line
shall be covered by promissory note or
notes for 90 days but not beyond the expiry
dates of the coveting L/C and proceeds of
said L/C shall first be applied to the
correspondent drawings on the line;
e) That drawings against the line shall be
charged interest at the rate of 9% per
annum and subject to 1/2% penalty charge
857
 on all drawings not paid or extended on
maturity date; and
f) That within 90 days from date of release
against the line, you shall negotiate with us
on equivalent amount in export bills,
otherwise, the line shag be temporarily
suspended until the outstanding export
advance is fully liquidated.
We are writing the National Investment & Development
Corporation, the Republic Bank, the Philippine Commercial
& Industrial Bank and the Manufacturers Bank & Trust
Company and the Manila Banking Corporation regarding the
above.
In connection with the above, kindly submit to us two (2)
copies of your board resolution certified to under oath by
your corporate secretary accepting the conditions
enumerated above authorizing the above transactions and
the officer or officers to sign on behalf of the corporation.
Thank you.
Very trulyyears
(SGD.) JOSE
SAMSON
The terms and conditions of the Financial Agreement were duly accepted by
Batjak. Under said Agreement, NIDC would, as it actually did, invest
P6,722,500.00 in Batjak in the form of preferred shares of stock convertible
within five (5) years at par into common stock, to liquidate Batjak's
obligations to Republic Bank (RB), Manufacturers Bank and Trust Company
(MBTC) and Philippine Commercial & Industrial Bank (PCIB), and the
balance of the investment was to be applied to Batjak's past due account of
P 5 million with the PNB.
Upon receiving payment, RB, PCIB, and MBTC released in favor of PNB the
first and any mortgages they held on the properties of Batjak.
As agreed, PNB also granted Batjak an export-advance line of P 3 million,
later increased to P 5million, and a standby letter of credit facility in the
amount of P5,850,000.00. As of 29 September 1966, the financial
accomodation that had been extended by PNB to Batjak amounted to a total
of P 14,207,859.51.
As likewise agreed, Batjak executed a first mortgage in favor of PNB on all its
properties located at Jimenez, Misamis Occidental and Tanauan, Leyte.
Batjak's plant in Sasa, Davao City was mortgaged to the Manila Bank which,
in 1967, instituted foreclosure proceedings against the same but which were
aborted by the payment by Batjak of the sum of P2,400,000.00 to Manila
Bank, and which amount was advanced to Batjak by NIDC, a wholly-owned
subsidiary of PNB. To secure the advance, Batjak mortgaged the oil mill in
Sasa, Davao City to NIDC. 4
Next, a Voting Trust Agreement was executed on 26 October 1965 in favor of
NIDC by the stockholders representing 60% of the outstanding paid-up and
subscribed shares of Batjak. This agreement was for a period of five (5)
yours,and, upon its expiration, was to be subject to negotiation between the
parties. The voting Trust Agreement reads:
B.
VOTING TRUST AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT made and executed by the undersigned
stockholders of BATJAK, INC., a corporation duly organized
and existing under the laws of the Philippines, whose names
are hereinbelow subscribed hereinafter caged the
SUBSCRIBERS, and the NATIONAL INVESTMENT AND
858
DEVELOPMENT CORPORATION, hereinafter referred to as
the trustee.
WITNESSETH:
WHEREAS, the SUBSCRIBERS are owners respectively of
the capital stock of the BATJAK, INC. (hereinafter called the
CORPORATION) in the amounts represented by the number
of shares set fort opposite their respective names hereunder;
AND WHEREAS, with a view or establishing a safe and
competent management to operate the corporation for the
best interest of all the stockholders thereof, and as mutually
agreed between the SUBSCRIBERS and the TRUSTEE, this
Voting Trust Agreement has been executed under the
following terms and conditions.
NOW THEREFORE, the undersigned stockholders, in
consideration of the premises and of the mutual covenants
and agreements herein contained and to carry out the
foregoing purposes in order to vest in the TRUSTEE the
voting rights of the shares of stock held by the undersigned
in the CORPORATION as hereinafter stated it is mutually
agreed as follows:
1. PERIOD OF DESIGNATION For a period of five (5)
years from and after date hereof, without power of
revocation on the part of the SUBSCRIBERS, the TRUSTEE
designated in the manner herein provided is hereby made,
constituted and appointed as a VOTING TRUSTEE to act for
and in the name of the SUBSCRIBERS, it being understood,
however, that this Voting Trust Agreement shall, upon its
expiration be subject to a re-negotiation between the parties,
as may be warranted by the balance and attending
circumstance of the loan investment of the TRUSTEE or
otherwise in the CORPORATION.
2. ASSIGNMENT OF STOCK CERTIFICATES UPON
ISSUANCE The undersigned stockholders hereby
transfer and assign their common shares to the capital stock
of the CORPORATION to the extent shown hereunder:
JAMES A. KEISTER 21,500 shares
JOHNNY LIEUSON 20,300 shares
CBM FINANCE & INVESTMENT
CORP. (C.B. Mendoza, Pres.) 5,000 shares
ALEJANDRO G. BELTRAN 4,000 shares
ESPERANZA A. ZAMORA 3,000 shares
CIRIACO B. MENDOZA 2,000 shares
FIDELA DE GUZMAN 2,000 shares
LLOYD D. COMBS 2,000 shares
RENATO B. BEJAR 200 shares
TOTAL 60,000 shares
to the TRUSTEE by virtue of the provisions hereof and do
hereby authorize the Secretary of the CORPORATION to
issue the corresponding certificate directly in the name of the
TRUSTEE and on which certificates it shall appear that they
have been issued pursuant to this Voting Trust Agreement
and the said TRUSTEE shall hold in escrow all such
certificates during the term of the Agreement. In turn, the
TRUSTEE shall deliver to the undersigned stockholders the
859
corresponding Voting Trust certificates provided for in Sec.
36 of Act No. 1459.
3. VOTING POWER OF TRUSTEE The TRUSTEE and
its successors in trust, if anym shall have the power and it
shall be its duty to vote the shares of the undersigned
subject hereof and covered by this Agreement at all annual,
adjourned and special meetings of the CORPORATION on
all questions, motions, resolutions and matters including the
election of directors and such matters on which the
stockholders, by virtue of the by-laws of the CORPORATION
and of the existing legislations are entitled to vote, which
may be voted upon at any and all said meetings and shall
also have the power to execute and acknowledge any
agreements or documents that may be necessary in its
opinion to express the consent or assent of all or any of the
stockholders of the CORPORATION with respect to any
matter or thing to which any consent or assent of the
stockholders may be necessary, proper or convenient.
4. FILING of AGREEMENT An executed copy of this
Agreement shall be filed with the CORPORATION at its
office in the City of Manila wherever it may be transfered
therefrom and shall constitute irrevocable authority and
absolute direction of the officers of the CORPORATION
whose duty is to sign and deliver stock certificates to make
delivery only to said voting trustee of the shares and
certificates of stock subject to the provisions of this
Agreement as aforesaid. Such copy of this Agreement shall
at all times be open to inspection by any stockholder, as
provided by law.
5. DIVIDEND the full and absolute beneficial interest in
the shares subject of this Agreement shall remain with the
stockholders executing the same and any all dividends
which may be declared by the CORPORATION shall belong
and be paid to them exclusively in accordance with their
stockholdings after deducting therefrom or applying the
same to whatever liabilities the stockholders may have in
favor of the TRUSTEE by virtue of any Agreement or
Contract that may have been or will be executed by and
between the TRUSTEE and the CORPORATION or between
the former and the undersigned stockholders.
6 COMPENSATION; IMMUNITY The TRUSTEE or its
successor in trust shall not receive any compensation for its
serviceexcept perhaps that which the CORPORATION may
grant to the TRUSTEE's authorized representative, if any.
Expenses costs, champs, and other liabilities incurred in the
carrying out of the but herein established or by reason
thereof, shall be paid for with the funds of the
CORPORATION. The TRUSTEE or any of its duly
authorized representative shall incur no liability by reason of
any error of law or of any matter or thing done or omitted
under this Agreement, except for his own individual
malfeasance.
7. REPRESENTATION The TRUSTEE, being a
corporation and a juridical person shall accomplish the
foregoing objectives and perform its functions under this
Agreement as well as enjoy and exercise the powers,
privileges, rights and interests herein established through its
duly authorized and accredited re resentatives . p with full
authority under the specific appointment or designation or
Proxy.
8. IRREVOCABILITY This Agreement shall during its 5-
year term or any extension thereof be binding upon and
inure to the benefit of the undersigned stockholders and their
respective legal representatives, pledges, transferees,
and/or assigns and shall be irrevocable during the said terms
and/or its extension pursuant to the provisions of paragraph
1 hereof. It is hereby understood and the undersigned
stockholders have bound as they hereby bind themselves to
860
make a condition of every pledge, transfer of assignment of President
their interests in the CORPORATION that the interests and
participation so pledged, transferred or assigned is ESPERANZA A. ZAMORA (SGD) ALEJANDRO G.
evidenced by annotations in the certificates of stocks or in BELTRAN
the books of the corporation, shall be subject to this
Agreement and the same shall be binding upon the By: (SGD) MARIANO ZAMORA Stockholder
pledgees, transferees and assigns while the trust herein
created still subsists.
ESPERANZA A. ZAMORA

9. TERMINATION Upon termination of this Agreement as

(SGD) FIDELA DE GUZMAN (SGD) CIRIACO B. MENDOZA
heretofore provided, the certificates delivered to the
TRUSTEE by virtue hereof shall be returned and delivered to
the undersigned stockholders as the absolute owners Stockholder Stockholder
thereof, upon surrender of their respective voting trust
certificates, and the duties of the TRUSTEE shall cease and (SGD) RENATO B. BEJAR (SGD) LLOYD D. COMBS
terminate.
Stockholder Stockholder
10. ACCEPTANCE OF TRUST The TRUSTEE hereby
accepts the trust created by this Agreement under the NAT
signature of its duly authorized representative affixed ION
hereinbelow and agrees to perform the same in accordance AL
with the term/s hereof. INV
EST
IN WITNTESS HEREOF, the undersigned stockholders and ME
the TRUSTEE by its representatives, have hereunto affixed NT
their signatures this 26 day of October, 1965 in the City of AN
Manila, Philippines. D

(SGD) JAMES A. KEISER (SGD) JOHNNY LIEUSON

Stockholder Stockholder

CBM FINANCE & INVESTMENT CORPORATION

By: (SGD) C.B. MENDOZA

861
 DE As regards the oil mill located at Sasa, Davao City, the same was similarly
VEL foreclosed extrajudicial by NIDC. It was sold to NIDC as the highest bidder.
OP After Batjak failed to redeem the property, NIDC consolidated its ownership
ME of the oil mill. 8
NT
CO Three (3) years thereafter, or on 31 August 1970, Batjak represented by
RP majority stockholders, through Atty. Amado Duran, legal counsel of private
OR respondent Batjak, wrote a letter to NIDC inquiring if the latter was still
ATI interested in negotiating the renewal of the Voting Trust Agreement. 9 On 22
ON September 1970, legal counsel of Batjak wrote another letter to NIDC
informing the latter that Batjak would now safely assume that NIDC was no
By: longer interested in the renewal of said Voting Trust Agreement and, in view
thereof, requested for the turn-over and transfer of all Batjak assets,
(SG properties, management and operations. 10
D)
IGN On 23 September 1970, legal counsel of Batjak sent stin another letter to
ACI NIDC, this time asking for a complete accounting of the assets, properties,
O management and operation of Batjak, preparatory to their turn-over and
DE transfer to the stockholders of Batjak. 11
BU
QU NIDC replied, confirming the fact that it had no intention whatsoever to
E comply with the demands of Batjak. 12
JR.
On 24 February 1971, Batjak filed before the Court of First Instance of Rizal
Vice-President
a special civil action for mandamus with preliminary injunction against herein
petitioners docketed as Civil Case No. 14452. 13
In July 1967, forced by the insolvency of Batjak, PNB instituted extrajudicial
foreclosure proceedings against the oil mills of Batjak located in Tanauan, On 14 April 1971, in said Civil Case No. 14452, Batjak filed an urgent ex
Leyte and Jimenez, Misamis Occidental. The properties were sold to PNB as parte motion for the issuance of a writ of preliminary prohibitory and
the highest bidder. One year thereafter, or in September 1968, final mandatory injunction. 14 On the same day, respondent judge issued a
Certificates of Sale were issued by the provincial sheriffs of Leyte 6 and restraining order "prohibiting defendants (herein petitioners) from removing
Misamis Occidental 7 for the two (2) oil mills in Tanauan and Jimenez in favor any record, books, commercial papers or cash, and leasing, renting out,
of PNB, after Batjak failed to exercise its right to redeem the foreclosed disposing of or otherwise transferring any or all of the properties,
properties within the allowable one year period of redemption. Subsequently, machineries, raw materials and finished products and/or by-products thereof
PNB transferred the ownership of the two (2) oil mills to NIDC which, as now in the factory sites of the three (3) modem coco milling plants situated in
aforestated, was a wholly-owned PNB subsidiary. Jimenez, Misamis Occidental, Sasa, Davao City, and Tanauan, Leyte." 15

862
The order of 14 April 1971 was subsequently amended by respondent judge
upon an ex parte motion of private respondent Batjak so as to include the
premises of NIDC in Makati and those of PNB in Manila, as among the
premises which private respondent Batjak was authorized to enter in order to
conduct an inventory.
On 24 April 1971, NIDC and PNB filed an opposition to the ex
parte application for the issuance of a writ of preliminary prohibitory and
mandatory injunction and a motion to set aside restraining order.
Before the court could act on the said motion, private respondent Batjak filed
on 3 May 1971 a petition for receivership as alternative to writ of preliminary
prohibitory and mandatory injunction. 16 This was opposed by PNB and NIDC
. 17
On 8 May 1971., NIDC and PNB filed a motion to dismiss Batjak's
complaints. 18
On 16 August 1971, respondent judge issued the now assailed order denying
petitioners' motion to dismiss and appointing a set of three (3)
receivers. 19 NIDC moved for reconsideration of the aforesaid order. 20 On 30
September 1971, respondent judge denied the motion for reconsideration. 21
Hence, these two (2) petitions, which have been consolidated, as they
involve a resolution of the same issues. In their manifestation with motion for
early decision, dated 25 August 1986, private respondent, Batjak contends
that the NIDC has already been abolished or scrapped by its parent
company, the PNB.
After a careful study and examination of the records of the case, the Court
finds and holds for the petitioners.
1. On the denial of petitioners' motion to dismiss.
As a general rule, an order denying a motion to quash or to dismiss is
interlocutory and cannot be the subject of a petition for certiorari. The remedy
of the aggrieved party in a denied motion to dismiss is to file an answer and
interpose, as defense or defenses, the objection or objections raised by him
in said motion to dismiss, then proceed to trial and, in case of adverse
decision, to elevate the entire case by appeal in due course. However, under
certain situations, recourse to the extraordinary legal remedies of certiorari,
prohibition and mandamus to question the denial of a motion to dismiss or
quash is considered proper, in the interest of more enlightened and
substantial justice. As the court said in Pineda and Ampil Manufacturing Co.
vs. Bartolome, 95 Phil. 930,938
For analogous reasons it may be said that the petition for
certiorari interposed by the accused against the order of the
court a quo denying the motion to quash may be entertained,
not only because it was rendered in a criminal case, but
because it was rendered, as claimed, with grave abuse of
discretion, as found by the Court of Appeals. ..
and reiterated in Mead v. Argel 22 citing Yap v. Lutero (105 Phil. 1307):
However, were we to require adherence to this pretense, the
case at bar would have to be dismissed and petitioner
required to go through the inconvenience, not to say the
mental agony and torture, of submitting himself to trial on the
merits in Case No. 166443, apart from the expenses
incidental thereto, despite the fact that his trial and
conviction therein would violate one of this [sic] constitutional
rights, and that, an appeal to this Court, we would, therefore,
have to set aside the judgment of conviction of the lower
court. This would, obviously, be most unfair and unjust.
Under the circumstances obtaining the present case, the
flaw in the procedure followed by petitioner herein may be
overlooked, in the interest of a more enlightened and
substantial justice.
863
Thus, where there is patent grave abuse of discretion, in denying the motion
to dismiss, as in the present case, this Court may entertain the petition for
certiorari interposed by the party against whom the said order is issued.
In their motion to dismiss Batjaks complaint, in Civil Case No. 14452, NIDC
and PNB raised common grounds for its allowance, to wit:
1. This Honorable Court (the trial court) has no jurisdiction
over the subject of the action or suit;
2. The venue is improperly laid; and
3. Plaintiff has no legal capacity to sue.
In addition, PNB contended that the complaint states no cause of action
(Rule 16, Sec. 1, Par. a, c, d & g, Rules of Court).
Anent the first ground, it is a well-settled rule that the jurisdiction of a Court of
First Instance to issue a writ of preliminary or permanent injunction is
confined within the boundaries of the province where the land in controversy
is situated. 23 The petition for mandamus of Batjak prayed that NIDC and
PNB be ordered to surrender, relinquish and turnover to Batjak the assets,
management and operation of Batjak particularly the three (3) oil mills
located in Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan,
Leyte.
Clearly, what Batjak asked of respondent court was the exercise of power or
authority outside its jurisdiction.
On the matter of proper venue, Batjak's complaint should have been filed in
the provinces where said oil mills are located. Under Rule 4, Sec. 2,
paragraph A of the Rules of Court, "actions affecting title to, or for recovery of
possession, or for partition or condemnation of, or foreclosure of mortgage
on, real property, shall be commenced and tried in the province where the
property or any part thereof lies."
In support of the third ground of their motion to dismiss, PNB and NIDC
contend that Batjak's complaint for mandamus is based on its claim or right
to recovery of possession of the three (3) oil mills, on the ground of an
alleged breach of fiduciary relationship. Noteworthy is the fact that, in the
Voting Trust Agreement, the parties thereto were NIDC and certain
stockholders of Batjak. Batjak itself was not a signatory thereto. Under Sec.
2, Rule 3 of the Rules of Court, every action must be prosecuted and
defended in the name of the real party in interest. Applying the rule in the
present case, the action should have been filed by the stockholders of
Batjak, who executed the Voting Trust Agreement with NIDC, and not by
Batjak itself which is not a party to said agreement, and therefore, not the
real party in interest in the suit to enforce the same.
In addition, PNB claims that Batjak has no cause of action and prays that the
petition for mandamus be dismissed. A careful reading of the Voting Trust
Agreement shows that PNB was really not a party thereto. Hence,
mandamus will not lie against PNB.
Moreover, the action instituted by Batjak before the respondent court was a
special civil action for mandamus with prayer for preliminary mandatory
injunction. Generally, mandamus is not a writ of right and its allowance or
refusal is a matter of discretion to be exercised on equitable principles and in
accordance with well-settled rules of law, and that it should never be used to
effectuate an injustice, but only to prevent a failure of justice. 24 The writ does
not issue as a matter of course. It will issue only where there is a clear legal
right sought to be enforced. It will not issue to enforce a doubtful right. A clear
legal right within the meaning of Sec. 3, Rule 65 of the Rules of Court means
a right clearly founded in or granted by law, a right which is enforceable as a
matter of law.
Applying the above-cited principles of law in the present case, the Court finds
no clear right in Batjak to be entitled to the writ prayed for. It should be noted
that the petition for mandamus filed by it prayed that NIDC and PNB be
ordered to surrender, relinquish and turn-over to Batjak the assets,
management, and operation of Batjak particularly the three (3) oil mills and to
make the order permanent, after trial, and ordering NIDC and PNB to submit
a complete accounting of the assets, management and operation of Batjak
864
from 1965. In effect, what Batjak seeks to recover is title to, or possession of,
real property (the three (3) oil mills which really made up the assets of
Batjak) but which the records show already belong to NIDC. It is not disputed
that the mortgages on the three (3) oil mills were foreclosed by PNB and
NIDC and acquired by them as the highest bidder in the appropriate
foreclosure sales. Ownership thereto was subsequently consolidated by PNB
and NIDC, after Batjak failed to exercise its right of redemption. The three (3)
oil mills are now titled in the name of NIDC. From the foregoing, it is evident
that Batjak had no clear right to be entitled to the writ prayed for. In Lamb vs.
Philippines(22 Phil. 456) citing the case of Gonzales V. Salazar vs. The
Board of Pharmacy, 20 Phil. 367, the Court said that the writ of mandamus
will not issue to give to the applicant anything to which he is not entitled by
law.
2. On the appointment of receiver.
A receiver of real or personal property, which is the subject of the action, may
be appointed by the court when it appears from the pleadings that the party
applying for the appointment of receiver has an interest in said
property. 25 The right, interest, or claim in property, to entitle one to a receiver
over it, must be present and existing.
As borne out by the records of the case, PNB acquired ownership of two (2)
of the three (3) oil mills by virtue of mortgage foreclosure sales. NIDC
acquired ownership of the third oil mill also under a mortgage foreclosure
sale. Certificates of title were issued to PNB and NIDC after the lapse of the
one (1) year redemption period. Subsequently, PNB transferred the
ownership of the two (2) oil mills to NIDC. There can be no doubt, therefore,
that NIDC not only has possession of, but also title to the three (3) oil mills
formerly owned by Batjak. The interest of Batjak over the three (3) oil mills
ceased upon the issuance of the certificates of title to PNB and NIDC
confirming their ownership over the said properties. More so, where Batjak
does not impugn the validity of the foreclosure proceedings. Neither Batjak
nor its stockholders have instituted any legal proceedings to annul the
mortgage foreclosure aforementioned.
Batjak premises its right to the possession of the three (3) off mills on the
Voting Trust Agreement, claiming that under said agreement, NIDC was
constituted as trustee of the assets, management and operations of Batjak,
that due to the expiration of the Voting Trust Agreement, on 26 October 1970,
NIDC should tum over the assets of the three (3) oil mills to Batjak. The
relevant provisions of the Voting Trust Agreement, particularly paragraph 4 &
No. 1 thereof, are hereby reproduced:
NOW THEREFORE, the undersigned stockholders, in
consideration of the premises and of the mutual covenants
and agreements herein contained and to carry out the
foregoing purposes in order to vest in the TRUSTEE the
voting right.8 of the shares of stock held by the undersigned
in the CORPORATION as hereinafter stated it is mutually
agreed as follows:
1. PERIOD OF DESIGNATION For a period of five (5)
years from and after date hereof, without power of revocation
on the part of the SUBSCRIBERS, the TRUSTEE
designated in the manner herein provided is hereby made,
constituted and appointed as a VOTING TRUSTEE to act for
and in the name of the SUBSCRIBERS, it being understood,
however, that this Voting Trust Agreement shall, upon its
expiration be subject to a re-negotiation between the parties,
as may be warranted by the balance and attending
circumstance of the loan investment of the TRUSTEE or
otherwise in the CORPORATION.
and No. 3 thereof reads:
3. VOTING POWER OF TRUSTEE The TRUSTEE and its
successors in trust, if any, shall have the power and it shall
be its duty to vote the shares of the undersigned subject
hereof and covered by this Agreement at all annual,
adjourned and special meetings of the CORPORATION on
all questions, motions, resolutions and matters including the
865
 election of directors and all such matters on which the
stockholders, by virtue of the by-laws of the CORPORATION
and of the existing legislations are entitled to vote, which
may be voted upon at any and all said meetings and shall
also have the power to execute and acknowledge any
agreements or documents that may be necessary in its
opinion to express the consent or assent of all or any of the
stockholders of the CORPORATION with respect to any
matter or thing to which any consent or assent of the
stockholders may be necessary, proper or convenient.
From the foregoing provisions, it is clear that what was assigned to NIDC
was the power to vote the shares of stock of the stockholders of Batjak,
representing 60% of Batjak's outstanding shares, and who are the
signatories to the agreement. The power entrusted to NIDC also included the
authority to execute any agreement or document that may be necessary to
express the consent or assent to any matter, by the stockholders. Nowhere in
the said provisions or in any other part of the Voting Trust Agreement is
mention made of any transfer or assignment to NIDC of Batjak's assets,
operations, and management. NIDC was constituted as trustee only of the
voting rights of 60% of the paid-up and outstanding shares of stock in Batjak.
This is confirmed by paragraph No. 9 of the Voting Trust Agreement, thus:
9. TERMINATION Upon termination of this Agreement as
heretofore provided, the certificates delivered to the
TRUSTEE by virtue hereof shall be returned and delivered to
the undersigned stockholders as the absolute owners
thereof, upon surrender of their respective voting trust
certificates, and the duties of the TRUSTEE shall cease and
terminate.-
Under the aforecited provision, what was to be returned by NIDC as trustee
to Batjak's stockholders, upon the termination of the agreement, are the
certificates of shares of stock belonging to Batjak's stockholders, not the
properties or assets of Batjak itself which were never delivered, in the first
place to NIDC, under the terms of said Voting Trust Agreement.
In any event, a voting trust transfers only voting or other rights pertaining to
the shares subject of the agreement or control over the stock. The law on the
matter is Section 59, Paragraph 1 of the Corporation Code (BP 68) which
provides:
Sec. 59. Voting Trusts One or more stockholders of a
stock corporation may create a voting trust for the purpose of
confering upon a trustee or trusties the right to vote and
other rights pertaining to the shares for a period not
exceeding five (5) years at any one time: ... 26
The acquisition by PNB-NIDC of the properties in question was not made or
effected under the capacity of a trustee but as a foreclosing creditor for the
purpose of recovering on a just and valid obligation of Batjak.
Moreover, the prevention of imminent danger to property is the guiding
principle that governs courts in the matter of appointing receivers. Under
Sec. 1 (b), Rule 59 of the Rules of Court, it is necessary in granting the relief
of receivership that the property or fired be in danger of loss, removal or
material injury.
In the case at bar, Batjak in its petition for receivership, or in its amended
petition therefor, failed to present any evidence, to establish the requisite
condition that the property is in danger of being lost, removed or materially
injured unless a receiver is appointed to guard and preserve it.
WHEREFORE, the petitions are GRANTED. The orders of the respondent
judge, dated 16 August 1971 and 30 September 1971, are hereby
ANNULLED and SET ASIDE. The respondent judge and/or his successors
are ordered to desist from hearing and/or conducting any further proceedings
in Civil Case No. 14452, except to dismiss the same. With costs against
private respondents.
SO ORDERED.
Yap, C.J., Melencio-Herrera, Paras and Sarmiento, JJ., concur.
866
867
G.R. No. L-15568 November 8, 1919

W. G. PHILPOTTS, petitioner,
vs.
PHILIPPINE MANUFACTURING COMPANY and F. N.
BERRY, respondents.

868
Lawrence and Ross for petitioner.
Crossfield and O'Brien for defendants.
STREET, J.:
The petitioner, W. G. Philpotts, a stockholder in the Philippine Manufacturing
Company, one of the respondents herein, seeks by this proceeding to obtain
a writ of mandamus to compel the respondents to permit the plaintiff, in
person or by some authorized agent or attorney, to inspect and examine the
records of the business transacted by said company since January 1, 1918.
The petition is filed originally in this court under the authority of section 515 of
the Code of Civil Procedure, which gives to this tribunal concurrent
jurisdiction with the Court of First Instance in cases, among others, where
any corporation or person unlawfully excludes the plaintiff from the use and
enjoyment of some right to which he is entitled. The respondents interposed
a demurrer, and the controversy is now before us for the determination of the
questions thus presented.
The first point made has reference to a supposed defect of parties, and it is
said that the action can not be maintained jointly against the corporation and
its secretary without the addition of the allegation that the latter is the
custodian of the business records of the respondent company.
By the plain language of sections 515 and 222 of our Code of Civil
Procedure, the right of action in such a proceeding as this is given against
the corporation; and the respondent corporation in this case was the only
absolutely necessary party. In the Ohio case of Cincinnati Volksblatt
Co. vs. Hoffmister (61 Ohio St., 432; 48 L. R. A., 735), only the corporation
was named as defendant, while the complaint, in language almost identical
with that in the case at bar, alleged a demand upon and refusal by the
corporation.
Nevertheless the propriety of naming the secretary of the corporation as a
codefendant cannot be questioned, since such official is customarily charged
with the custody of all documents, correspondence, and records of a
corporation, and he is presumably the person against whom the personal
orders of the court would be made effective in case the relief sought should
be granted. Certainly there is nothing in the complaint to indicate that the
secretary is an improper person to be joined. The petitioner might have
named the president of the corporation as a respondent also; and this official
might be brought in later, even after judgment rendered, if necessary to the
effectuation of the order of the court.
Section 222 of our Code of Civil Procedure is taken from the California Code,
and a decision of the California Supreme Court Barber vs. Mulford (117
Cal., 356) is quite clear upon the point that both the corporation and its
officers may be joined as defendants.
The real controversy which has brought these litigants into court is upon the
question argued in connection with the second ground of demurrer, namely,
whether the right which the law concedes to a stockholder to inspect
the records can be exercised by a proper agent or attorney of the
stockholder as well as by the stockholder in person. There is no
pretense that the respondent corporation or any of its officials has refused to
allow the petitioner himself to examine anything relating to the affairs of the
company, and the petition prays for a peremptory order commanding the
respondents to place the records of all business transactions of the company,
during a specified period, at the disposal of the plaintiff or his duly authorized
agent or attorney, it being evident that the petitioner desires to exercise said
right through an agent or attorney. In the argument in support of the demurrer
it is conceded by counsel for the respondents that there is a right of
examination in the stockholder granted under section 51 of the Corporation
Law, but it is insisted that this right must be exercised in person.
The pertinent provision of our law is found in the second paragraph of
section 51 of Act No. 1459, which reads as follows: "The record of all
business transactions of the corporation and the minutes of any meeting
shall be open to the inspection of any director, member or stockholder of the
corporation at reasonable hours."
869
This provision is to be read of course in connecting with the related inspection given by law to the stockholder; as for instance, where a
provisions of sections 51 and 52, defining the duty of the corporation in corporation, engaged in the business of manufacture, has acquired a
respect to the keeping of its records. formula or process, not generally known, which has proved of utility to
it in the manufacture of its products. It is not our intention to declare
Now it is our opinion, and we accordingly hold, that the right of that the authorities of the corporation, and more particularly the Board
inspection given to a stockholder in the provision above quoted can be of Directors, might not adopt measures for the protection of such
exercised either by himself or by any proper representative or attorney process form publicity. There is, however, nothing in the petition which
in fact, and either with or without the attendance of the stockholder. would indicate that the petitioner in this case is seeking to discover
This is in conformity with the general rule that what a man may do in anything which the corporation is entitled to keep secret; and if
person he may do through another; and we find nothing in the statute anything of the sort is involved in the case it may be brought out at a
that would justify us in qualifying the right in the manner suggested by more advanced stage of the proceedings.lawphil.net
the respondents.
The demurrer is overruled; and it is ordered that the writ of mandamus shall
This conclusion is supported by the undoubted weight of authority in the issue as prayed, unless within 5 days from notification hereof the
United States, where it is generally held that the provisions of law conceding respondents answer to the merits. So ordered.
the right of inspection to stockholders of corporations are to be liberally
construed and that said right may be exercised through any other properly Arellano, C.J., Torres, Johnson, Araullo, Malcolm and Avancea, JJ., concur.
authorized person. As was said in Foster vs. White (86 Ala., 467), "The right
may be regarded as personal, in the sense that only a stockholder may enjoy
it; but the inspection and examination may be made by another. Otherwise it
would be unavailing in many instances." An observation to the same effect is
contained in Martin vs. Bienville Oil Works Co. (28 La., 204), where it is said:
"The possession of the right in question would be futile if the possessor of it,
through lack of knowledge necessary to exercise it, were debarred the right
of procuring in his behalf the services of one who could exercise it." In
Deadreck vs. Wilson (8 Baxt. [Tenn.], 108), the court said: "That stockholders
have the right to inspect the books of the corporation, taking minutes from
the same, at all reasonable times, and may be aided in this by experts and
counsel, so as to make the inspection valuable to them, is a principle too well
settled to need discussion." Authorities on this point could be accumulated in
great abundance, but as they may be found cited in any legal encyclopedia
or treaties devoted to the subject of corporations, it is unnecessary here to
refer to other cases announcing the same rule.

In order that the rule above stated may not be taken in too sweeping a
sense, we deem it advisable to say that there are some things which a
corporation may undoubtedly keep secret, notwithstanding the right of

870
G.R. No. L-22442 August 1, 1924

ANTONIO PARDO, petitioner,

vs.
THE HERCULES LUMBER CO., INC., and IGNACIO
FERRER, respondents.

W.J. O'Donovan and M.H. de Joya for petitioner.

Sumulong and Lavides and Ross, Lawrence and Selph for respondents.

871
STREET, J.:
The petitioner, Antonio Pardo, a stockholder in the Hercules Lumber
Company, Inc., one of the respondents herein, seeks by this original
proceeding in the Supreme Court to obtain a writ of mandamus to compel the
respondents to permit the plaintiff and his duly authorized agent and
representative to examine the records and business transactions of said
company. To this petition the respondents interposed an answer, in which,
after admitting certain allegations of the petition, the respondents set forth
the facts upon which they mainly rely as a defense to the petition. To this
answer the petitioner in turn interposed a demurrer, and the cause is now
before us for determination of the issue thus presented.
It is inferentially, if not directly admitted that the petitioner is in fact a
stockholder in the Hercules Lumber Company, Inc., and that the respondent,
Ignacio Ferrer, as acting secretary of the said company, has refused to
permit the petitioner or his agent to inspect the records and business
transactions of the said Hercules Lumber Company, Inc., at times desired by
the petitioner. No serious question is of course made as to the right of the
petitioner, by himself or proper representative, to exercise the right of
inspection conferred by section 51 of Act No. 1459. Said provision was under
the consideration of this court in the case of Philpotts vs. Philippine
Manufacturing Co., and Berry (40 Phil., 471), where we held that the right of
examination there conceded to the stockholder may be exercised either by a
stockholder in person or by any duly authorized agent or representative.
The main ground upon which the defense appears to be rested has
reference to the time, or times, within which the right of inspection may be
exercised. In this connection the answer asserts that in article 10 of the By-
laws of the respondent corporation it is declared that "Every shareholder
may examine the books of the company and other documents
pertaining to the same upon the days which the board of directors shall
annually fix." It is further averred that at the directors' meeting of the
respondent corporation held on February 16, 1924, the board passed a
resolution to the following effect:
The board also resolved to call the usual general (meeting of shareholders)
for March 30 of the present year, with notice to the shareholders that the
books of the company are at their disposition from the 15th to 25th of the
same month for examination, in appropriate hours.
The contention for the respondent is that this resolution of the board
constitutes a lawful restriction on the right conferred by statute; and it
is insisted that as the petitioner has not availed himself of the
permission to inspect the books and transactions of the company
within the ten days thus defined, his right to inspection and
examination is lost, at least for this year.
We are entirely unable to concur in this contention. The general right given
by the statute may not be lawfully abridged to the extent attempted in
this resolution. It may be admitted that the officials in charge of a
corporation may deny inspection when sought at unusual hours or
under other improper conditions; but neither the executive officers nor
the board of directors have the power to deprive a stockholder of the
right altogether. A by-law unduly restricting the right of inspection is
undoubtedly invalid. Authorities to this effect are too numerous and direct
to require extended comment. (14 C.J., 859; 7 R.C.L., 325; 4 Thompson on
Corporations, 2nd ed., sec. 4517; Harkness vs. Guthrie, 27 Utah, 248; 107
Am., St. Rep., 664. 681.) Under a statute similar to our own it has been held
that the statutory right of inspection is not affected by the adoption by the
board of directors of a resolution providing for the closing of transfer books
thirty days before an election. (State vs. St. Louis Railroad Co., 29 Mo., Ap.,
301.)
It will be noted that our statute declares that the right of inspection can
be exercised "at reasonable hours." This means at reasonable hours on
business days throughout the year, and not merely during some
arbitrary period of a few days chosen by the directors.
In addition to relying upon the by-law, to which reference is above made, the
answer of the respondents calls in question the motive which is supposed to
prompt the petitioner to make inspection; and in this connection it is alleged
872
that the information which the petitioner seeks is desired for ulterior purposes
in connection with a competitive firm with which the petitioner is alleged to be
connected. It is also insisted that one of the purposes of the petitioner is to
obtain evidence preparatory to the institution of an action which he means to
bring against the corporation by reason of a contract of employment which
once existed between the corporation and himself. These suggestions are
entirely apart from the issue, as, generally speaking, the motive of the
shareholder exercising the right is immaterial. (7 R.C.L., 327.)

We are of the opinion that, upon the allegations of the petition and the
admissions of the answer, the petitioner is entitled to relief. The demurrer is,
therefore, sustained; and the writ of mandamus will issue as prayed, with the
costs against the respondent. So ordered.

Johnson, Malcolm, Villamor, Ostrand, and Romualdez, JJ., concur.

873
874
 directors, and to place at his disposal at reasonable hours, the minutes, and
documents, and books of the aforesaid corporation, for his inspection as
director and stockholder, and to issue, upon payment of the fees, certified
copies of any documentation in connection with said minutes, documents,
and books of the corporation; and (b) that, in view of the memoranda and
hearing of the parties, a final and absolute writ of mandamus be issued to
each and all of the respondents to notify immediately the petitioner within the
reglamentary period, of all regular and special meetings of the board of
directors of the Isabela Sugar Central Company, Inc., and to place at his
disposal at reasonable hours the minutes, documents, and books of said
corporation for his inspection as director and stockholder, and to issue
immediately, upon payment of the fees, certified copies of any documentation
in connection with said minutes, documents, and the books of the aforesaid
G.R. No. L-37064 October 4, 1932 corporation. To the petition an answer has been interposed by the
respondent, too long to be here summarized, which raised questions of fact
EUGENIO VERAGUTH, Director and Stockholder of the Isabela Sugar and law. Following the taking of considerable before the clerk as
Company, Inc., petitioner, commissioner, the case has been submitted on memoranda.
vs.
ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting President, It should first be observed that when the case was filed here, it was, in
and AGUSTIN B. MONTILLA, Secretary of the same accordance with settled practice, dismissed without prejudice to the right of
corporation, respondents. the petitioner to present the action before the Court of First Instance of
Occidental Negros. Thereafter, on a motion of reconsideration being
Jose B. Gamboa for petitioner. presented, this order was set aside and the case was permitted to continue
Agustin P. Seva for respondents. in this court. On further reflection, we now feel that this was error, and that it
would have been the correct practice to have required the petitioner to
present the action in a court of First Instance which is better equipped for the
taking of testimony and the resolution of questions of fact than is the
appellate court. Only with considerable difficulty, therefore, can we decide the
MALCOLM, J.:
issues of fact, since none of the members of the court saw or heard the
witnesses testify.
The parties to this action are Eugenio Veraguth, a director and stockholder of
the Isabela Sugar Company, Inc., who is the petitioner, and the Isabela
Speaking to the first point with which the petition is concerned, relating to the
Sugar Company, Inc., Gil Montilla, acting president of the company, and
alleged failure of the secretary of the company to notify the petitioner in due
Agustin B. Montilla, secretary of the company, who are the respondents. The
time of a special meeting of the company, we find by-laws, together with a
petitioner prays: (a) That the respondents be required within five days from
resolution of the board of directors, providing for the holding of ordinary and
receipt of notice of this petition to show cause why they refuse to notify the
special meetings. Whether there was a malicious attempt to keep Director
petitioner, as director, of the regular and special meetings of the board of
Veraguth from attending a special meeting of the board of the board of

875
directors at which the compensation of the attorneys of the company was
fixed, or whether Director Veraguth, in a spirit of antogonism, has made this
merely a pretext to cause trouble, we are unable definitely to say. This much,
however, can appropriately be stated and is decisive, and this is that the
meeting in question is in the past and, therefore, now merely presents an
academic question; that no damage was caused to Veraguth by the action
taken at the special meeting which he did not attend, since his interests were
fully protected by the Philippine National Bank; and that as to meetings in the
future it is to be presumed that the secretary of the company will fulfill the
requirements of the resolutions of the company pertaining to regular and
special meetings. It will, of course, be incumbent upon Veraguth to give
formal notice to the secretary of his post-office address if he desires notice
sent to a particular residence. 1awphil.net
On the second question pertaining to the right of inspection of the books of
the company, we find Director Veraguth telegraphing the secretary of the
company, asking the latter to forward in the shortest possible time a certified
copy of the resolution of the board of directors concerning the payment of
attorney's fees in the case against the Isabela Sugar Company and others.
To this the secretary made answer by letter stating that, since the minutes of
the meeting in question had not been signed by the directors present, a
certified copy could not be furnished and that as to other proceedings of the
stockholders a request should be made to the president of the Isabela Sugar
Company, Inc. It further appears that the board of directors adopted a
resolution providing for inspection of the books and the taking of copies "by
authority of the President of the corporation previously obtained in each
case."
The Corporation Law, section 51, provides that:
All business corporations shall keep and carefully preserve a record
of all business transactions, and a minute of all meetings of
directors, members, or stockholders, in which shall be set forth in
detail the time and place of holding the meeting was regular or
special, if special its object, those present and absent, and every act
done or ordered done at the meeting. . . .
The record of all business transactions of the corporation and the
minutes of any meeting shall be open to the inspection of any
director, member, or stockholder of the corporation at reasonable
hours.
The above puts in statutory form the general principles of Corporation
Law. Directors of a corporation have the unqualified right to inspect the
books and records of the corporation at all reasonable times. Pretexts
may not be put forward by officers of corporations to keep a director or
shareholder from inspecting the books and minutes of the corporation,
and the right of inspection is not to be denied on the ground that the
director or shareholder is on unfriendly terms with the officers of the
corporation whose records are sought to be inspected. A director or
stockholder can not of course make copies, abstracts, and memoranda
of documents, books, and papers as an incident to the right of
inspection, but cannot, without an order of a court, be permitted to take
books from the office of the corporation. We do not conceive, however,
that a director or stockholder has any absolute right to secure certified
copies of the minutes of the corporation until these minutes have been
written up and approved by the directors. (See Fisher's Philippine Law of
Stock Corporations, sec. 153, and Fletcher Cyclopedia Corporations, vol. 4,
Chap. 45.)
Combining the facts and the law, we do not think that anything improper
occurred when the secretary declined to furnish certified copies of minutes
which had not been approved by the board of directors, and that while so
much of the last resolution of the board of directors as provides for
prior approval of the president of the corporation before the books of
the corporation can be inspected puts an illegal obstacle in the way of a
stockholder or director, that resolution, so far as we are aware, has not
been enforced to the detriment of anyone. In addition, it should be said
that this is a family dispute, the petitioner and the individual respondents
belonging to the same family; that a test case between the petitioner and the
respondents has not been begun in the Court of First Instance of Occidental
Negros involving hundreds of thousands of pesos, and that the appellate
court should not intrude its views to give an advantage to either party. We
rule that the petitioner has not made out a case for relief by mandamus.
876
Petition denied with costs.

Avancea, C.J., Villamor, Villa-Real, Hull and Imperial, JJ., concur.

877
G.R. No. L-33320 May 30, 1983
RAMON A. GONZALES, petitioner,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.
Ramon A. Gonzales in his own behalf.
Juan Diaz for respondent.
VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First
Instance of Manila a special civil action for mandamus against the herein
respondent praying that the latter be ordered to allow him to look into the
books and records of the respondent bank in order to satisfy himself as to the
truth of the published reports that the respondent has guaranteed the
obligation of Southern Negros Development Corporation in the purchase of a
US$ 23 million sugar-mill to be financed by Japanese suppliers and
financiers; that the respondent is financing the construction of the P 21
million Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and the
construction of Passi Sugar Mill at Iloilo by the Honiron Philippines, Inc., as
well as to inquire into the validity of Id transactions. The petitioner has
alleged hat his written request for such examination was denied by the
respondent. The trial court having dismissed the petition for mandamus, the
instant appeal to review the said dismissal was filed.
The facts that gave rise to the subject controversy have been set forth by the
trial court in the decision herein sought to be reviewed, as follows:
Briefly stated, the following facts gathered from the
stipulation of the parties served as the backdrop of this
proceeding.
Previous to the present action, the petitioner instituted
several cases in this Court questioning different transactions
entered into by the Bark with other parties. First among them
is Civil Case No. 69345 filed on April 27, 1967, by petitioner
as a taxpayer versus Sec. Antonio Raquiza of Public Works
and Communications, the Commissioner of Public
Highways, the Bank, Continental Ore Phil., Inc., Continental
Ore, Huber Corporation, Allis Chalmers and General Motors
Corporation In the course of the hearing of said case on
August 3, 1967, the personality of herein petitioner to sue
the bank and question the letters of credit it has extended for
the importation by the Republic of the Philippines of public
works equipment intended for the massive development
program of the President was raised. In view thereof, he
expressed and made known his intention to acquire one
share of stock from Congressman Justiniano Montano
which, on the following day, August 30, 1967, was
transferred in his name in the books of the Bank.
Subsequent to his aforementioned acquisition of one share
of stock of the Bank, petitioner, in his dual capacity as a
taxpayer and stockholder, filed the following cases involving
the bank or the members of its Board of Directors to wit:
l. On October l8,1967, Civil Case No. 71044 versus the
Board of Directors of the Bank; the National Investment and
Development Corp., Marubeni Iida Co., Ltd., and Agro-Inc.
Dev. Co. or Saravia;
2. On May 11, 1968, Civil Case No. 72936 versus Roberto
Benedicto and other Directors of the Bank, Passi (Iloilo)
Sugar Central, Inc., Calinog-Lambunao Sugar Mill Integrated
Farming, Inc., Talog sugar Milling Co., Inc., Safary Central,
Inc., and Batangas Sugar Central Inc.;
878
 3. On May 8, 1969, Civil Case No. 76427 versus Alfredo
Montelibano and the Directors of both the PNB and DBP;
On January 11, 1969, however, petitioner addressed a letter
to the President of the Bank (Annex A, Pet.), requesting
submission to look into the records of its transactions
covering the purchase of a sugar central by the Southern
Negros Development Corp. to be financed by Japanese
suppliers and financiers; its financing of the Cebu-Mactan
Bridge to be constructed by V.C. Ponce, Inc. and the
construction of the Passi Sugar Mills in Iloilo. On January 23,
1969, the Asst. Vice-President and Legal Counsel of the
Bank answered petitioner's letter denying his request for
being not germane to his interest as a one-share stockholder
and for the cloud of doubt as to his real intention and
purpose in acquiring said share. (Annex B, Pet.) In view of
the Bank's refusal the petitioner instituted this action.' (Rollo,
pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court
in its brief which he characterized as having been "correctly stated."
(Petitioner-Appellant"s Brief, pp. 57.)
The court a quo denied the prayer of the petitioner that he be allowed to
examine and inspect the books and records of the respondent bank
regarding the transactions mentioned on the grounds that the right of a
stockholder to inspect the record of the business transactions of a
corporation granted under Section 51 of the former Corporation Law (Act No.
1459, as amended) is not absolute, but is limited to purposes reasonably
related to the interest of the stockholder, must be asked for in good faith for a
specific and honest purpose and not gratify curiosity or for speculative or
vicious purposes; that such examination would violate the confidentiality of
the records of the respondent bank as provided in Section 16 of its charter,
Republic Act No. 1300, as amended; and that the petitioner has not
exhausted his administrative remedies.
Assailing the conclusions of the lower court, the petitioner has assigned the
single error to the lower court of having ruled that his alleged improper
motive in asking for an examination of the books and records of the
respondent bank disqualifies him to exercise the right of a stockholder to
such inspection under Section 51 of Act No. 1459, as amended. Said
provision reads in part as follows:
Sec. 51. ... The record of all business transactions of the
corporation and the minutes of any meeting shall be open to
the inspection of any director, member or stockholder of the
corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify the
qualification made by the lower court that the inspection of corporate records
may be denied on the ground that it is intended for an improper motive or
purpose, the law having granted such right to a stockholder in clear and
unconditional terms. He further argues that, assuming that a proper motive or
purpose for the desired examination is necessary for its exercise, there is
nothing improper in his purpose for asking for the examination and inspection
herein involved.
Petitioner may no longer insist on his interpretation of Section 51 of Act No.
1459, as amended, regarding the right of a stockholder to inspect and
examine the books and records of a corporation. The former Corporation
Law (Act No. 1459, as amended) has been replaced by Batas Pambansa
Blg. 68, otherwise known as the "Corporation Code of the Philippines."
The right of inspection granted to a stockholder under Section 51 of Act No.
1459 has been retained, but with some modifications. The second and third
paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following:
The records of all business transactions of the corporation
and the minutes of any meeting shag be open to inspection
by any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he
879
 may demand, in writing, for a copy of excerpts from said
records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to
allow any director, trustee, stockholder or member of the
corporation to examine and copy excerpts from its records or
minutes, in accordance with the provisions of this Code,
shall be liable to such director, trustee, stockholder or
member for damages, and in addition, shall be guilty of an
offense which shall be punishable under Section 144 of this
Code: Provided, That if such refusal is made pursuant to a
resolution or order of the board of directors or trustees, the
liability under this section for such action shall be imposed
upon the directors or trustees who voted for such refusal;
and Provided, further, That it shall be a defense to any
action under this section that the person demanding to
examine and copy excerpts from the corporation's records
and minutes has improperly used any information secured
through any prior examination of the records or minutes of
such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making his
demand.
As may be noted from the above-quoted provisions, among the
changes introduced in the new Code with respect to the right of
inspection granted to a stockholder are the following:
the records must be kept at the principal office of the corporation;
the inspection must be made on business days;
the stockholder may demand a copy of the excerpts of the records or
minutes;
and the refusal to allow such inspection shall subject the erring officer or
agent of the corporation to civil and criminal liabilities.
However, while seemingly enlarging the right of inspection, the new
Code has prescribed limitations to the same. It is now expressly
required as a condition for such examination that
the one requesting it must not have been guilty of using improperly any
information through a prior examination,
and that the person asking for such examination must be "acting in good faith
and for a legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously
contained in Section 51, Act No. 1459, as amended, no longer holds
true under the provisions of the present law. The argument of the
petitioner that the right granted to him under Section 51 of the former
Corporation Law should not be dependent on the propriety of his
motive or purpose in asking for the inspection of the books of the
respondent bank loses whatever validity it might have had before the
amendment of the law. If there is any doubt in the correctness of the
ruling of the trial court that the right of inspection granted under
Section 51 of the old Corporation Law must be dependent on a showing
of proper motive on the part of the stockholder demanding the same, it
is now dissipated by the clear language of the pertinent provision
contained in Section 74 of Batas Pambansa Blg. 68.
Although the petitioner has claimed that he has justifiable motives in seeking
the inspection of the books of the respondent bank, he has not set forth the
reasons and the purposes for which he desires such inspection, except to
880
satisfy himself as to the truth of published reports regarding certain
transactions entered into by the respondent bank and to inquire into their
validity. The circumstances under which he acquired one share of stock in
the respondent bank purposely to exercise the right of inspection do not
argue in favor of his good faith and proper motivation. Admittedly he sought
to be a stockholder in order to pry into transactions entered into by the
respondent bank even before he became a stockholder. His obvious purpose
was to arm himself with materials which he can use against the respondent
bank for acts done by the latter when the petitioner was a total stranger to
the same. He could have been impelled by a laudable sense of civic
consciousness, but it could not be said that his purpose is germane to his
interest as a stockholder.
We also find merit in the contention of the respondent bank that the
inspection sought to be exercised by the petitioner would be violative
of the provisions of its charter. (Republic Act No. 1300, as amended.)
Sections 15, 16 and 30 of the said charter provide respectively as
follows:
Sec. 15. Inspection by Department of Supervision and
Examination of the Central Bank. The National Bank shall
be subject to inspection by the Department of Supervision
and Examination of the Central Bank'
Sec. 16. Confidential information. The Superintendent of
Banks and the Auditor General, or other officers designated
by law to inspect or investigate the condition of the National
Bank, shall not reveal to any person other than the President
of the Philippines, the Secretary of Finance, and the Board
of Directors the details of the inspection or investigation, nor
shall they give any information relative to the funds in its
custody, its current accounts or deposits belonging to private
individuals, corporations, or any other entity, except by order
of a Court of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act.
Any director, officer, employee, or agent of the Bank, who
violates or permits the violation of any of the provisions of
this Act, or any person aiding or abetting the violations of
any of the provisions of this Act, shall be punished by a fine
not to exceed ten thousand pesos or by imprisonment of not
more than five years, or both such fine and imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a charter
of its own, it is not governed, as a rule, by the Corporation Code of the
Philippines. Section 4 of the said Code provides:
SEC. 4. Corporations created by special laws or charters.
Corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or
charter creating them or applicable to them. supplemented
by the provisions of this Code, insofar as they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new
Corporation Code with respect to the right of a stockholder to demand an
inspection or examination of the books of the corporation may not be
reconciled with the abovequoted provisions of the charter of the respondent
bank. It is not correct to claim, therefore, that the right of inspection under
Section 74 of the new Corporation Code may apply in a supplementary
capacity to the charter of the respondent bank.
WHEREFORE, the petition is hereby DISMISSED, without costs.
Richardson v. Arizona Fuels Corp.
614 P.2d 636 (1980)
Donald J. RICHARDSON, Grove L. Cook and Wayne Weaver, Individually
and for and on behalf of all similarly situated shareholders of Major Oil
Corporation, Plaintiffs and Respondents, v. ARIZONA FUELS
CORPORATION, a Utah Corporation, Eugene Dalton, an Individual, Deanna
881
J. Dalton, an Individual, and Major Oil Corporation, a Utah Corporation,
Defendants and Appellants.
No. 15691.
Supreme Court of Utah.
May 1, 1980.
*637 LeRoy S. Axland and David R. Olsen, of Suitter, Axland & Armstrong,
Salt Lake City, for defendants and appellants.
Paul N. Cotro-Manes, Parker M. Nielson, Salt Lake City, for plaintiffs and
respondents.
STEWART, Justice:
We here review on interlocutory appeal an order of the district court of Salt
Lake County appointing a receiver for defendant Major Oil Corporation
(hereafter "Major") and certifying this case as a class action. All references to
rules refer to the Utah Rules of Civil Procedure.
Plaintiffs Donald J. Richardson, Grove L. Cook, and Wayne Weaver are
stockholders of Major who brought this action individually and on behalf of all
other stockholders of Major. The original complaint named as defendants
Arizona Fuels, Inc.; Eugene Dalton; and Deanna J. Dalton. Arizona Fuels is
alleged to be the legal or beneficial owner of 47% of the issued and
outstanding shares of stock of Major. Eugene Dalton is alleged to be the
controlling stockholder, officer and director of Arizona Fuels and the
controlling officer and director of Major. Deanna Dalton is alleged to be an
officer and director of both Major and Arizona Fuels.
The complaint was subsequently amended, inter alia, to name Major as an
involuntary defendant, pursuant to Rule 19(a). The amended complaint
describes this action as one brought as a class action pursuant to Rule 23
and as a stockholders' derivative action pursuant to Rule 23.1. Plaintiffs
moved for an order certifying this suit as a class action and for appointment
of a receiver for Major pursuant to Rule 66. Both motions were granted by
the district court.
Defendants attack the order on the grounds (1) that the appointment of a
receiver was not justified, (2) that certification of all the claims in the suit as a
class action was improper, and (3) alternatively, that the district court erred in
not designating under which subsection of Rule 23(b) this action is to
proceed. Plaintiffs' motions were granted solely on the basis of the verified
amended complaint.
*638 We first consider the propriety of the appointment of a receiver. The
ground for appointment, as stated in the amended complaint, is that the
defendants' conduct has caused Major to become insolvent or placed Major
in imminent danger of becoming insolvent. Rule 66(a)(5) permits
appointment of a receiver "[i]n cases where a corporation . . . is insolvent or
in imminent danger of insolvency . . .."
The authorities are generally in agreement that the appointment of a receiver
for a corporation is permissible at the request of stockholders of the
corporation suing either individually or on behalf of the corporation. 3 Clark
on Receivers 738(d) (3rd ed. 1959); 16 Fletcher, Cyclopedia of the Law of
Private Corporations 7688 (rev. perm. ed. 1979) (hereinafter cited as
"Fletcher"); 65 Am.Jur.2d Receivers 11 (1972); 19 C.J.S. Corporations
833c. (1940). Defendants attack the appointment on the ground that it is not
justified by allegations on information and belief, even though those
allegations were stated in a verified complaint. The amended complaint
contains numerous allegations based on information and belief of fraudulent
and otherwise wrongful conduct on the part of defendants. The allegations
specify suspect transactions and state details of alleged fraud. The
allegations requesting appointment of a receiver, however, are made without
any qualification as to information and belief, and these allegations are not
controverted by defendants, either by pleading or affidavit.
882
In determining whether a receiver should be appointed, the district court
should consider the pleadings as a whole. Receivers have historically been
appointed in cases where misappropriation of corporate assets by corporate
insiders is asserted. Stevens v. South Ogden Land, Bldg. & Improvement
Co., 14 Utah 232, 47 P. 81 (1896); Bookout v. Atlas Financial Corp., 395 F.
Supp. 1338 (D.Ga. 1974). If defendants seriously contend that insolvency is
not imminent or that a receivership is not appropriate under the
circumstances, they had abundant opportunity to provide factual support for
their contention. The record discloses that they did not do so.
The appointment of a receiver is among those discretionary powers subject
to review for abuse, but we cannot find abuse where the ground for
appointment is stated in the language of the rules and remains
uncontroverted through a full hearing with extensive preliminary written
memoranda.
The next issue is whether the district court erred in certifying this matter as a
class action. It is alleged in the amended complaint that "some" of the causes
of action found therein belong to Major, and that as to those causes plaintiffs
bring the suit derivatively on behalf of the corporation pursuant to Rule 23.1.
A class action and a derivative action rest upon fundamentally different
principles of substantive law; to ignore those differences is not a minor
procedural solecism. A derivative action must necessarily be based on a
claim for relief which is owned by the stockholders' corporation. Indeed, a
prerequisite for filing a derivative action is the failure of the corporation to
initiate the action in its own name. The stockholder, as a nominal party, has
no right, title or interest whatsoever in the claim itself whether the action is
brought by the corporation or by the stockholder on behalf of the corporation.
A class action, on the other hand, is predicated on ownership of the claim
for relief sued upon in the representative of the class and all other class
members in their capacity as individuals. Shareholders of the corporation
may, of course, have claims for relief directly against their corporation
because the corporation itself has violated rights possessed by the
shareholders, and a class action would be an appropriate means for
enforcing their claims. A recovery in a class action is a recovery which
belongs directly to the shareholders. However, in a derivative action, the
plaintiff shareholder recovers nothing and the judgment runs in favor of
the corporation.
The difference in the two procedures and their relationship to underlying
substantive law has been stated as follows:
*639 Suits which are said to be derivative, and therefore
come within the rule, are those which seek to enforce any right
which belongs to the corporation and is not being enforced, such as
the liability of corporate officers or majority shareholders for
mismanagement, to recover corporate assets and related claims, to
enforce rights of the corporation by virtue of its contract with a third
person, and to enjoin those in charge of the corporation from causing
it to commit an ultra vires act. [Footnotes omitted.] [3B Moore's
Federal Practice 23.1.16[1] (2nd ed. 1980).]
On the other hand,
[i]f the injury is one to the plaintiff as a stockholder and to
him individually, and not to the corporation, as where the action is
based on a contract to which he is a party, or on a right belonging
severally to him, or on a fraud affecting him directly, it is an
individual action. [Footnotes omitted.] [13 Fletcher 5911 (1970).]
It is the duty of the district court to apply carefully the criteria set forth in Rule
23(a) and (b) to the facts of the case to determine whether an action may be
maintained as a class action. 3B Moore's Federal Practice 23.5. If the
criteria of Rule 23 are complied with, it is within the sound discretion of the
district court to determine whether a suit, or some of the issues in a lawsuit,
should proceed as a class action. Id.
In this case, neither the memorandum decision nor the order of the district
court does any more than recite that the suit may be maintained as a class
action. Furthermore, the amended complaint in alleging that the action
883
should be maintained as a class action, does no more than mimic the
language of Rule 23. As was pointed out in Jones v. Diamond, 519 F.2d
1090, 1098 (5th Cir.1975), "Without more, mere mimicry is insufficient to
undergird a decision either way on the propriety of class certification." See
also Rossin v. Southern Union Gas Co., 472 F.2d 707, 712 (10th Cir.1973);
Weathers v. Peters Realty Corp., 499 F.2d 1197, 1200 (6th Cir.1974). We
therefore direct our attention to the contents of the verified amended
complaint, which was the basis upon which the district court made its
determination.
The amended complaint states twelve causes of action, the first eight of
which allege some fraudulent appropriation of or scheme to appropriate
Major's assets by defendants. These causes of action seek to require the
defendants to disgorge and return to Major the assets wrongfully obtained.
Of the remaining four causes, three seek compensatory or punitive damages
for injury attributable to alleged breaches of fiduciary duty implicit in the
fraudulent acts enumerated in the first eight causes. The final cause of action
seeks appointment of a receiver.
There is no doubt that the first eight causes of action allege injury to the
corporation only. The injury alleged can be asserted by plaintiffs only
derivatively as stockholders on behalf of the corporation. This leaves the
ninth, tenth and eleventh causes of action to be analyzed to determine if they
state claims which may be pursued by the stockholders as a class to redress
injuries to the stockholders as individuals.
The ninth cause of action alleges initially that the defendants "breached their
fiduciary duties to Major Oil and to its stockholders . . .." As a general rule,
directors and other officers of a corporation stand in a fiduciary relation to the
corporation. Branch v. Western Factors, Inc., 28 Utah 2d 361, 502 P.2d
570 (1972); 3 Fletcher 838. While the statement is made that directors and
officers stand in a like relation to the stockholders of the corporation, 3
Fletcher 838, in Utah it is clear that that relation is to the stockholders
collectively. Jones Min. Co. v. Cardiff Min. & Mill. Co., 56 Utah 449, 456, 191
P. 426, 428 (1920); accord, Hansen v. Granite Holding Co., 117 Utah
530, 218 P.2d 274 (1950); 3 Fletcher 838 at 144. The distinction between a
fiduciary duty owed to the corporation as a whole as opposed to the
stockholders collectively does not appear to be one of substance in this case.
There is no important *640 issue as to whether the cause of action states a
corporate claim. Although plaintiff frames this claim, in the alternative, as one
belonging to the shareholders, the claim for relief belongs to the corporation.
The ninth cause of action then goes on to allege that the defendants
"mismanaged the corporate and prudential affairs of Major Oil . . .." The rule
in Utah is that mismanagement of the corporation gives rise to a cause of
action in the corporation, even if the mismanagement results in damage to
stockholders by depreciating the value of the corporation's stock. Morris v.
Ogden State Bank, 84 Utah 127, 140-41, 28 P.2d 138, 143 (1934).
Therefore, any compensatory damages which may be recovered on account
of any breach by defendants of their fiduciary duty as directors and officers or
arising as a result of mismanagement of the corporation by defendants
belong to the corporation and not to the stockholders individually.
The ninth cause of action also prays for punitive damages based on the
nature of defendants' conduct. Because there is no claim for relief for punitive
damages as such, a claim for punitive damages must be related to an
underlying cause of action on which the punitive damages may be based.
Graham v. Street, 2 Utah 2d 144, 270 P.2d 456 (1954); 22 Am.Jur.2d
Damages 241 (1965). Since we have concluded that the other aspects of
the ninth cause of action state a corporate claim, the punitive damages claim
alleged must likewise belong to the corporation. In short, the ninth cause of
action states a claim belonging to the corporation and precludes that claim
from being alleged as a class action.
The tenth cause of action alleges that the defendants "defrauded the
stockholders of Major Oil Company . . .." The fraud is premised on
defendants' fiduciary duty owed to the stockholders of the corporation. That
duty is alleged to have been breached in six particulars. Each of the six
alleged defalcations states a claim belonging to the corporation and not to
the stockholders or any of them individually. The tenth cause of action is
rounded out by allegations of the defendants' knowledge of their wrongful
conduct, the reasonable reliance of the plaintiffs on defendants' performance
of defendants' fiduciary duties, and the resulting damage to the stockholders.
However, in no regard can the tenth cause of action be interpreted as stating
884
a claim belonging to the stockholders individually, and therefore that claim for
relief will not support a class action.

The eleventh cause of action alleges the possibility of other conversions of

Major's assets and alleges that the defendants should be required to account
to the stockholders for all of the assets of Major and disgorge themselves of
any assets so converted. This claim also clearly belongs to the corporation.

Although class actions have historical antecedents in rules of equity

that go back several centuries in English jurisprudence,[1] it is not to
be gainsaid that the modern class action rule is one of the most
farreaching and important changes in legal procedure in many a
decade. Its impact on the enforcement of consumer rights, antitrust
claims, securities claims and civil rights actions, to name but a few
areas, has been monumental. However, the class action device, if used
inappropriately and in lieu of a derivative action, is likely to result in
grave injustices, not the least of which is the diversion of assets
recovered in a lawsuit from creditors of a corporation to stockholders,
thereby reversing long established substantive rules of law as to the
relative priorities of the claims of creditors and stockholders to the G.R. No. 123553 July 13, 1998
assets of an insolvent corporation.
(CA-G.R. No. 33291) July 13, 1998
We therefore reverse the district court's certification of this suit as a class
action and remand for further proceedings not inconsistent with this opinion. NORA A. BITONG, petitioner,

Costs to Defendants. vs.

CROCKETT, C.J., and WILKINS, MAUGHAN and HALL, JJ., concur. COURT OF APPEALS (FIFTH DIVISION), EUGENIA D. APOSTOL, JOSE
A. APOSTOL, MR. & MS. PUBLISHING CO., LETTY J. MAGSANOC, AND
ADORACION G. NUYDA, respondents.

(CA-G.R. No. 33873) July 13, 1998

NORA A. BITONG, petitioner,

885
vs.
COURT OF APPEALS (FIFTH DIVISION) and EDGARDO B.
ESPIRITU, respondents.
BELLOSILLO, J.:
These twin cases originated from a derivative suit 1 filed by petitioner Nora A.
Bitong before the Securities and Exchange Commission (SEC hereafter)
allegedly for the benefit of private respondent Mr. & Ms. Publishing Co.,
Inc. (Mr. & Ms. hereafter), among others, to hold respondent spouses
Eugenia D. Apostol and Jose A. Apostol 2 liable for fraud, misrepresentation,
disloyalty, evident bad faith, conflict of interest and mismanagement in
directing the affairs of Mr. & Ms. to the damage and prejudice of Mr. & Ms.
and its stockholders, including petitioner.
Alleging before the SEC that she had been the Treasurer and a Member of
the Board of Directors of Mr. & Ms. from the time it was incorporated on 29
October 1976 to 11 April 1989, and was the registered owner of 1,000 shares
of stock out of the 4,088 total outstanding shares, petitioner complained of
irregularities committed from 1983 to 1987 by Eugenia D. Apostol, President
and Chairperson of the Board of Directors. Petitioner claimed that except for
the sale of the name Philippine Inquirer to Philippine Daily Inquirer (PDI
hereafter) all other transactions and agreements entered into by Mr. & Ms.
with PDI were not supported by any bond and/or stockholders' resolution.
And, upon instructions of Eugenia D. Apostol, Mr. & Ms. made several cash
advances to PDI on various occasions amounting to P3.276 million. On some
of these borrowings PDI paid no interest whatsoever. Despite the fact that
the advances made by Mr. & Ms. to PDI were booked as advances to an
affiliate, there existed no board or stockholders' resolution, contract nor any
other document which could legally authorize the creation of and support to
an affiliate.
Petitioner further alleged that respondents Eugenia and Jose Apostol were
stockholders, directors and officers in both Mr. & Ms. and PDI. In fact on 2
May 1986 respondents Eugenia D. Apostol, Leticia J. Magsanoc and
Adoracion G. Nuyda subscribed to PDI shares of stock at P50,000.00 each
or a total of P150,000.00. The stock subscriptions were paid for by Mr. & Ms.
and initially treated, as receivables from officers and employees. But, no
payments were ever received from respondents, Magsanoc and Nuyda.
The petition principally sought to (a) enjoin respondents Eugenia D. Apostol
and Jose A. Apostol from further acting as president-director and director,
respectively, of Mr. & Ms. and disbursing any money or funds except for the
payment of salaries and similar expenses in the ordinary course of business,
and from disposing of their Mr. & Ms. shares; (b) enjoin respondents Apostol
spouses, Magsanoc and Nuyda from disposing of the PDI shares of stock
registered in their names; (c) compel respondents Eugenia and Jose Apostol
to account for and reconvey all profits and benefits accruing to them as a
result of their improper and fraudulent acts; (d) compel respondents
Magsanoc and Nuyda to account for and reconvey to Mr. & Ms. all shares of
stock paid from cash advances from it and all accessions or fruits thereof; (e)
hold respondents Eugenia and Jose Apostol liable for damages suffered by
Mr. & Ms. and the other stockholders, including petitioner, by reason of their
improper and fraudulent acts; (f) appoint a management committee for Mr. &
Ms. during the pendency of the suit to prevent further dissipation and loss of
its assets and funds as well as paralyzation of business operations; and, (g)
direct the management committee for Mr. & Ms. to file the necessary action
to enforce its rights against PDI and other third parties.
Private respondents Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms., on
the other hand, refuted the allegations of petitioner by starting with a
narration of the beginnings of Mr. & Ms. They recounted that on 9 March
1976 Ex Libris Publishing Co., Inc. (Ex Libris hereafter) was incorporated for
the purpose of publishing a weekly magazine. Its original principal
stockholders were spouses Senator Juan Ponce Enrile (then Minister of
National Defense) and Cristina Ponce Enrile through Jaka Investments
Corporation (JAKA hereafter), and respondents Eugenia and Jose Apostol.
When Ex Libris suffered financial difficulties, JAKA and the Apostols, together
886
with new investors Luis Villafuerte and Ramon Siy, restructured Ex Libris by
organizing a new corporation known as Mr. & Ms.
The original stockholders of Mr. & Ms., i.e., JAKA, Luis Villafuerte, Ramon
Siy, the Apostols and Ex Libriscontinued to be virtually the same up to 1989.
Thereafter it was agreed among them that, they being close friends, Mr. &
Ms. would be operated as a partnership or a close corporation; respondent
Eugenia D. Apostol would manage the affairs of Mr. & Ms.; and, no shares of
stock would be sold to third parties without first offering the shares to the
other stockholders so that transfers would be limited to and only among the
original stockholders.
Private respondents also asserted that respondent Eugenia D. Apostol had
been informing her business partners of her actions as manager, and
obtaining their advice and consent. Consequently the other stockholders
consented, either expressly or impliedly, to her management. They offered no
objections. As a result, the business prospered. Thus, as shown in a
statement prepared by the accounting firm Punongbayan and Araullo, there
were increases from 1976 to 1988 in the total assets of Mr. & Ms. from
P457,569.00 to P10,143,046.00; in the total stockholders' equity from
P203,378.00 to P2,324,954.00; and, in the net sales, from P301,489.00 to
P16,325,610.00. Likewise, cash dividends were distributed and received by
the stockholders.
Private respondents further contended that petitioner, being merely a holder-
in-trust of JAKA shares, only represented and continued to represent JAKA in
the board. In the beginning, petitioner cooperated with and assisted the
management until mid-1986 when relations between her and her principals
on one hand, and respondent Eugenia D. Apostol on the other, became
strained due to political differences. Hence from mid-1986 to mid-1988
petitioner refused to speak with respondent Eugenia D. Apostol, and in 1988
the former became openly critical of the management of the latter.
Nevertheless, respondent Eugenia D. Apostol always made available to
petitioner and her representatives all the books of the corporation.
Private respondents averred that all the PDI shares owned by respondents
Eugenia and Jose Apostol were acquired through their own private funds and
that the loan of P750,000.00 by PDI from Mr. & Ms. had been fully paid with
20% interest per annum. And, it was PDI, not Mr. & Ms., which loaned off
P250,000.00 each to respondents Magsanoc and Nuyda. Private
respondents further argued that petitioner was not the true party to this case,
the real party being JAKA which continued to be the true stockholder of Mr. &
Ms.; hence, petitioner did not have the personality to initiate and prosecute
the derivative suit which, consequently, must be dismissed.
On 6 December 1990, the SEC Hearing Panel 3 issued a writ of preliminary
injunction enjoining private respondents from disbursing any money except
for the payment of salaries and other similar expenses in the regular course
of business. The Hearing Panel also enjoined respondent Apostol spouses,
Nuyda and Magsanoc from disposing of their PDI shares, and further ruled
. . . respondents' contention that petitioner is not entitled to
the provisional reliefs prayed for because she is not the real
party in interest . . . is bereft of any merit. No less than
respondents' Amended Answer, specifically paragraph V, No.
8 on Affirmative Allegations/Defenses states that "The
petitioner being herself a minor stockholder and holder-in-
trust of JAKA shares represented and continues to represent
JAKA in the Board." This statement refers to petitioner sitting
in the board of directors of Mr. & Ms. in two capacities, one
as a minor stockholder and the other as the holder in trust of
the shares of JAKA in Mr. & Ms. Such reference alluded to
by the respondents indicates an admission on respondents'
part of the petitioner's legal personality to file a derivative suit
for the benefit of the respondent Mr. & Ms. Publishing Co.,
Inc.
The Hearing Panel however denied petitioner's prayer for the
constitution of a management committee.
887
On 25 March 1991 private respondents filed a Motion to Amend Pleadings to
Conform to Evidence alleging that the issue of whether petitioner is the real
party-in-interest had been tried by express or implied consent of the parties
through the admission of documentary exhibits presented by private
respondents proving that the real party-in-interest was JAKA, not petitioner
Bitong. As such, No. 8, par. V (Affirmative Allegations/Defenses), Answer to
the Amended Petition, was stipulated due to inadvertence and excusable
mistake and should be amended. On 10 October 1991 the Hearing Panel
denied the motion for amendment.
Petitioner testified at the trial that she became the registered and beneficial
owner of 997 shares of stock of Mr. & Ms. out of the 4,088 total outstanding
shares after she acquired them from JAKA through a deed of sale executed
on 25 July 1983 and recorded in the Stock and Transfer Book of Mr. & Ms.
under Certificate of Shares of Stock No. 008. She pointed out that Senator
Enrile decided that JAKA should completely divest itself of its holdings in Mr.
& Ms. and this resulted in the sale to her of JAKA's interest and holdings in
that publishing firm.
Private respondents refuted the statement of petitioner that she was a
stockholder of Mr. & Ms. since 25 July 1983 as respondent Eugenia D.
Apostol signed Certificate of Stock No. 008 only on 17 March 1989, and not
on 25 July 1983. Respondent Eugenia D. Apostol explained that she stopped
using her long signature (Eugenia D. Apostol) in 1987 and changed it to E.D.
Apostol, the signature which appeared on the face of Certificate of Stock No.
008 bearing the date 25 July 1983. And, since the Stock and Transfer Book
which petitioner presented in evidence was not registered with the SEC, the
entries therein including Certificate of Stock No. 008 were fraudulent.
Respondent Eugenia D. Apostol claimed that she had not seen the Stock and
Transfer Book at anytime until 21 March 1989 when it was delivered by
petitioner herself to the office of Mr. & Ms., and that petitioner repeatedly
referred to Senator Enrile as "my principal" during the Mr. & Ms. board
meeting of 22 September 1988, seven (7) times no less.
On 3 August 1993, after trial on the merits, the SEC Hearing Panel dismissed
the derivative suit filed by petitioner and dissolved the writ of preliminary
injunction barring private respondents from disposing of their PDI shares and
any of Mr. & Ms. assets. The Hearing Panel ruled that there was no serious
mismanagement of Mr. & Ms. which would warrant drastic corrective
measures. It gave credence to the assertion of respondent Eugenia D.
Apostol that Mr. & Ms. was operated like a close corporation where important
matters were discussed and approved through informal consultations at
breakfast conferences. The Hearing Panel also concluded that while the
evidence presented tended to show that the real party-in-interest indeed was
JAKA and/or Senator Enrile, it viewed the real issue to be the alleged
mismanagement, fraud and conflict of interest on the part of respondent
Eugenia D. Apostol, and allowed petitioner to prosecute the derivative suit if
only to resolve the real issues. Hence, for this purpose, the Hearing Panel
considered petitioner to be the real party-in-interest.
On 19 August 1993 respondent Apostol spouses sold the PDI shares
registered in the name of their holding company, JAED Management
Corporation, to Edgardo B. Espiritu. On 25 August 1993 petitioner Bitong
appealed to the SEC En Banc.
On 24 January 1994 the SEC En Banc 4 reversed the decision of the Hearing
Panel and, among others, ordered private respondents to account for, return
and deliver to Mr. & Ms. any and all funds and assets that they disbursed
from the coffers of the corporation including shares of stock, profits,
dividends and/or fruits that they might have received as a result of their
investment in PDI, including those arising from the P150,000.00 advanced to
respondents Eugenia D. Apostol, Leticia J. Magsanoc and Adoracion G.
Nuyda; account for and return any profits and fruits of all amounts irregularly
or unlawfully advanced to PDI and other third persons; and, cease and desist
from managing the affairs of Mr. & Ms. for reasons of fraud, mismanagement,
disloyalty and conflict of interest.
The SEC En Banc also declared the 19 August 1993 sale of the PDI shares
of JAED Management Corporation to Edgardo B. Espiritu to be tainted with
fraud, hence, null and void, and considered Mr. & Ms. as the true and lawful
owner of all the PDI shares acquired by respondents Eugenia D. Apostol,
Magsanoc and Nuyda. It also declared all subsequent transferees of such
shares as trustees for the benefit of Mr. & Ms. and ordered them to forthwith
deliver said shares to Mr. & Ms.
888
Consequently, respondent Apostol spouses, Magsanoc, Nuyda, and Mr. &
Ms. filed a petition for review before respondent Court of Appeals, docketed
as CA-GR No. SP 33291, while respondent Edgardo B. Espiritu filed a
petition for certiorari and prohibition also before respondent Court of Appeals,
docketed as CA-GR No. SP 33873. On 8 December 1994 the two (2)
petitions were consolidated.
On 31 August 1995 respondent appellate court rendered a decision reversing
the SEC En Banc and held that from the evidence on record petitioner was
not the owner of any share of stock in Mr. & Ms. and therefore not the real
party-in-interest to prosecute the complaint she had instituted against private
respondents. Accordingly, petitioner alone and by herself as an agent could
not file a derivative suit in behalf of her principal. For not being the real party-
in-interest, petitioner's complaint did not state a cause of action, a defense
which was never waived; hence, her petition should have been dismissed.
Respondent appellate court ruled that the assailed orders of the SEC were
issued in excess of jurisdiction, or want of it, and thus were null and
void. 5 On 18 January 1996, petitioner's motion for reconsideration was
denied for lack of merit.
Before this Court, petitioner submits that in paragraph 1 under the caption "I.
The Parties" of her Amended Petition before the SEC, she stated that she
was a stockholder and director of Mr. & Ms. In par. 1 under the caption "II.
The Facts" she declared that she "is the registered owner of 1,000 shares of
stock of Mr. & Ms. out of the latter's 4,088 total outstanding shares" and that
she was a member of the Board of Directors of Mr. & Ms. and treasurer from
its inception until 11 April 1989. Petitioner contends that private respondents
did not deny the above allegations in their answer and therefore they are
conclusively bound by this judicial admission. Consequently, private
respondents' admission that petitioner has 1,000 shares of stock registered
in her name in the books of Mr. & Ms. forecloses any question on her status
and right to bring a derivative suit on behalf of Mr. & Ms.
Not necessarily. A party whose pleading is admitted as an admission against
interest is entitled to overcome by evidence the apparent inconsistency, and
it is competent for the party against whom the pleading is offered to show
that the statements were inadvertently made or were made under a mistake
of fact. In addition, a party against whom a single clause or paragraph of a
pleading is offered may have the right to introduce other paragraphs which
tend to destroy the admission in the paragraph offered by the adversary. 6
The Amended Petition before the SEC alleges
I. THE PARTIES
1. Petitioner is a stockholder and director of Mr. & Ms. . . . .
II. THE FACTS
1. Petitioner is the registered owner of 1,000 shares of stock
of Mr. & Ms. out of the latter's 4,088 total outstanding shares.
Petitioner, at all times material to this petition, is a member of
the Board of Directors of Mr. & Ms. and from the inception of
Mr. & Ms. until 11 April 1989 was its treasurer . . .
On the other hand, the Amended Answer to the Amended Petition states
I. PARTIES
1. Respondents admit the allegations contained in Caption I,
pars. 1 to 4 of the Petition referring to the personality,
addresses and capacity of the parties to the petition
except . . . but qualify said admission insofar as they are
limited, qualified and/or expanded by allegations in the
Affirmative Allegations/Defenses . . .
II. THE FACTS
1. Respondents admit paragraph 1 of the Petition, but qualify
said admission as to the beneficial ownership of the shares
of stock registered in the name of the petitioner, the truth
889
being as stated in the Affirmative Allegations/Defenses of this
Answer . . .
V. AFFIRMATIVE ALLEGATIONS/DEFENSES
Respondents respectfully allege by way of Affirmative
Allegations/Defenses, that . . . .
3. Fortunately, respondent Apostol was able to convince Mr.
Luis Villafuerte to take interest in the business and he,
together with the original investors, restructured the Ex Libris
Publishing Company by organizing a new corporation known
as Mr. & Ms. Publishing Co., Inc. . . . Mr. Luis Villafuerte
contributed his own P100,000.00. JAKA and respondent
Jose Z. Apostol, original investors of Ex Libris contributed
P100,000.00 each; Ex Libris Publishing Company was paid
800 shares for the name of Mr. & Ms. magazine and
goodwill. Thus, the original stockholders of respondent Mr. &
Ms. were:
Cert./No./Date Name of Stockholder No. of Shares
% limited, qualified and/or expanded by," "the truth being as stated in
001-9-15-76 JAKA Investments Corp. 1,000 21%
002-9-15-76 Luis Villafuerte 1,000 21%
003-9-15-76 Ramon L. Siy 1,000 21%
004-9-15-76 Jose Z. Apostol 1,000 21%
005-9-15-76 Ex Libris Publishing Co. 800 16%
When taken in its totality, the Amended Answer to the Amended Petition, or
4,800 96%
4. The above-named original stockholders of respondent Mr.
& Ms. continue to be virtually the same stockholders up to
this date . . . .
8. The petitioner being herself a minor stockholder and
holder-in-trust of JAKA shares, represented and continues to
represent JAKA in the Board . . . .
21. Petitioner Nora A. Bitong is not the true party to this
case, the true party being JAKA Investments Corporation
which continues to be the true stockholder of respondent Mr.
& Ms. Publishing Co., Inc., consequently, she does not have
the personality to initiate and prosecute this derivative suit,
and should therefore be dismissed . . . .
The answer of private respondents shows that there was no judicial
admission that petitioner was a stockholder of Mr. & Ms. to entitle her to file a
derivative suit on behalf of the corporation. Where the statements of the
private respondents were qualified with phrases such as, "insofar as they are
the Affirmative Allegations/Defenses of this Answer" they cannot be
considered definite and certain enough, cannot be construed as judicial
admissions. 7
More so, the affirmative defenses of private respondents directly refute the
representation of petitioner that she is a true and genuine stockholder of Mr.
& Ms. by stating unequivocally that petitioner is not the true party to the case
but JAKA which continues to be the true stockholder of Mr. & Ms. In fact, one
of the reliefs which private respondents prayed for was the dismissal of the
petition on the ground that petitioner did not have the legal interest to initiate
and prosecute the same.
even the Answer to the Amended Petition alone, clearly raises an issue as to
890
the legal personality of petitioner to file the complaint. Every alleged
admission is taken as an entirety of the fact which makes for the one side
with the qualifications which limit, modify or destroy its effect on the other
side. The reason for this is, where part of a statement of a party is used
against him as an admission, the court should weigh any other portion
connected with the statement, which tends to neutralize or explain the portion
which is against interest.
In other words, while the admission is admissible in evidence, its probative
value is to be determined from the whole statement and others intimately
related or connected therewith as an integrated unit. Although acts or facts
admitted do not require proof and cannot be contradicted, however,
evidence aliunde can be presented to show that the admission was made
through palpable mistake. 8 The rule is always in favor of liberality in
construction of pleadings so that the real matter in dispute may be submitted
to the judgment of the court. 9
Petitioner also argues that since private respondents failed to appeal the 6
December 1990 Order and the 3 August 1993 Decision of the SEC Hearing
Panel declaring that she was the real party-in-interest and had legal
personality to sue, they are now estopped from questioning her personality.
Not quite. The 6 December 1990 Order is clearly an interlocutory order which
cannot be considered as having finally resolved on the merits the issue of
legal capacity of petitioner. The SEC Hearing Panel discussed the issue of
legal capacity solely for the purpose of ruling on the application for writ of
preliminary injunction as an incident to the main issues raised in the
complaint. Being a mere interlocutory order, it is not appealable.
For, an interlocutory order refers to something between the commencement
and end of the suit which decides some point or matter but it is not the final
decision of the whole controversy. 10 Thus, even though the 6 December
1990 Order was adverse to private respondents, they had the legal right and
option not to elevate the same to the SEC En Banc but rather to await the
decision which resolves all the issues raised by the parties and to appeal
therefrom by assigning all errors that might have been committed by the
Hearing Panel.
On the other hand, the 3 August 1993 Decision of the Hearing Panel
dismissing the derivative suit for failure to prove the charges of
mismanagement, fraud, disloyalty and conflict of interest and dissolving the
writ of preliminary injunction, was favorable to private respondents. Hence,
they were not expected to appeal therefrom.
In fact, in the 3 August 1993 Decision, the Hearing Panel categorically stated
that the evidence presented showed that the real party-in-interest was not
petitioner Bitong but JAKA and/or Senator Enrile. Petitioner was merely
allowed to prosecute her complaint so as not to sidetrack "the real issue to
be resolved (which) was the allegation of mismanagement, fraud and conflict
of interest allegedly committed by respondent Eugenia D. Apostol." It was
only for this reason that petitioner was considered to be capacitated and
competent to file the petition.
Accordingly, with the dismissal of the complaint of petitioner against private
respondents, there was no compelling reason for the latter to appeal to the
SEC En Banc. It was in fact petitioner's turn as the aggrieved party to
exercise her right to appeal from the decision. It is worthy to note that even
during the appeal of petitioner before the SEC En Banc private respondents
maintained their vigorous objection to the appeal and reiterated petitioner's
lack of legal capacity to sue before the SEC.
Petitioner then contends that she was a holder of the proper certificates of
shares of stock and that the transfer was recorded in the Stock and Transfer
Book of Mr. & Ms. She invokes Sec. 63 of The Corporation Code which
provides that no transfer shall be valid except as between the parties until the
891
transfer is recorded in the books of the corporation, and upon its recording
the corporation is bound by it and is estopped to deny the fact of transfer of
said shares. Petitioner alleges that even in the absence of a stock certificate,
a stockholder solely on the strength of the recording in the stock and transfer
book can exercise all the rights as stockholder, including the right to file a
derivative suit in the name of the corporation. And, she need not present a
separate deed of sale or transfer in her favor to prove ownership of stock.
Sec. 63 of The Corporation Code expressly provides
Sec. 63. Certificate of stock and transfer of shares. The
capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or vice
president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall
be issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally
authorized to make the transfer. 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 . . . .
This provision above quoted envisions a formal certificate of stock which can
be issued only upon compliance with certain requisites. First, the certificates
must be signed by the president or vice-president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the corporation.
A mere typewritten statement advising a stockholder of the extent of his
ownership in a corporation without qualification and/or authentication cannot
be considered as a formal certificate of stock. 11 Second, delivery of the
certificate is an essential element of its issuance. Hence, there is no
issuance of a stock certificate where it is never detached from the stock
books although blanks therein are properly filled up if the person whose
name is inserted therein has no control over the books of the
company. 12 Third, the par value, as to par value shares, or the full
subscription as to no par value shares, must first be fully paid. Fourth, the
original certificate must be surrendered where the person requesting the
issuance of a certificate is a transferee from a stockholder.
The certificate of stock itself once issued is a continuing affirmation or
representation that the stock described therein is valid and genuine and is at
least prima facie evidence that it was legally issued in the absence of
evidence to the contrary. However, this presumption may be
rebutted. 13 Similarly, books and records of a corporation which include even
the stock and transfer book are generally admissible in evidence in favor of
or against the corporation and its members to prove the corporate acts, its
financial status and other matters including one's status as a stockholder.
They are ordinarily the best evidence of corporate acts and proceedings.
However, the books and records of a corporation are not conclusive even
against the corporation but are prima facie evidence only. Parol evidence
may be admitted to supply omissions in the records, explain ambiguities, or
show what transpired where no records were kept, or in some cases where
such records were contradicted. 14The effect of entries in the books of the
corporation which purport to be regular records of the proceedings of its
board of directors or stockholders can be destroyed by testimony of a more
conclusive character than mere suspicion that there was an irregularity in the
manner in which the books were kept. 15
The foregoing considerations are founded on the basic principle that stock
issued without authority and in violation of law is void and confers no rights
on the person to whom it is issued and subjects him to no liabilities. 16 Where
there is an inherent lack of power in the corporation to issue the stock,
neither the corporation nor the person to whom the stock is issued is
estopped to question its validity since an estopped cannot operate to create
stock which under the law cannot have existence. 17
As found by the Hearing Panel and affirmed by respondent Court of Appeals,
there is overwhelming evidence that despite what appears on the certificate
of stock and stock and transfer book, petitioner was not a bona
892
fidestockholder of Mr. & Ms. before March 1989 or at the time the complained
acts were committed to qualify her to institute a stockholder's derivative suit
against private respondents. Aside from petitioner's own admissions, several
corporate documents disclose that the true party-in-interest is not petitioner
but JAKA.
Thus, while petitioner asserts in her petition that Certificate of Stock No. 008
dated 25 July 1983 was issued in her name, private respondents argue that
this certificate was signed by respondent Eugenia D. Apostol as President
only in 1989 and was fraudulently antedated by petitioner who had
possession of the Certificate Book and the Stock and Transfer Book. Private
respondents stress that petitioner's counsel entered into a stipulation on
record before the Hearing Panel that the certificate was indeed signed by
respondent Apostol only in 1989 and not in 1983.
In her reply, petitioner admits that while respondent Eugenia D. Apostol
signed the Certificate of Stock No. 008 in petitioner's name only in 1989, it
was issued by the corporate secretary in 1983 and that the other certificates
covering shares in Mr. & Ms. had not yet been signed by respondent Eugenia
D. Apostol at the time of the filing of the complaint with the SEC although
they were issued years before.
Based on the foregoing admission of petitioner, there is no truth to the
statement written in Certificate of Stock No. 008 that the same was issued
and signed on 25 July 1983 by its duly authorized officers specifically the
President and Corporate Secretary because the actual date of signing
thereof was 17 March 1989. Verily, a formal certificate of stock could not be
considered issued in contemplation of law unless signed by the president or
vice-president and countersigned by the secretary or assistant secretary.
In this case, contrary to petitioner's submission, the Certificate of Stock No.
008 was only legally issued on 17 March 1989 when it was actually signed by
the President of the corporation, and not before that date. While a certificate
of stock is not necessary to make one a stockholder, e.g., where he is an
incorporator and listed as stockholder in the articles of incorporation although
no certificate of stock has yet been issued, it is supposed to serve as paper
representative of the stock itself and of the owner's interest therein. Hence,
when Certificate of Stock No. 008 was admittedly signed and issued only on
17 March 1989 and not on 25 July 1983, even as it indicates that petitioner
owns 997 shares of stock of Mr. & Ms., the certificate has no evidentiary
value for the purpose of proving that petitioner was a stockholder since 1983
up to 1989.
And even the factual antecedents of the alleged ownership by petitioner in
1983 of shares of stock of Mr. & Ms. are indistinctive if not enshrouded in
inconsistencies. In her testimony before the Hearing Panel, petitioner said
that early in 1983, to relieve Mr. & Ms. from political pressure, Senator Enrile
decided to divest the family holdings in Mr. & Ms. as he was then part of the
government and Mr. & Ms. was evolving to be an opposition newspaper. The
JAKA shares numbering 1,000 covered by Certificate of Stock No. 001 were
thus transferred to respondent Eugenia D. Apostol in trust or in blank. 18
Petitioner now claims that a few days after JAKA's shares were transferred to
respondent Eugenia D. Apostol, Senator Enrile sold to petitioner 997 shares
of JAKA. For this purpose, a deed of sale was executed and antedated to 10
May 1983. 19 This submission of petitioner is however contradicted by the
records which show that a deed of sale was executed by JAKA transferring
1,000 shares of Mr. & Ms. to respondent Apostol on 10 May 1983 and not to
petitioner. 20
Then Senator Enrile testified that in May or June 1983 he was asked at a
media interview if his family owned shares of stock in Mr. & Ms. Although he
and his family were stockholders at that time he denied it so as not to
embarrass the magazine. He called up petitioner and instructed her to work
out the documentation of the transfer of shares from JAKA to respondent
Apostol to be covered by a declaration of trust. His instruction was to transfer
the shares of JAKA in Mr. & Ms. and Ex Libris to respondent Apostol as a
nominal holder. He then finally decided to transfer the shareholdings to
petitioner. 21
When asked if there was any document or any written evidence of that
divestment in favor of petitioner, Senator Enrile answered that there was an
893
endorsement of the shares of stock. He said that there was no other
document evidencing the assignment to petitioner because the stocks were
personal property that could be transferred even orally. 22 Contrary to Senator
Enrile's testimony, however, petitioner maintains that Senator Enrile executed
a deed of sale in her favor.
A careful perusal of the records shows that neither the alleged endorsement
of Certificate of Stock No. 001 in the name of JAKA nor the alleged deed of
sale executed by Senator Enrile directly in favor of petitioner could have
legally transferred or assigned on 25 July 1983 the shares of stock in favor of
petitioner because as of 10 May 1983 Certificate of Stock No. 001 in the
name of JAKA was already cancelled and a new one, Certificate of Stock No.
007, issued in favor of respondent Apostol by virtue of a Declaration of Trust
and Deed of Sale. 23
It should be emphasized that on 10 May 1983 JAKA executed, a deed of sale
over 1,000 Mr. & Ms. shares in favor of respondent Eugenio D. Apostol. On
the same day, respondent Apostol signed a declaration of trust stating that
she was the registered owner of 1,000 Mr. & Ms. shares covered by
Certificate of Stock No. 007.
The declaration of trust further showed that although respondent Apostol was
the registered owner, she held the shares of stock and dividends which might
be paid in connection therewith solely in trust for the benefit of JAKA, her
principal. It was also stated therein that being a trustee, respondent Apostol
agreed, on written request of the principal, to assign and transfer the shares
of stock and any and all such distributions or dividends unto the principal or
such other person as the principal would nominate or appoint.
Petitioner was well aware of this trust, being the person in charge of this
documentation and being one of the witnesses to the execution of this
document. 24 Hence, the mere alleged endorsement of Certificate of Stock
No. 001 by Senator Enrile or by a duly authorized officer of JAKA to effect the
transfer of shares of JAKA to petitioner could not have been legally feasible
because Certificate of Stock No. 001 was already canceled by virtue of the
deed of sale to respondent Apostol.
And, there is nothing in the records which shows that JAKA had revoked the
trust it reposed on respondent Eugenia D. Apostol. Neither was there any
evidence that the principal had requested her to assign and transfer the
shares of stock to petitioner. If it was true that the shares of stock covered by
Certificate of Stock No. 007 had been transferred to petitioner, the person
who could legally endorse the certificate was private respondent Eugenia D.
Apostol, she being the registered owner and trustee of the shares of stock
covered by Certificate of Stock No. 007. It is a settled rule that the trustee
should endorse the stock certificate to validate the cancellation of her share
and to have the transfer recorded in the books of the corporation. 25
In fine, the records are unclear on how petitioner allegedly acquired the
shares of stock of JAKA. Petitioner being the chief executive officer of JAKA
and the sole person in charge of all business and financial transactions and
affairs of JAKA 26 was supposed to be in the best position to show convincing
evidence on the alleged transfer of shares to her, if indeed there was a
transfer. Considering that petitioner's status is being questioned and several
factual circumstances have been presented by private respondents
disproving petitioner's claim, it was incumbent upon her to submit rebuttal
evidence on the manner by which she allegedly became a stockholder. Her
failure to do so taken in the light of several substantial inconsistencies in her
evidence is fatal to her case.
The rule is that the endorsement of the certificate of stock by the owner or his
attorney-in-fact or any other person legally authorized to make the transfer
shall be sufficient to effect the transfer of shares only if the same is coupled
with delivery. The delivery of the stock certificate duly endorsed by the owner
is the operative act of transfer of shares from the lawful owner to the new
transferee.
Thus, for a valid transfer of stocks, the requirements are as follows: (a) There
must be delivery of the stock certificate; (b) The certificate must be endorsed
by the owner or his attorney-in-fact or other persons legally authorized to
make the transfer; and, (c) to be valid against third parties, the transfer must
be recorded in the books of the corporation. 27 At most, in the instant case,
petitioner has satisfied only the third requirement. Compliance with the first
two requisites has not been clearly and sufficiently shown.
894
Considering that the requirements provided under Sec. 63 of The
Corporation Code should be mandatorily complied with, the rule on
presumption of regularity cannot apply. The regularity and validity of the
transfer must be proved. As it is, even the credibility of the stock and transfer
book and the entries thereon relied upon by petitioner to show compliance
with the third requisite to prove that she was a stockholder since 1983 is
highly doubtful.
The records show that the original stock and transfer book and the stock
certificate book of Mr. & Ms. were in the possession of petitioner before their
custody was transferred to the Corporate Secretary, Atty. Augusto San
Pedro. 28 On 25 May 1988, Assistant Corporate Secretary Renato Jose
Unson wrote Mr. & Ms. about the lost stock and transfer book which was also
noted by the corporation's external auditors, Punongbayan and Araullo, in
their audit. Atty. Unson even informed respondent Eugenia D. Apostol as
President of Mr. & Ms. that steps would be undertaken to prepare and
register a new Stock and Transfer Book with the SEC. Incidentally, perhaps
strangely, upon verification with the SEC, it was discovered that the general
file of the corporation with the SEC was missing. Hence, it was even possible
that the original Stock and Transfer Book might not have been registered at
all.
On 20 October 1988 respondent Eugenia D. Apostol wrote Atty. Augusto San
Pedro noting the changes he had made in the Stock and Transfer Book
without prior notice to the corporate officers. 29 In the 27 October 1988
directors' meeting, respondent Eugenia D. Apostol asked about the
documentation to support the changes in the Stock and Transfer Book with
regard to the JAKA shares. Petitioner answered that Atty. San Pedro made
the changes upon her instructions conformably with established practice. 30
This simply shows that as of 1988 there still existed certain issues affecting
the ownership of the JAKA shares, thus raising doubts whether the alleged
transactions recorded in the Stock and Transfer Book were proper, regular
and authorized. Then, as if to magnify and compound the uncertainties in the
ownership of the shares of stock in question, when the corporate secretary
resigned, the Stock and Transfer Book was delivered not to the corporate
office where the book should be kept but to petitioner. 31
That JAKA retained its ownership of its Mr. & Ms. shares was clearly shown
by its receipt of the dividends issued in December 1986. 32 This only means,
very obviously, that Mr. & Ms. shares in question still belonged to JAKA and
not to petitioner. For, dividends are distributed to stockholders pursuant to
their right to share in corporate profits. When a dividend is declared, it
belongs to the person who is the substantial and beneficial owner of the
stock at the time regardless of when the distribution profit was earned. 33
Finally, this Court takes notice of the glaring and open admissions of
petitioner made, not just seven (7) but nine (9) times, during the 22
September 1988 meeting of the board of directors that the Enriles were her
principals or shareholders, as shown by the minutes thereof which she duly
signed 34
5. Mrs. E. Apostol explained to the Directors that through her
efforts, the asset base of the Company has improved and
profits were realized. It is for this reason that the Company
has declared a 100% cash dividend in 1986. She said that it
is up for the Board to decide based on this performance
whether she should continue to act as Board Chairman or
not. In this regard, Ms. N.A. Bitong expressed her
recollection of how Ex-Libris/Mr. & Ms. were organized and
her participation for and on behalf of her principals, as
follows: She recalled that her principals were invited by Mrs.
E. Apostol to invest in Ex-Libris and eventually Mr. & Ms. The
relationship between her principals and Mrs. E. Apostol
made it possible for the latter to have access to several
information concerning certain political events and issues. In
many instances, her principals supplied first hand and
newsworthy information that made Mr. & Ms. a popular
paper . . . .
6. According to Ms. Bitong, her principals were instrumental
in helping Mr. & Ms. survive during those years that it was
cash strapped . . . . Ms. N.A. Bitong pointed out that the
practice of using the former Minister's influence and stature
895
 in the government is one thing which her
principals themselves are strongly against . . . .
7. . . . . At this point, Ms. N. Bitong again expressed her
recollection of the subject matter as follows: (a) Mrs. E.
Apostol, she remembers, brought up the concept of a
cooperative-ran newspaper company in one of her breakfast
session with her principals sometime during the end of
1985. Her principals when asked for an opinion, said that
they recognized the concept as something very noble and
visible . . . . Then Ms. Bitong asked a very specific question
"When you conceptualized Ex-Libris and Mr. & Ms., did
you not think of my shareholders the Ponce Enriles as
liabilities? How come you associated yourself with them then
and not now? What is the difference?" Mrs. Apostol did not
answer the question.
The admissions of a party against his interest inscribed upon the record
books of a corporation are competent and persuasive evidence against
him. 35 These admissions render nugatory any argument that petitioner is
a bona fidestockholder of Mr. & Ms. at any time before 1988 or at the time
the acts complained of were committed. There is no doubt that petitioner was
an employee of JAKA as its managing officer, as testified to by Senator Enrile
himself. 36 However, in the absence of a special authority from the board of
directors of JAKA to institute a derivative suit for and in its behalf, petitioner is
disqualified by law to sue in her own name. The power to sue and be sued in
any court by a corporation even as a stockholder is lodged in the board of
directors that exercises its corporate powers and not in the president or
officer thereof. 37
It is well settled in this jurisdiction that where corporate directors are guilty of
a breach of trust, not of mere error of judgment or abuse of discretion, and
intracorporate remedy is futile or useless, a stockholder may institute a suit in
behalf of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. 38 The stockholder's right to
institute a derivative suit is not based on any express provision of The
Corporation Code but is impliedly recognized when the law makes corporate
directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties.
Hence, a stockholder may sue for mismanagement, waste or dissipation of
corporate assets because of a special injury to him for which he is otherwise
without redress. 39 In effect, the suit is an action for specific performance of
an obligation owed by the corporation to the stockholders to assist its rights
of action when the corporation has been put in default by the wrongful refusal
of the directors or management to make suitable measures for its
protection. 40
The basis of a stockholder's suit is always one in equity. However, it cannot
prosper without first complying with the legal requisites for its institution. The
most important of these is the bona fide ownership by a stockholder of a
stock in his own right at the time of the transaction complained of which
invests him with standing to institute a derivative action for the benefit of the
corporation. 41
WHEREFORE, the petition is DENIED. The 31 August 1995 Decision of the
Court of Appeals dismissing the complaint of petitioner Nora A. Bitong in CA-
G.R. No. SP 33291, and granting the petition for certiorari and prohibition
filed by respondent Edgardo U. Espiritu as well as annulling the 5 November
1993, 24 January 1993 and 18 February 1994 Orders of the SEC En Banc in
CA-G.R. No. SP 33873, is AFFIRMED. Costs against petitioner.
SO ORDERED.
Davide, Vitug and Quisumbing, JJ., concur.
Panganiban, J., took no part.
896
897
G.R. No. 85339 August 11, 1989

898
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS
ANGELES, petitioners,
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO
ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO
SORIANO, RALPH KAHN and RAMON DEL ROSARIO, JR.,respondents.
Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles petitioner.
Roco & Bunag Law Offices for respondent Ernest Kahn.
Siguion Reyna, Montecillo and Ongsiako for other respondents.
NARVASA, J.:
On December 15, 1983, 33,133,266 shares of the outstanding capital stock
of the San Miguel Corporation were acquired 1 by fourteen (14) other
corporations, 2 and were placed under a Voting Trust Agreement in favor of
the late Andres Soriano, Jr. When the latter died, Eduardo M. Cojuangco, Jr.
was elected Substitute Trustee on April 9, 1984 with power to delegate the
trusteeship in writing to Andres Soriano III. 3 Shortly after the Revolution of
February, 1986, Cojuangco left the country amid "persistent reports" that
"huge and unusual cash disbursements from the funds of SMC" had been
irregularly made, and the resources of the firm extensively used in support of
the candidacy of Ferdinand Marcos during the snap elections in February,
1986 . 4
On March 26, 1986, an "Agreement" was executed between Andres Soriano
III, as "Buyer," and the 14 corporations, as "Sellers," for the purchase by
Soriano, "for himself and as agent of several persons," of the 33,133,266
shares of stock at the price of P100.00 per share, or "an aggregate sum of
Three Billion Three Hundred Thirteen Million Three Hundred Twenty Six
Thousand Six Hundred (P3,313,326,600.00) Pesos payable in specified
installments. 5 The Agreement revoked the voting trust above mentioned, and
expressed the desire of the 14 corporations to sell the shares of stock "to pay
certain outstanding and unpaid debts," and Soriano's own wish to purchase
the same "in order to institutionalize and stabilize the management of the
COMPANY in .. (himself) and the professional officer corps, mandated by the
COMPANY's By- laws, and to direct the COMPANY towards giving the
highest priority to its principal products and extensive support to agriculture
programme of' the Government ... 6 Actually, according to Soriano and the
other private respondents, the buyer of the shares was a foreign company,
Neptunia Corporation Limited (of Hongkong, a wholly owned subsidiary of
San Miguel International which is, in turn, a wholly owned subsidiary of San
Miguel Corporation; 7 and it was Neptunia which on or about April 1, 1986
had made the down payment of P500,000,000.00, "from the proceeds of
certain loans". 8
At this point the 33,133,266 SMC shares were sequestered by the
Presidential Commission on Good Government (PCGG), on the ground that
the stock belonged to Eduardo Cojuangco, Jr., allegedly a close associate
and dummy of former President Marcos, and the sale thereof was "in direct
contravention of .. Executive Orders Numbered 1 and 2 (.. dated February
28, 1986 and March 12, 1986, respectively) which prohibit .. the transfer,
conveyance, encumbrance, concealment or liquidation of assets and
properties acquired by former President Ferdinand Marcos and/or his wife,
Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business
associates. 9 The sequestration was subsequently lifted, and the sale allowed
to proceed, on representations by San Miguel Corporation x x that the shares
were 'owned by 1.3 million coconut farmers;' the seller corporations were
'fully owned' by said farmers and Cojuangco owned only 2 shares in one of
the companies, etc. However, the sequestration was soon re-imposed by
Order of the PCGG dated May 19, 1986 .. The same order forbade the SMC
corporate Secretary to register any transfer or encumbrance of any of the
stock without the PCGG's prior written authority. 10
San Miguel promptly suspended payment of the other installments of the
price to the fourteen (14) seller corporations. The latter as promptly sued for
rescission and damages. 11
899
On June 4,1986, the PCGG directed San Miguel Corporation"to issue
qualifying shares" in the corporation to seven (7) individuals, including
Eduardo de los Angeles, "from the sequestered shares registered as street
certificates under the control of Anscor- Hagedorn Securities, Inc.," to "be
held in trust by .. (said seven [7] persons) for the benefit of Anscor-Hagedom
Securities, Inc. and/or whoever shall finally be determined to be the
owner/owners of said shares. 12
In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to
assume the loans incurred by Neptunia for the down payment ((P500M)) on
the 33,133,266 shares." The Board opined that there was "nothing illegal in
this assumption (of liability for the loans)," since Neptunia was "an indirectly
wholly owned subsidiary of SMC," there "was no additional expense or
exposure for the SMC Group, and there were tax and other benefits which
would redound to the SMC group of companies. 13
However, at the meeting of the SMC Board on January 30, 1987, Eduardo de
los Angeles, one of the PCGG representatives in the SMC board, impugned
said Resolution No. 86-12-2, denying that it was ever adopted, and stating
that what in truth was agreed upon at the meeting of December 4, 1986 was
merely a "further study" by Director Ramon del Rosario of a plan presented
by him for the assumption of the loan. De los Angeles also pointed out
certain "deleterious effects" thereof. He was however overruled by private
respondents. 14 When his efforts to obtain relief within the corporation and
later the PCGG proved futile, he repaired to the Securities and Exchange
Commission (SEC).lwph1.t
He filed with the SEC in April, 1987, what he describes as a derivative suit in
behalf of San Miguel Corporation, against ten (10) of the fifteen-member
Board of Directors who had "either voted to approve and/or refused to
reconsider and revoke Board Resolution No. 86-12-2." 15 His Amended
Petition in the SEC recited substantially the foregoing antecedents and the
following additional facts, to wit:
a) On April 1, 1986 Soriano, Kahn and Roxas, as directors
of' Neptunia Corporation, Ltd., had met and passed a
resolution authorizing the company to borrow up to US
$26,500,000.00 from the Hongkong & Shanghai Banking
Corporation, Hongkong "to enable the Soriano family to
initiate steps and sign an agreement for the purchase of
some 33,133,266 shares of San ,Miguel Corporation. 16
b) The loan of $26,500,000.00 was obtained on the same
day, the corresponding loan agreement having been signed
for Neptunia by Ralph Kahn and Carl Ottiger. At the latter's
request, the proceeds of the loan were deposited in different
banks 17 for the account of "Eduardo J. Soriano".
c) Three (3) days later, on April 4, 1986, Soriano III sent
identical letters to the stockholders of San Miguel
Corporation, 18 inter alia soliciting their proxies and
announcing that "the Soriano family, friends and affiliates
acquired a considerable block of San Miguel Corporation
shares only a few days ago .., the transaction .. (having
been) made through the facilities of the Manila Stock
Exchange, and 33,133,266 shares .. (having thereby been)
purchased for the aggregate price of' P3,313,326,600.00."
The letters also stated that the purchase was "an exercise of
the Sorianos' right to buy back the same number of shares
purchased in 1983 by the .. (14 seller corporations)."
d) In implementing the assumption of the Neptunia loan and
the purchase agreement for which said loan was obtained,
which assumption constituted an improper use of corporate
funds to pay personal obligations of Andres Soriano III,
enabling him; to purchase stock of the corporation using
funds of' the corporation itself, the respondents, through
various subsequent machinations and manipulations, for
interior motives and in breach of fiduciary duty, compound
the damages caused San Miguel Corporation by, among
other things: (1) agreeing to pay a higher price for the shares
than was originally covenanted in order to prevent a
rescission of the purchase agreement by the sellers; (2)
900
 urging UCPB to accept San Miguel Corporation and c) he has not come to court
Neptunia as buyers of the shares, thereby committing the with clean hands; and
former to the purchase of its own shares for at least 25%
higher than the price at which they were fairly traded in the 2. The Securities & Exchange Commission has no
stock exchanges, and shifting to said corporations the jurisdiction over the controversy because the matters
personal obligations of Soriano III under the purchase involved are exclusively within the business judgment of the
agreement; and (3) causing to be applied to the part Board of Directors. 19
payment of P1,800,000.00 on said purchase, various assets
and receivables of San Miguel Corporation. Kahn's motion to dismiss was subsequently adopted by his
correspondents . 20
The complaint closed with a prayer for injunction against the execution or
consummation of any agreement causing San Miguel Corporation to The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay
purchase the shares in question or entailing the use of its corporate funds or Paz, by order dated September 4, 1987. 21 In her view
assets for said purchase, and against Andres Soriano III from further using or
disposing of the funds or assets of the corporation for his obligations; for the
1) the fact that de los Angeles was a PCGG nominee was
nullification of the SMC Board's resolution of April 2, 1987 making San
irrelevant because in law, ownership of even one share only,
Miguel Corporation a party to the purchase agreement; and for damages.
sufficed to qualify a person to bring a derivative suit;

Ernest Kahn moved to dismiss de los Angeles' derivative suit on two

2) it is indisputable that the action had been brought by de
grounds, to wit:
los Angeles for the benefit of the corporation and all the
other stockholders;
1 De los Angeles has no legal capacity to sue because
3) he was a stockholder at the time of the commission of the
a) having been merely acts complained of, the number of shares owned by him
imposed by the PCGG as a being to repeat, immaterial;
director on San Miguel, he
has no standing to bring a
4) there is no merit in the assertion that he had come to
minority derivative suit;
Court with unclean hands, it not having been shown that he
participated in the act complained of or ratified the same;
b) he personally holds only and
20 shares and hence
cannotfairly and adequately
5) where business judgment transgresses the law, the
represent the minority
securities and Exchange Commission always has
stockholders of the
competence to inquire thereinto.
corporation;

901
Kahn filed a petition for certiorari and prohibition with the Court of Appeals,
seeking the annulment of this adverse resolution of the SEC Hearing Officer
and her perpetual inhibition from proceeding with SEC Case No. 3152.
A Special Division of that Court sustained him, upon a vote of three-to-two.
The majority 22 ruled that de los Angeles had no egal capacity to institute the
derivative suit, a conclusion founded on the following propositions:
1) a party "who files a derivative suit should adequately
represent the interests of the minority stockholders;" since
"De los Angeles holds 20 shares of stock out of 121,645,860
or 0.00001644% (appearing to be undisputed), (he) cannot
even be remotely said to adequately represent the interests
of the minority stockholders, (e)specially so when .. de los
Angeles was put by the PCGG to vote the majority stock," a
situation generating "a genuine conflict of interest;"
2) de los Angeles has not met this conflict-of-interest
argument, i.e., that his position as PCGG-nominated director
is inconsistent with his assumed role of representative of
minority stockholders; not having been elected by the
minority, his voting would expectedly consider the interest of
the entity which placed him in the board of directors;
3) Baseco v. PCGG, May 27,1987, 23 has laid down the
principle that the (a) PCGG cannot exercise acts of dominion
over sequestered property, (b) it has only powers of
administration, and (c) its voting of sequestered stock must
be done only pursuant to its power of administration; and
4) de los Angeles' suit is not a derivative suit, a derivative
suit being one brought for the benefit of the corporation.
The dissenting Justices, 24 on the other hand, were of the opinion that the suit
had been properly brought by de los Angeles because
1) the number of shares owned by him was immaterial, he
being a stockholder in his own right;
2) he had not voted in favor of the resolution authorizing the
purchase of the shares; and
3) even if PCGG was not the owner of the sequestered
shares, it had the right to seek the protection of the interest
of the corporation, it having been held that even an
unregistered shareholder or an equitable owner of shares
and pledgees of shares may be deemed a shareholder for
purposes of instituting a derivative suit.
De los Angeles has appealed to this Court. He prays for reversal of the
judgment of the Court of Appeals, imputing to the latter the following errors:
1) having granted the writ of certiorari despite the fact that
Kahn had not first resorted to the plain remedy available to
him, i.e., appeal to the SEC en banc and despite the fact that
no question of jurisdiction was involved;
2) having ruled on Kahn's petition on the basis merely of his
factual allegations, although he (de los Angeles) had
disputed them and there had been no trial in the SEC; and
3) having held that he (de los Angeles) could not file a
derivative suit as stockholder and/or director of the San
Miguel Corporation.
For their part, and in this Court, the respondents make the following
assertions:
1) SEC has no jurisdiction over the dispute at bar which
involves the ownership of the 33,133,266 shares of SMC
stock, in light of this Court's Resolution in G.R. Nos. 74910,
902
5075, 75094, 76397, 79459 and 79520, promulgated on
August 10, 1988; 25
2) de los Angeles was beholden to the controlling
stockholder in the corporation (PCGG), which had "imposed"
him on the corporation; since the PCGG had a clear conflict
of interest with the minority, de los Angeles, as director of the
former, had no legal capacity to sue on behalf of the latter;
3) even assuming absence of conflict of interest, de los
Angeles does not fairly and adequately represent the interest
of the minority stockholders;
4) the respondents had properly applied for certiorari with
the Court of Appeals because
a) that Court had, by law, exclusive appellate jurisdiction
over officers and agencies exercising quasi-judicial
functions, and hence file competence to issue the writ
of certiorari;
b) the principle of exhaustion of administrative remedies
does not apply since the issue involved is one of law;
c) said respondents had no plain, speedy and adequate
remedy within SEC;
d) the Order of the SEC Investigating Officer denying the
motion to dismiss was issued without or in excess of
jurisdiction, hence was correctly nullified by the Court of
Appeals; and
e) de los Angeles had not raised the issue of absence of a
motion for reconsideration by respondents in the SEC case;
in any event, such a motion was unnecessary in the
premises.
De los Angeles' Reply seeks to make the following points:
1) since the law lays down three (3) requisites for a
derivative suit, viz:
a) the party bringing suit should be a
shareholder as of the time of the act or
transaction complained of,
b) he has exhausted intra-corporate
remedies, i.e., has made a demand on the
board of directors for the appropriate relief
but the latter has failed or refused to heed
his plea; and
c) c)the cause of action actually devolves on
the corporation, the ,wrongdoing or harm
having been caused to the corporation and
not to .the particular stockholder bringing the
suit;
and since (1) he is admittedly the owner of 20 shares of SMC stock in
his own right, having acquired those shares as early as 1977, (2) he had
sought without success to have the board of' directors remedy with wrong,
and (3) that wrong was in truth a 'wrong against the stockholders of the
corporation, generally, ,and not against him individually and it was the
corporation, and not he, particularly, that would be entitled to the appropriate'
relief the propriety of his suit cannot be gainsaid;
2) Kahn had not limited himself to questions of law in the
proceedings in the Court of Appeals and hence could not
claim exclusion from the scope of the doctrine of exhaustion
of remedies; moreover, Rule 65, invoked by him, bars a
resort to certiorari. where a plain, speedy and accurate
remedy was available to him in this case, to wit, a motion for
reconsideration before the Sec en banc and, contrary to the
903
respondent's claim, De Los Angeles had in fact asserted to
this propositions before the Appellate Tribunal; and
3) the respondent had not raised the issue of jurisdiction
before the Court of Appeals; indeed, they admit to their
Comment that that
issue has not yet been resolved by the SEC," be this as it
may, the derivative suit does not fall within the BASECO
doctrine since it does not involve any question of ownership
of the 33,133,266 sequestered SMC shares but rather, the
validity of the resolution of the board of directors for the
assumption by the corporation, for the benefit of certain of its
officers and stockholders, of liability for loans contracted by
another corporation, which is an intra-corporate dispute
within the exclusive jurisdiction of the SEC.
1. De los Angeles is not opposed to the asserted position of
the PCGG that the sequestered SMC shares of stock belong
to Ferdinand Marcos and/or his dummies and/or cronies. His
consent to sit in the board as nominee of PCGG
unquestionably indicates his advocacy of the PCGG
position. He does not here seek, and his complaint in the
SEC does not pray for, the annulment of the purchase by
SMC of the stock in question, or even the subsequent
purchase of the same stock by others 26which proposition
was challenged by (1) one Evio, in SEC Case No. 3000; (2)
by the 14 corporations which sold the stock to SMC, in Civil
Case No. 13865 of the Manila RTC, said cases having later
become subject of G.R. No. 74910 of this Court; (3) by
Neptunia, SMC, and others, in G.R. No. 79520 of this Court;
and (4) by Eduardo Cojuangco and others in Civil Case No.
16371 of the RTC, Makati, [on the theory that the
sequestered stock in fact belonged to coconut planters and
oil millers], said case later having become subject of G.R.
No. 79459 of this court . 27 Neither does de los Angeles
impugn, obviously, the right of the PCGG to vote the
sequestered stock thru its nominee directors as was done
by United Coconut Planters Bank and the 14 seller
corporations (in SEC Case No. 3005, later consolidated with
SEC Case No. 3000 above mentioned, these two (2) cases
later having become subject of G.R.No. 76397) as well as by
one Clifton Ganay, a UCPB stockholder (in G.R. No. 75094
of this Court).lwph1.t 28
The subject matter of his complaint in the SEC does not therefore fall within
the ambit of this Court's Resolution of August 10, 1988 on the cases just
mentioned, to the effect that, citing PCGG v. Pena, et al 29 an cases of the
Commission regarding 'the funds, moneys, assets, and properties illegally
acquired or misappropriated by former President Ferdinand Marcos, Mrs.
Imelda Romualdez Marcos, their close relatives, Subordinates, Business
Associates, Dummies, Agents, or Nominees, whether civil or criminal, are
lodged within the exclusive and original jurisdiction of the Sandiganbayan,'
and all incidents arising from, incidental to, or related to, such cases
necessarily fall likewise under the Sandiganbayan's exclusive and original
jurisdiction, subject to review on certiorari exclusively by the Supreme Court."
His complaint does not involve any property illegally acquired or
misappropriated by Marcos, et al., or "any incidents arising from, incidental
to, or related to" any case involving such property, but assets indisputably
belonging to San Miguel Corporation which were, in his (de los Angeles')
view, being illicitly committed by a majority of its board of directors to answer
for loans assumed by a sister corporation, Neptunia Co., Ltd.
De los Angeles' complaint, in fine, is confined to the issue of the validity of
the assumption by the corporation of the indebtedness of Neptunia Co., Ltd.,
allegedly for the benefit of certain of its officers and stockholders, an issue
evidently distinct from, and not even remotely requiring inquiry into the matter
of whether or not the 33,133,266 SMC shares sequestered by the PCGG
belong to Marcos and his cronies or dummies (on which- issue, as already
pointed out, de los Angeles, in common with the PCGG, had in fact espoused
the affirmative). De los Angeles' dispute, as stockholder and director of SMC,
with other SMC directors, an intra-corporate one, to be sure, is of no concern
to the Sandiganbayan, having no relevance whatever to the ownership- of
the sequestered stock. The contention, therefore, that in view of this Court's
904
ruling as regards the sequestered SMC stock above adverted to, the SEC
has no jurisdiction over the de los Angeles complaint, cannot be sustained
and must be rejected. The dispute concerns acts of the board of directors
claimed to amount to fraud and misrepresentation which may be detrimental
to the interest of the stockholders, or is one arising out of intra-corporate
relations between and among stockholders, or between any or all of them
and the corporation of which they are stockholders . 30
2. The theory that de los Angeles has no personality to bring
suit in behalf of the corporation because his stockholding
is minuscule, and there is a "conflict of interest" between him
and the PCGG cannot be sustained, either.
It is claimed that since de los Angeles 20 shares (owned by him since 1977)
represent only. 00001644% of the total number of outstanding shares (1
21,645,860), he cannot be deemed to fairly and adequately represent the
interests of the minority stockholders. The implicit argument that a
stockholder, to be considered as qualified to bring a derivative suit, must hold
a substantial or significant block of stock finds no support whatever in the
law. The requisites for a derivative suit 31 are as follows:
a) the party bringing suit should be a shareholder as of the
time of the act or transaction complained of, the number of
his shares not being material; 32
b) he has tried to exhaust intra-corporate remedies, i.e., has
made a demand on the board of directors for the appropriate
relief but the latter has failed or refused to heed his
plea; 33 and
c) the cause of action actually devolves on the corporation,
the wrongdoing or harm having been, or being caused to the
corporation and not to the particular stockholder bringing the
suit. 34
The bona fide ownership by a stockholder of stock in his own right suffices to
invest him with standing to bring a derivative action for the benefit of the
corporation. The number of his shares is immaterial since he is not suing in
his own behalf, or for the protection or vindication of his own particular right,
or the redress of a wrong committed against him, individually, but in behalf
and for the benefit of the corporation.
3. Neither can the "conflict-of-interest" theory be upheld.
From the conceded premise that de los Angeles now sits in
the SMC Board of Directors by the grace of the PCGG, it
does not follow that he is legally obliged to vote as the
PCGG would have him do, that he cannot legitimately take a
position inconsistent with that of the PCGG, or that, not
having been elected by the minority stockholders, his vote
would necessarily never consider the latter's interests. The
proposition is not only logically indefensible, non sequitur,
but also constitutes an erroneous conception of a director's
role and function, it being plainly a director's duty to vote
according to his own independent judgment and his own
conscience as to what is in the best interests of the
company. Moreover, it is undisputed that apart from the
qualifying shares given to him by the PCGG, he owns 20
shares in his own right, as regards which he cannot from any
aspect be deemed to be "beholden" to the PCGG, his
ownership of these shares being precisely what he invokes
as the source of his authority to bring the derivative suit.
4. It is also theorized, on the authority of the BASECO
decision, that the PCGG has no power to vote sequestered
shares of stock as an act of dominion but only in pursuance
to its power of administration. The inference is that the
PCGG's act of voting the stock to elect de los Angeles to the
SMC Board of Directors was unauthorized and void; hence,
the latter could not bring suit in the corporation's behalf. The
argument is strained and obviously of no merit. As already
more than plainly indicated, it was not necessary for de los
Angeles to be a director in order to bring a derivative action;
905
 all he had to be was a stockholder, and that he was owning
in his own right 20 shares of stock, a fact not disputed by the
respondents. G.R. No. L-5174 March 17, 1911

Nor is there anything in the Baseco decision which can be interpreted as CANDIDO PASCUAL, plaintiff-appellant,
ruling that sequestered stock may not under any circumstances be voted by vs.
the PCGG to elect a director in the company in which such stock is held. On EUGENIO DEL SAZ OROZCO, ET AL, defendants-appellees.
the contrary, that it held such act permissible is evident from the context of its
reference to the Presidential Memorandum of June 26, 1986 authorizing the C.W. Ney and O'Brien and De Witt for appellant.
PCGG, "pending the outcome of proceedings to determine the ownership Ortigas and Fisher for appellees.
of .. sequestered shares of stock,"'to vote such shares .. at all stockholders'
meetings called for the election of directors ..," the only caveat being that the
TRENT, J.:
stock is not to be voted simply because the power to do so exists, whether it
be to oust and replace directors or to effect substantial changes in corporate
policy, programs or practice, but only "for demonstrably weighty and This is an appeal by the plaintiff from a judgment sustaining a demurrer to
defensible grounds" or "when essential to prevent disappearance or wastage the first and second causes of action set forth in the amended complaint. The
of corporate property." demurrer as to both causes of action was based upon the following grounds:

The issues raised here do not peremptorily call for a determination of
whether or not in voting petitioner de los Angeles to the San Miguel Board,
the PCGG kept within the parameters announced in Baseco; and absent any
showing to the contrary, consistently with the presumption that official duty is
regularly performed, it must be assumed to have done so.
WHEREFORE, the petition is GRANTED. The appealed decision of the
Court of Appeals in CA- G.R. SP No. 12857 setting aside the order of
September 4, 1987 issued in SEC Case No. 3153 and dismissing said case
is REVERSED AND SET ASIDE. The further disposition in the appealed
decision for the issuance of a writ of preliminary injunction upon the filing and
approval of a bond of P500,000.00 by respondent Ernest Kahn (petitioner in
the Appellate Court) is also SET ASIDE, and any writ of injunction issued
pursuant thereto is lifted. Costs against private respondents.
SO ORDERED.
Gancayco, Gri;o-Aquino and Medialdea, JJ., concur.
(a) Lack of legal capacity to use on part of plaintiff;
(b) Failure to state facts constituting a cause of action;
(c) Defect of parties plaintiff; and,
(d) Uncertainty.
The lower court sustained the demurrer as to both causes of action upon the
second ground above-mentioned.
The following errors have been assigned:
The court a quo erred in sustaining the demurrer to the first cause of action
and dismissing the same because (a) the facts alleged constitute a cause of
action, and (b) the remedy sought by the plaintiff is the only one available.
The same errors are assigned as to the second cause of action.
The gist of the first and second causes of action is as follows:

906
That during the years 1903, 1904, 1905, and 1907 the defendants and
appellees, without the knowledge, consent, or acquiescence of the
stockholders, deducted their respective compensation from the gross income
instead of from the net profits of the bank, thereby defrauding the bank and
its stockholders of approximately P20,000 per annum; that though due
demands has been made upon them therefor, defendants refuse to refund to
the bank the sums so misappropriated, or any part thereof; that defendants
constitute a majority of the present board of directors of the bank, who alone
can authorize an action against them in the name of the corporation, and that
prior to the filing of the present suit plaintiff exhausted every remedy in the
premises within this banking corporation.
The second cause of action sets forth that defendants' and appellees'
immediate predecessors in office in this bank during the years 1899, 1900,
1901, and 1902, committed the same illegality as to their compensation as is
charged against the defendants themselves; that in the four years
immediately following the year 1902, the defendants and appellees were the
only officials or representatives of the bank who could and should investigate
and take action in regard to the sums of money thus fraudulently
appropriated by their predecessors; that they were the only persons
interested in the bank who knew of the fraudulent appropriation by their
predecessors; that they wholly neglected to take any action in the premises
or inform the stockholders thereof; that due demand has been made upon
defendants to reimburse the bank for this loss; that the bank itself can not
bring an action in its own name against the defendants and appellees, for the
reason already stated, and that there remains no remedy within the
corporation itself.
The questions raised in third cause of action are not before us at this as the
demurrer to that cause of action was overruled.
The court below sustained the demurrer as to the first and second causes of
action on the ground that in actions of this character the plaintiff must aver in
his complaint that he was the owner of stock in the corporation at the time of
the occurrences complained of, or else that the stock has since devolved
upon him by operation of law.
This action was brought by the plaintiff Pascual, in his own right as a
stockholder of the bank, for the benefit of the bank, and all the other
stockholders thereof. The plaintiff sues on behalf of the corporation, which,
even though nominally a defendant, is to all intents and purposes the real
plaintiff in this case. That such is the case is shown by the prayer of the
complaint which is that judgment be entered in favor of the bank.
According to the pleadings, the Banco Espaol-Filipino is a banking
corporation, constituted as such by royal decree of the Crown of Spain in the
year 1854, the original grant having been subsequently extended and
modified by royal decree of July 14, 1897, and by Act No. 1790 of the
Philippine Commission. From the first it has been a bank of issue, and under
the Spanish regime was regarded as a quasi-public institution, its full title
having been originally "Banco Espaol-Filipino de Isabel II." The Captain-
General of the Philippine Islands was its protector and supreme head. To him
belonged the power to appoint its directors and other managing officers,
remove them from office for cause, fix the rate of interest demandable by the
bank, resolve all doubts and controversies relating to its management, "and
finally, exercise, as representative of Her Majesty's Government, the powers
that the laws give him respecting public establishments protected and
privileged."
It is alleged in the amended complaint that the only compensation
contemplated or provided for the managing officers of the bank was a certain
per cent of the net profits resulting from the bank's operations, as set forth in
article 30 of its reformed charter or statutes, which article is as follows:
Of the profits or gains which may result from the bank's operations,
after deducting all the expenses of its administration and the part, if
any, which corresponds to the legal reserve fund, there shall be set
apart ten per cent for the directors and five per cent for the board of
government, the distribution of which shall be made as provided in
the regulations. The eighty-five per cent remaining shall belong
integrally to the shareholders pro rata the number of shares owned
by each.
907
Before proceeding to the determination of the real questions involved in this
case it might be well to note briefly the origin and history of the right of a
stockholder in a corporation to maintain a suit of this kind.
A corporation is an artificial being, invinsible, intangible, and existing
only in contemplation of law. (Chief Justice Marshall in Trustees of
Dartmouth College vs. Woodward, 4 Wheat., 636.)
The word "corporation" is but a collective name for the corporators or
members who compose an incorporated association; and where it is
said that a corporation is itself a person, or being, or creature, this
must be understood in a figurative sense only. (Morawetz on Private
Corporations, 2nd ed., sec. 1.)
A corporation is "an artificial person created by the sovereign from
natural persons and in which artificial person the natural persons of
which it is composed become merged and nonexistent." (Quoted
with approval in case of The People, ex rel. Winchester, etc.,
respondent, vs. Coleman, et al., commissioners of taxes etc.,
appellants, 133 N.Y. Appls., 279.)
In suits of this character the corporation itself and not the plaintiff stockholder
is the real party in interest. The rights of the individual stockholder are
merged into that of the corporation. It is a universally recognized doctrine that
a stockholder in a corporation has no title legal or equitable to the corporate
property; that both of these are in the corporation itself for the benefit of all
the stockholders. Text writers illustrate this rule by the familiar example of
one person or entity owning all the stock and still having no greater or
essentially different title than if he owned but one single share. Since,
therefore, the stockholder has no title, it is evident that what he does have,
with respect to the corporation and his fellow stockholder, are certain
rights sui generis. These rights are generally enumerated as being, first, to
have a certificate or other evidence of his status as stockholder issued to
him; second, to vote at meetings of the corporation; third, to receive his
proportionate share of the profits of the corporation; and lastly, to participate
proportionately in the distribution of the corporate assets upon the dissolution
or winding up. (Purdy's Beach on Private Corporations, sec. 554.)
The right of individual stockholders to maintain suits for and on behalf of the
corporation was denied until within a comparatively short time, but his right is
now no longer doubted. On this point Cook on Corporations, 5th ed. (1903),
secs. 644, 645, and 646, says:
Notwithstanding this fact, however, that it was the duty and right of the
corporation to bring suit remedy these wrongs, it gradually became apparent
that frequently the corporation was helpless and unable to institute the suit. It
was found, where the guilty parties themselves controlled the directors and
also a majority of the stock, that the corporation was in their power, was
unable to institute suit, and that the minority of the stockholders were being
defrauded of their rights and were without remedy. The time came when the
minority of the stockholders of the defrauded corporation the corporation
itself being controlled by the guilty parties were given a standing in court
for the purpose of taking up the cause of the corporation, and, in its name
and stead, of bringing the guilty parties to an account. Accordingly, in 1843,
in the leading case of Foss vs. Harbottle, a stockholder brought suit in the
name of himself and other defrauded stockholders, and for the benefit of the
corporation, against the directors, for a breach of their duty to the
corporation. This case was decided against the complaining stockholder, on
908
the ground that the complainant had not proved that the corporation itself
was under the control of the guilty parties, and had not proved that it was
unable to institute suit. The court, however, broadly intimated that a
case might arise when a suit instituted by defrauded stockholders would be
entertained by the court and redress given. Acting upon this suggestion, and
impelled by the utter inadequacy of suits instituted by the corporation,
defrauded stockholders continued to institute these suits and to urge the
courts of equity to grant relief. These efforts were unsuccessful in clearly
establishing the right of stockholders herein until the cases of Atwol against
Merriwether, in England, 1867, and of Dodge vs. Woolsey, in this country, in
1855. These two great and leading cases have firmly established the law for
England and America, that where corporate directors have committed a
breach of trust either by their frauds, ultra vires acts, or negligence, and the
corporation is unable or unwilling to institute suit to remedy the wrong, a
single stockholder may institute that suit, suing on behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress
of the wrong done directly to the corporation and indirectly to the
stockholders.
It is now no longer doubted, said Mr. Justice Wayne, in the case of
Dodge vs. Woolsey, 18 How. (U.S.), 331 either in England or the
United States, that courts of equity, in both, have a jurisdiction over
corporations, at the instance of one or more of their members; to
apply preventive remedies by injunction, to restrain those who
administer them from doing acts which would amount to a violation of
charters, or to prevent any misapplication of their capitals or profits,
which might result in lessening the dividends of stockholders, or the
value of their shares, as either may be protected by the franchises of
a corporation, if the acts intended to be done create what is in the
law denominated a breach of trust. And the jurisdiction extends to
inquire into, and to enjoin, as the case may require that to be done,
any proceedings by individuals, in whatever character they may
profess to act, if the subject of complaint is an imputed violation of a
corporate franchise, or the denial of a right growing out of it, for
which there is not an adequate remedy at law.
So it is clear that the plaintiff, by reason of the fact that he is a stockholder in
the bank (corporation) has a right to maintain a suit for and on behalf of the
bank, but the extent of such a right must depend upon when, how, and for
what purpose he acquired the shares which he now owns. In the
determination of these questions we can not see how, if it be true that the
bank is a quasi-public institution, it can affect in any way the final result.
It is alleged that the plaintiff became a stockholder on the 13th of November,
1903; that the defendants, as members of the board of directors and board of
government, respectively, during each and all the years 1903, 1904, 1905,
1906, and 1907, did fraudulently, and to the great prejudice of the bank and
its stockholders, appropriate to their own use from the profits of the bank
sums of money amounting approximately to P20,000 per annum.
Article 31 of the bank's charter provides that dividends shall be declared
each semestre. The stockholders meet once a year, in February, to receive
and consider the report of the bank's operations contained in the annual
balance and memorial. Beyond this they have no direct voice in the affairs of
the bank, but all who are then stockholders and have a right to vote must
clearly have a right to vote upon all the business proceedings of the year,
irrespective of the date upon which they may have become stockholders.
They are entitled to all the dividends that have been earned by their stock
during the year which has not been earned by their stock during the year
which has not been already declared and paid, regardless of the precise
period of the year in which it may have accrued. So, in the general meeting
of the stockholders on February 3, 1904, the plaintiff had a right to
participate.
Neither the charter, the by-laws, nor the regulations prescribe when, within
the semestre, the dividends shall be declared; but it may be presumed that
such dividends are declared at the end of the semestre and that the
first semestre begins with the first day of January of each year. On this basis
the owner of stock from whom the plaintiff purchased his ten shares might
have received the dividends corresponding to these ten shares for the
first semestre (six months) of the year 1903. The dividends were declared
twice a year, every six months. The times for declaring the dividends are
specifically and distinctly pointed out one period is separated from the
909
other. Every six months forms a period. So if the plaintiff was not entitled to
the dividends for the first period (from January to July, 1903), he having
become a stockholder in September of that year, he would have been
entitled to the dividends on his stock for the second period, or semestre. The
plaintiff was, therefore, a stockholder during all the time for which he seeks
recovery in his first cause of action, except the first six months of the year
1903. Then again, as a matter of fact (which we do not now decide), if the
defendants had taken their salaries for the year 1903 at the close of that year
or at any time after September 13, the plaintiff would then have had an
interest and, on the theory that he was a stockholder, could have questioned
the legality of the defendants' right to take such salary, inasmuch as his
dividends would be directly affected, in that, if the defendants took 10 per
cent of the gross instead of the net earnings of the bank, his dividend on his
ten shares for the second period (from July to December, 1903) would be
less.
Conceding that this cause of action is demurrable on the grounds that the
plaintiff was not a stockholder during the first six moths of the year 1903,
should the demurrer have been sustained as to the whole cause of action
when the time for which recovery is sought is clearly divisible?
Section 90 of the Code of Civil Procedure in force in the Philippine Islands
provides, in part, as follows:
2. ... If the complaint contains more than one cause of action, each
distinct cause of action must be set forth in a separate paragraph
containing all the facts constituting the particular cause of action.
Where the matter in a single count is divisible in its nature, the
demurrer should be confined to those parts which are defective, as
the same general rule which applies to different counts applies also
to divisible matter in the same count constituting different causes of
action; and where one count, containing distinct averments,
discloses a good cause of action in one of such averments, as when
several breaches are assigned, some well and others ill, a general
demurrer will be overruled. (6 Ency. Plead. & Prac., 303, 304.)
The complaint contains three causes of action, each set forth in a separate
paragraph. The matter in the first cause is, as we have said, divisible in its
nature. The rule above quoted is, therefore, perfectly applicable.
The most important question to be decided is, did the lower court err in
sustaining the demurrer to the second cause of action? If this question be
decided in the negative, then it will not be necessary to determine whether or
not the allegations in this part of the complaint are sufficient to hold the
defendants liable for the acts of their predecessors.
It affirmatively appears from the complaint that the plaintiff was not a
stockholder during any of the time in question in this second cause of action.
Upon the question whether or not a stockholder can maintain a suit of this
character upon a cause of action pertaining to the corporation when it
appears that he was not a stockholder at the time of the occurrence of the
acts complained of and upon which the action is based, the authorities do not
agree.
In the case of Hawes vs. Oakland (14 Otto [104 U.S.], 450, 456), the plaintiff,
a shareholder in the Contra Costa Waterworks Company, brought a bill in
equity against the company and the city of Oakland in the Circuit Court of the
United States for California, on the ground that he was a citizen of New York
and the defendant citizens of California, alleging that the company was
furnishing the city of Oakland with water free charge beyond what the law
required it to do, and that, although he had required them to desist, the
directors had failed to heed his protest and that unless enjoined they would
continue to furnish water to the city in excess of their legal obligations in this
particular, to the damage of plaintiff and the shareholders.
To this complaint the city of Oakland demurred upon the ground that the
appellant had shown no capacity in himself to maintain the suit, the injury, if
any, being to the corporation and the right to sue pertaining to it solely. The
demurrer was sustained and the bill dismissed, whereupon the plaintiff
carried the case to the Supreme Court of the United States.
910
The decision of the court, which was written by Mr. Justice Miller and
concurred in by all the other justices, contains a review of the earlier
decisions of the English and American courts with respect to the right of
stockholders of corporations to maintain suits of this character. In concluding,
the court, after enumerating a number of circumstances in which a
stockholder might be permitted to sue upon a cause of action pertaining to
the corporation, said:
But in addition to the existence of grievances which call for this kind of relief,
it is equally important that before the shareholder is permitted, in his own
name to institute and conduct a litigation which usually belongs to the
corporation, he should show to the satisfaction of the court that he has
exhausted all the means within his reach to attain within the corporation
itself, the redress of his grievances, or action in conformity to his wishes. He
must make an earnest, not a simulated effort, with the managing body of the
corporation, to induce remedial action on their part, and this must be made
apparent to the court. If the time permits, or has permitted, he must show, if
he fails with the directors, that he has made an honest effort to obtain action
by the stockholders as a body, in the matter of which he complains. And he
must show a case, if this is not done, where it could not be done, or it was
not reasonable to require it.
The effort to induce such action as plaintiff desires on the part of the
directors, or of the stockholders when that is necessary, and the
cause of failure in these efforts, and all allegation that plaintiff was a
shareholder at the time of the transactions of which he complains, or
that the shares have devolved on him since by operation of law and
that the suit is not a collusive one to confer on a court otherwise
have no cognizance, should be in the bill, which should be verified by
affidavit.
This case was decided January 16, 1882. More than a year afterward the
Supreme Court embodied the procedural part of this decision in the 94th
Equity Rule, adopted January 23, 1883. The rule reads as follows:
Every bill brought by one or more stockholders in a corporation
against the corporation and other parties, founded on rights which
may properly be asserted by the corporation, must be verified by
oath, and must contain an allegation that the plaintiff was a
shareholder at the time of the transaction of which he complains, or
that his shares had devolved on him since by operation of law, and
that the suit is not a collusive one to confer on a court of the United
States jurisdiction of a case of which it would not otherwise have
cognizance. It must also set forth with particularity the efforts of the
plaintiff to secure such action as he desires on the part of the
managing directors or trustees, and, if necessary, of the
shareholders, and the causes of his failure to obtain such action.
January 21, 1884, the Supreme Court decided the case of Dimpfel vs. Ohio,
etc., R.R. Co. (110 U.S., 212; 28 Law Ed., 121, 122), which was similar to the
Hawes case, above cited. Mr. Justice Field, by whom the opinion of the court
was written, says (p. 122):
The suit was brought to set aside a contract by which the Ohio and
Mississippi Railway Company became the owner of a portion of its
road known as the Springfield Division, and to obtain a decree from
the court declaring that the bonds, issued by the company and
secured by a mortgage upon that division, are null and void. It was
commenced by Dimpfel, and individual stockholder in the company,
who stated in his bill, that it was filed on behalf of himself and such
other stockholders as might join him in the suit. Callaghan, another
stockholder, is the only one who joined him. The two claim to be
owners of fifteen hundred shares of the stock of the company. The
whole number of shares is 240,000. The owners of the balance of
this large number make no complaint of the transactions which the
complainants seek to annul. And it does not appear that the
complainant owned their shares when these transactions took place.
For aught we can see to the contrary, they may have purchased the
shares long afterwards, expressly to annoy and vex the company, in
the hope that they might thereby extort, from its fears, a larger
benefit than the other stockholders have received or may reasonably
expect from the purchase, or compel the company to buy their
911
 shares at prices above the market value. Unfortunately, litigation
against large companies is often instituted by individual stockholders
from no higher motive.
The bill in this case was also open to the objection that the plaintiff had not
exhausted the means of redress available within the corporation. The next
proceeds to consider this point, but prefaces its remarks with the following
significant phrase:
But assuming that the complainants were the owners of the shares
held by them when the transactions of which they complain took
place, it does not appear that they made any attempt, etc.
Counsel for the plaintiff in a very able and exhaustive brief sought to show
that the doctrine laid down in these two cases is not applicable to the case at
bar, first, because the Supreme Court in these cases merely established a
rule of practice, designed to prevent collusive suits in the Federal court; and,
second, that if such rule is to be regarded as a declaration of substantive law,
it is wrong on principle and should be disregarded. Many of the authorities
cited by the plaintiff to the effect that the rule is merely one of practice,
peculiar to the Federal court, base that conclusion upon the fact that the
requirement of the inclusion of the averments in question in the bill to be
found in the 94th Equity Rule. Some of the authorities cited, which hold this
view, are: Pomeroy, Eq. Jur., sec. 1096; Thompson, Corporations, sec. 4570;
Cook, Corporations vol. 3, secs. 736, 737; Morawetz, Corporations, sec. 209;
Forrester vs. Mining Co., 55 Pac. Rep., 229.
In the first place the doctrine was announced in Hawes vs. Oakland, supra,
more than a year before the 94th Equity Rule was promulgated, so that it can
admit of no dispute that in the opinion of the Supreme Court, as least, the
ownership of stock at the time of the transaction complained of was essential
to the right to maintain such an action as a matter of substantive law, prior to
and independent of the Equity Rule.
It is true that the court in writing the decision in the Hawes case, had in mind
the prevalence of the practice of bringing suits in the Federal courts, by
collusion between the parties, which should property be tried in the State
court. It is equally true that the court was desirous of preventing a
continuance of these fraudulent practices, by establishing a test which should
prevent them. The basis of the right to sue in the Federal courts being
diversity of citizenship, the usual method employed to enable parties to suits
of this kind to invoke the jurisdiction of these courts was to have a few shares
of stock transferred to some person who was a citizen of a State other than
that of which the proposed defendants were citizens. In a case of this kind
the transfer of the stock would be, of necessity, merely nominal, and the
plaintiff, under such circumstances, would not be a bona fide stockholder,
and would not be entitled to maintain the suit. Of necessity, in cases of this
kind, of genuine collusion to create a fictitious diversity of citizenship the
nominal transfer of the stock is made at a date subsequent to that of the
occurrence of the acts or omissions complained of. Although the court was
lawfully entitled to protect itself against such frauds as those of which it
complains in this case, and to refuse to take cognizance of cases in which,
owing to the purely fictitious nature of the simulated diversity of citizenship,
the proper tribunals were the State courts, on the other hand, in cases of
genuine diversity of citizenship, it could not lawfully refuse to exercise the
jurisdiction vested in it. No citation of authority is needed to support the
proposition that it is the duty of courts to exercise the jurisdiction properly
conferred upon them. It is elementary that where there is a higher tribunal
authorized to issue the writ, mandamus will lie to put the judicial machinery in
motion. (Spelling, Extraordinary Relief, sec. 1394.) This being the case, the
conclusion is obvious that the mere fact that in some cases persons suing as
stockholders for the redress of grievances anterior to the transfer of the stock
held by the plaintiff are not acting in good faith would not justify or authorize a
refusal to take jurisdiction in any case in which the plaintiff's stock was
acquired after the occurrence of the facts supposed to constitute the cause of
action, unless the court were of the opinion, as a matter of substantive law,
that in no event would a stockholder so situated be entitled to maintain such
an action.
It is only upon this assumption that the correctness of the decision in
Hawes vs. Oakland and the legality of the 94th Equity Rule can be
maintained. The court had no authority to change the substantive law either
by its decision or the rule, and it is not to be presumed that it intended to do
912
so. A careful examination of the Hawes case and of the rule will show that no
such change was in fact made. The decision is merely declaratory of the
preexisting law, as the court understood it to be, and the rule merely provides
a rule of pleading.
The decision in the Hawes case it that among other necessary averments,
the bill should contain "an allegation that the plaintiff was a shareholder at the
time of the transaction of which he complains ... and that the suit is not a
collusive one to confer jurisdiction on a court of the United States in a case in
which it would otherwise have no cognizance ... ." The language of the 94th
Equity Rule is practically identical with this. It provides, in terms that a
stockholder's bill in cases of this character "must contain an allegation that
the plaintiff was a stockholder at the time of the transaction of which he
complains ... and that the suit is not a collusive one to confer
jurisdiction . . . ."
This is, obviously, a mere rule of pleading it requires averments of facts
upon which the plaintiff's cause of action and the jurisdiction of the court rest.
It assumes, as the court had already decided, that the ownership of the stock
at the time of the transaction is a fact essential to the maintenance of the suit
in any event. Unless that fact exists no cause of action exists, whether the
suit is collusive or not. Even if the stock was owned prior to the transaction
complained of, if the suit is collusive as it would be, for instance if one of
the defendants had acquired a merely colorable domicile in another State to
support the allegation of diversity of citizenship the plaintiff has no right to
maintain the action in a Federal court. Consequently, the rule requires that
these two facts be distinctly averred. The requirement that they be pleaded is
procedural. The necessity of the existence of the facts in order to give rise to
the right of action is substantive.
If the Supreme Court had been of the opinion, as are some of the State
courts and text writers cited in plaintiff's brief, that the transferee of shares of
stock in a corporation acquires the right to sue upon the causes of action
which accrued before he acquired such shares, it surely would not have
attempted to deprive him of the right to exercise in the Federal court an
action which, were it not for diversity of citizenship, he might exercise in a
State court. If the court had believed that the transferee of stock could, under
any circumstances, sue upon a cause of action accruing to the corporation
prior to such transfer, the rule instead of requiring the plaintiff to allege
unconditionally that he was a stockholder at the time of the transaction
complained of and that the suit is not collusive, would have provided that the
plaintiff should be required to aver in his sworn bill the date upon which he
acquired his stock, and if it appeared that it was acquired after the
occurrence of the acts complained of, then that he should also required to
aver under oath that the suit was not collusive.
Sound reason and good authority sustain the rule that a purchaser of
stock can not complain of the prior acts and management of the
corporation. (Home Fire Ins. Co. vs. Baker, 60 L.R.A., 927, 933,
citing Hawes vs. Oakland, supra; Dimpfel vs. Ohio & M.R.
Co., supra; Taylor vs. Fayette Fuel Gas Co., 146 Pa., 13;
Alexander vs. Searcy, 81 Ga., 536; Clark vs. American Coal Co., 86
Iowa, 436; United Electric Securities Co., vs. Louisiana Electric Light
Co., 68 Fed., 673; Venner vs. Atchison T. & S.F.R. Co., 28 Fed., 581;
Heath vs. Erie R. Co., 8 Blachf., 347; Dannmeyer vs. Coleman, 8
Sawy., 51; Works vs. Sowers, 2 Walk (Pa.), 416; 4 Thompson Corp.,
4569.)
In Alexander vs. Searcy, supra, the court said (p. 550):
The weight of authority seems to be that a person who did not own
stock at the time of the transactions complained of can not complain
or bring a suit to have them declared illegal.
In the United Electric Securities Co. vs. Louisiana Electric Light Co., supra, it
is said:
As a general proposition, the purchaser of stock in a corporation is
not allowed to attack the acts and management of the company prior
to the acquisition of his stock; otherwise we might have a case where
stock duly represented in a corporation consented to and
participated in bad management and waste, and after reaping the
benefits from such transaction, could be easily passed into the hands
913
 of a subsequent purchaser, who could make his harvest by
appearing and contesting the very acts and conducts which his
vendor had consented to.
Where stock is required for the purpose of bringing suit it has been held that
the complainant is a mere interloper and entitled to no consideration. And
stockholder suits not brought in good faith in the interest of the corporation
have been dismissed on the ground. (Home Fire Ins. Co. vs. Baker, supra,
and cases cited therein.) Some of the State courts hold that a purchaser of
shares in a corporation acquires all the rights of the vendor. The Alabama
Supreme Court has gone so far as to hold that a purchaser in good faith is
not necessarily disqualified as a suitor in all cases because the prior holder
was personally disqualified. (Parsons vs. Joseph, 92 Ala., 403.) From the
pleadings in this case (it having been decided by the Supreme Court upon a
demurrer) it appears that Joseph sought to have cancelled certain certificates
of stock issued by the Street Railway Company to Parsons, on the ground
that said stock was fictitious and was issued in violation of the constitution
and statute law of the State. It was alleged, as a special defense, that if the
transactions, which form the basis of the issuance of the stock to Parsons,
were illegal, and fraudulent, and not done in good faith, the complainant,
Joseph, was estopped from setting up fraud in such transactions or, seeking
to cancel the stock, because one E. Lesser, who was complainant's
transferrer, participated in all of said transactions. In this case the court,
speaking through Mr. Justice Coleman, said:
If the transferee purchased the shares in good faith, and without
notice of the fact that the prior holder had precluded himself from
suing, he would have as just a title to relief as if he had purchased
from a shareholder who was under no disability; but if the purchaser
was aware that the prior holder had barred his right to relief, neither
justice nor public policy would require that the transferee, under
these circumstances, should be accorded any greater rights than his
transferrer.
xxx xxx xxx
If a stockholder participates in a wrongful or fraudulent contract, or
silently acquiesces until the contract becomes executed, he can not
then come into a court of equity to cancel the contract, and more
especially if the company, or himself, as a stockholder, has reaped a
benefit from the contract; and this rule holds good, although the
consideration of the contract may be one expressly prohibited by
statute. The same disability would attach to the transferee of his
stock who bought with notice.
This rule, in the main, is correctly stated, but we think that the latter part of
the same should be modified so as to read: "The same disability would attach
to the transferee of his stock who bought with or without notice." We base our
modification of this rule upon the ground that a transferee could not sue as
being a bona fide purchaser in ignorance of the disability attaching to his
vendor, because shares of stock, strictly speaking, are not negotiable, and
the sale can not pass greater rights than those possessed by the vendor.
(Clark vs. American Coal Co., 86 Iowa, 436; 4 Thomp. Corp., 3410.)
It is self-evident that the plaintiff in the case at bar was not, before he
acquired in September, 1903, the shares which he now owns, injured or
affected in any manner by the transactions set forth in the second cause of
action. His vendor could have complained of these transactions, but he did
not choose to do so. The discretion whether to sue to set them aside, or to
acquiesce in and agree to them, is, in our opinion, incapable of transfer. If the
plaintiff himself had been injured by the acts of defendants' predecessors that
is another matter. He ought to take things as he found them when he
voluntarily acquired his ten shares. If he was defrauded in the purchase of
these shares he should sue his vendor.
If the party himself, who is the victim of fraud or usury, chooses to
waive his remedy and release the party, it does not belong to a
subsequent purchaser under him to recall and assume the remedy
for him. (Quoted with approval in the case of the Graham vs. La
Crosse and Milwaukee R.R. Co., 102., U.S., 148.)
914
 But it is contended that this is a case in which the debtor corporation Arellano, C.J., Torres, Mapa, and Johnson, JJ., concur.
was defrauded of its property, and that as the company had a right of
proceeding for its recovery, any of its judgment and execution
creditors have an equal right; that it is a property right, and one that
inures to the benefit of creditors.

Conceding that creditors who were such when the fraudulent

procurement of the debtor's property occurred and cases to that
effect have been cited the question still remains, whether, the
debtor being unwilling to disturb the transaction, subsequent
creditors have such an interest that they can reach the property for
the satisfaction of their debts. We doubt whether any case, going as
far as this, can be found. No such case has been cited in the
argument. Dicta of judges to that effect may undoubtedly be
produced, but they are not supported by the facts of the cases under
consideration.

It seems clear that subsequent creditors have no better right than

subsequent purchasers, to question a previous transaction in which
the debtor's property was obtained from him by fraud, which he has
acquiesced in, and which he has manifested no desire to disturb.
Yet, in such a case, subsequent purchasers have no such right. (Id.)

So it seems to be settled by the Supreme Court of the United States, as a

matter of substantive law, that a stockholder in a corporation who was not
such at the time of the transactions complained of, or whose shares had not
devolved upon him since by operation of law, can not maintain suits of this
character, unless such transactions continue and are injurious to the
stockholder, or affect him especially and specifically in some other way.

We are, therefore of the opinion, and so hold, that the judgment appealed
from, sustaining the demurrer to the first cause of action should be, and the
same is hereby reversed; and the judgment sustaining the demurrer to the
second cause of action should be, and is hereby affirmed, without any
special ruling as to costs. The record will be returned to the court whence it
came for further proceedings in accordance with this decision. So ordered.

915
916
 3. In holding that it was proper for defendants to compute their
compensation upon the gross profits before charging against such
gross profits the aggregate amount of accounts written off as
uncollectible (dudosa y fallida) as shown in Exhibits C-1 to C-9,
inclusive.

4. In holding that any of the debit items appearing in Exhibits C-1 to

C-9 and especially the industrial and internal-revenue taxes, are
items that should be charged against capital and not against current
profits.1awphil.net

5. In holding that it was within the power of the stockholders of the

bank to ratify the so-called interpretation by defendants of said article
G.R. No. L-7945 December 1, 1914 30.

CANDIDO PASCUAL, plaintiff-appellant, This action was commenced by the plaintiff as a shareholder of the Banco
vs. Espaol-Filipino for the benefit of the bank and all of the stockholders
EUGENIO DEL SAZ OROZCO, ET AL., defendants-appellees. thereof. Its purpose is to require the defendants as former directors and
councilors of the bank to refund a portion of the compensation paid to them
C. W. Ney and O'Brien & De Witt for appellant. for their services, on the ground that the amounts thereof have been
Hausermann, Cohn & Fisher for appellees. wrongfully computed.

TRENT, J.:
The plaintiff appeals from a judgment upon the merits in favor of the
defendants, and insists that the court erred:
The complaint contains three separate causes of action, of which the first
only is here involved. The defendants' demurrer to this cause of action was
sustained upon the ground that the facts alleged therein were not sufficient to
entitle the plaintiff to the relief sought. Upon appeal this judgment was
reversed and the record returned for further proceedings. (19 Phil. Rep., 82.)
The complaint was not thereafter amended.

1. In holding that the interpretation placed upon article 30 of the The question raised by the plaintiff in his first assignment of error requires an
bank's charter by the decision of the Supreme Court herein is not the examination of the pertinent allegations in the first cause of action. These
law of the case. allegations are as follows.

2. In holding that the defendants had a right to deduct their X. That, notwithstanding the fact that article 30 of the said by-laws
compensation from the gross profits of the bank. (Exhibit B) clearly and unequivocally prescribes that the net profits of
the said bank shall be apportioned as follows: Then per cent for the

917
 board of directors, five per cent for the board of managers
(composed of counselors and trustees) in compensation for their
services as such, and the remainder, eighty-five per
cent, integrally for the shareholders of the said bank, the defendants,
as such members of the said boards of directors and managers,
respectively, did, during each and all of the years specified,
fraudulently and to the great detriment of the said Bank and its
shareholders, and without the knowledge, consent or acquiescence
of the latter, appropriate to themselves for their own use from the
profits of the said Bank sums of money reaching an approximate
amount of twenty thousand pesos, or a total sum of one hundred
thousand pesos during the five years aforementioned, by deducting
their said ten and five per cent, respectively, from the gross profits
instead of deducting them from the net profits of the said bank.
XI. That the said defendants, during the time mentioned, carefully
concealed in all the balances and reports of the said Bank published
by them every indication that might gave the stockholders of the said
Bank the slightest suspicion that the said defendants were
fraudulently appropriating to themselves the funds of the same; and
that the plaintiff learned of such appropriation, by a mere chance, in
the month of November, 1907.
The Banco Espaol-Filipino was a banking corporation which, until January
1, 1908, was controlled by the by-laws and regulations annexed to the
complaint as Exhibits A and B. On November 13, 1903, the plaintiff acquired
10 shares of the capital stock and has been the registered holder of these
shares since that date. The defendants filled, during the time mentioned in
the complaint, the offices of director, consiliario, and sindico, and collectively
constituted the board of government. The only compensation to which the
defendants were entitled for their services is that prescribed by article 30 of
the by-laws then in force.
This article reads: "Of the profits or gains which may result from the bank's
operations, after deducting all the expenses of its administration and the part,
if any, which corresponds to the legal reserve fund, there shall be set apart
ten per cent remaining shall belong integrally to the shareholders pro data
the number of shares owned by each."
Since the date on which the plaintiff acquired his shares, the earnings of
each half-year of the bank have been liquidated in the manner set forth in the
Exhibits C-1 to C-9, inclusive, attached to the agreed statement of facts, and
the respective defendants have individually collected for their services the
sums specified in Exhibit D.
Under date of November 15, 2907, the plaintiff addressed to the defendants
a letter alleging that the earnings of the bank had not been apportioned in
accordance with the provisions of article 30, supra, and making demand
upon them for the refund to the bank of a portion of the amounts received by
them in compensation for their services. The defendants refused to comply
with this demand and on December 7, 1907, the plaintiff commenced an
action seeking the same relief herein prayed for. This action was dismissed,
and on December 21, 1907, the shareholders of the bank were convened in
a special meeting "for the express purpose of discussing and taking action
relative to the alleged interpretation of article 30 of the by-laws." At this
shareholders' meeting there were present, either in person or by proxy, 183
persons and entities, holding 6,499 shares of the total issue of 7,500. Among
those present at this meeting was plaintiff's attorney. The plaintiff's letter,
referred to above, was read, as was the complaint which the plaintiff had
previously filed, and, after a discussion in which the appellant's attorney took
part, a resolution was adopted ratifying and approving the distribution of the
bank's earnings as made, and authorizing the defendants to proceed in the
same manner with the earnings of the latter half of the year 1907. In favor of
this resolution there was a total of 555 votes, representing 5,550 shares.
Soon thereafter the present action was commenced.
As will be seen from the plaintiff's first assignment of error and the argument
of counsel relating thereto, it is strongly urged that inquiry respecting the
interpretation and application of article 30, supra, has been closed by the
decision of this court rendered upon the demurrer of the defendants to the
complaint. Under the doctrine of stare decisis the plaintiff insists that "the law
of the case" has been established and that it has been necessarily decided
918
that the remuneration received by the defendants for their services was not in
accordance with article 30.
The decision is relied upon by the plaintiff is that of Pascual vs. Del Saz
Orozco (19 Phil. Rep., 82). "The law of the case," established by that
decision, is the law of the case which was before the court and which the
court thereby decided.1awphil.net
The plaintiff, as will be seen from paragraphs 10 and 11, above quoted,
whose sufficiency was then and there under consideration, alleged that the
defendants, in violation of article 30, had fraudulently misappropriated to
themselves certain funds of the bank by computing their percentages upon
the gross earnings of the bank and, by a series of fraudulent concealment's,
had withheld the knowledge thereof from the shareholders. The demurrer
admitted the facts as alleged and raised the question of the right of the
plaintiff to recover upon those facts. The ruling of the lower court was to the
effect that, even assuming the facts to be as alleged in the complaint, the
plaintiff had no right of action. On appeal the Supreme Court considered this
very question and necessarily none other, which relates to the point now
under consideration, and, in reversing the ruling of the lower court, decided
that, assuming the facts to be as alleged in the complaint, the plaintiff did
have a cause of action. If these were the facts of the case now under
consideration, there would be neither occasion nor opportunity to further
discuss the law applicable thereto. But the case which the present appeal
presents is not the case at all. Since that decision was rendered the case has
been tried and the facts now before the court for consideration are not the
allegations that the defendants fraudulently mis-appropriated to themselves
certain funds of the bank, and by a series of concealment's withheld the
knowledge thereof from the shareholders, but the real facts as they have
been stipulated in the agreed statement. These facts are that the defendants
did not, as alleged, fraudulently misappropriate certain funds of the bank by
computing their percentages upon the gross earnings, but the first deduct the
expenses of administration, and that none of the acts of the defendants were
tainted in any way with fraud.
In this particular the case now under consideration is clearly differentiated
and distinguished from the former case. In the case the court decided that
the defendants may not fraudulently compute their percentages upon the
gross earnings, and that a complaint which alleges that they have done so
states a cause of action. This was question submitted and decided. The
question submitted upon the present appeal is whether the computation
really made is in accordance with article 30. This holding is not in conflict with
the rule announced in the cases cited and relied upon by counsel for the
plaintiff.
For example, in the case of Heidt vs. Minor (113 Cal., 385), the court said:
"Moreover, the rule of the law of the case only applies when, on subsequent
trial, the issues and the facts found remain substantially the same."itc@alf
In the case of Foregerson et al. vs. Smith (104 Ind., 246), the court laid down
this rule: "But where the questions are necessarily involved, . . . the judgment
on appeal rules the case throughout all its subsequent stages. The decision
is an adjudication concluding the courts and the parties. It is not, of course,
conclusive in judgment in the case in which it was rendered, upon the parties
and those in privity with them. . . . We regard the former decision as
adjudicating all of the controlling questions in the case, for it was not possible
to reach the conclusion there announced without deciding that the property in
the promissory notes in controversy was in the administrator of the estate of
Mahala Shaw deceased."
In Standard Sewing Machine Co. vs. Leslie (118 Fed., 557), the court used
this language: "It is a familiar and entirely righteous rule that a court of review
is precluded from agitating the questions that were made, considered, and
decided on previous reviews. The former decision furnishes 'the law of the
case' not only to the tribunal to which the cause is remanded, but to the
appellate tribunal itself on a subsequent writ or appeal."
Now, has the remuneration of the defendants for their services been
computed in accordance with article 30 of the by-laws?
The item of "profit and loss" for each half year, during the entire period
covered by the complaint, was made up by crediting to it all the items of net
profits produced by the various accounts of the bank, including the accounts
919
of current debtors, the profits from exchange, the profits in the sale of money,
the profits from the discount of bills and notes, the net proceeds from the real
properties of the bank after the payment of all the expense thereof, including
taxes, insurance, and repairs, and all other net profits obtained by the bank.
To the debit of this "profit and loss" account were entered all sums paid out
by the bank as interest upon fixed deposits or credit balances of current
accounts. The items of "general expenses" included salaries, light , water,
stationery, stamps, attorneys' fees, and all other items of general expenses
incurred either by the main office in Manila or by the branch office in Iloilo. In
short, it appears that every expenditure of whatever nature made from the
funds of the bank, with the exception of the industrial tax (later internal-
revenue tax) and amounts set off against bad accounts, was included in the
item of "general expenses," or, what amounted to the same thing, deducted
from the "profit and loss" account before computing the remuneration
received by the respective defendants for their services. Upon this point it
might be well to set out in full Exhibit C-1. (Exhibits C-2 to
C-9, inclusive, were made up in the same manner.) This exhibit is as follows:
1903.
December 31. Balance of the account of profit and
loss ............................. $196,580.22 Deduction of surplus of June 30,
last .....................................
188,763.84 Do.
expenses ...............................................................
137,010.07 Compensation for the board of government,
15
per cent .......................................................................................
20,551.51 116,458.56 Dividend of 4 per cent on
$1,500,000 .................................... 60,000.00 56,458.56
Industrial tax (later internal revenue) 5 per cent of
$60,000 .......................................................................................
3,000.00 53,458.56 Balance on June 30 carried
forward ..................................... 7,816.38 61,274.94
Amount for bad accounts .................................................... 60,000.00
Balance for next semester ................................. 1,274.94
To this method of computing the defendants' remuneration the objection of
the plaintiff is twofold:
(a) That before computing the defendants' remuneration there was
not first deducted from the earnings or gains the amount payable as
industrial tax (later internal revenue), and
(b) That before computing the defendant's remuneration there was
not first deducted from the earnings or gains the amounts retained to
cover bad accounts.
From an examination of article 30 it will be seen that only two items from the
gross profits of the bank are to be deducted before computing the
compensation of the directors and board of government (the defendants
constituted both the directors and the board of government), to wit: Expenses
of administration and the amount, if any, corresponding to the legal reserve
fund. On December 31, 1903, the legal reserve fund of P225,000 was not
only completed, but a voluntary reserve fund of P665,000, authorized by the
charter, had accumulated. From the various Exhibits, C-1 to C-9, inclusive, it
is apparent that nothing whatever was applied to this reserve fund, and, as
the correctness of these exhibits is not disputed, it is also apparent that
nothing was due this fund at any time during the period covered by the
7,816.38 complaint. Unless, therefore, the items of industrial tax (later internal-revenue
General tax) and the amounts set aside to cover bad debts that there is no merit in
51,753.77 the plaintiff's contention.
At the outset it may be said that the proper disposition of this case is
rendered difficult by the inaccurate language used in article 30. This article
provides for a percentage of the profits (utilidades y ganacias), and it may be
at once said that these are not necessarily net profits, as claimed by counsel
for the plaintiff. Profits may be either gross profits or net profits, and there are
innumerable methods of computing each of these. Likewise, "expenses of
administration" may or may not include all amounts expended in the conduct
of business. Indeed, it is somewhat unusual that a provision of the bank's
charter, so difficult of exact definition, should be so lacking in precision.
Hardly less unusual, from an American point of view, is the incorporation into
920
the bank's charter of the measure of remuneration of the board of
government. This, is America, has generally been considered a detail in the
internal management of a corporation to be controlled by the shareholders
themselves, who, in many instances, even delegate to the directors the
power of fixing their own salaries.
The remuneration received by the defendants is not even alleged to be
excessive. The two active managers of the bank received, during the period
in question, sums amounting to approximately P15,000 per year, while the
other defendants, not participating in the active management of the
corporation, received sums amounting in no instance to a salary of P2,500
per year. All of the defendants received, during the four and a half years,
P201,825.81, or an approximate yearly average of P45,000 per year Bearing
in mind the magnitude of the business and the fact that the bank prospered
under the management of the defendants, there is no wonder that no claim is
made of excessive compensation. During all these years the plaintiff, as well
as the other shareholders of the bank, remained silent, apparently content
with the increased prosperity of the business, although at the increased
prosperity of the business, although at the end of each fiscal year they had
the opportunity to examine the books of the bank and inform themselves of
the method by which the defendants computed their compensation. And,
furthermore, an extraordinary meeting of the shareholders was duly
convened on December 21, 1907, for the express purpose, as we have
indicated, of discussing the interpretation placed upon article 30 by the
defendants.
The industrial tax, which the appellant insists should be first deducted from
the earnings before computing the percentages, was fixed by law at 5 per
cent of the dividends distributed among the shareholders of the bank. In
order to make the deduction of this tax, its amount must first be a known
quantity. Since its amount is a percentage of the dividends, the amount of the
latter must likewise by a known quantity before the operation can be made.
The amount available as dividends is dependent upon the amount due and
payable out of profits to the defendants for their services. Therefore, this
amount due the defendants from the profits must be known before the
amount remaining for dividends can be fixed. For example, if the remaining
earnings, after deducting from the gross earnings the general expenses, is
the sum of P58,000, how much is to be deducted therefrom as internal-
revenue tax before computing the percentage of the defendants? The law
said that the amount of this tax should be 5 per cent of the dividends
distributed. The amount to be distributed depends upon how much may be
left after the remuneraton of the defendants is paid. It is no reply to this
argument to point out that the total profits may be or are usually sufficiently
great to permit a declaration of the maximum dividend of P60,000 and that in
such cases t is simple matter to compute 5 per cent of P60,000, for the rule
of computation, established by article 30, is a general one, applicable alike in
all cases, whether the earnings of the bank be great in small. This article
does not establish two rules of computations, one which is only feasible or
practicable when the earnings are sufficiently large to warrant a dividend in
the maximum amount and another and different rule when the dividend falls
below that amount.
Again, in our opinion the nature of the old industrial tax negatives the idea
that it is one of the items of "expenses of administration" referred to in article
30. This tax was levied by law, not upon the earnings or profits of the bank,
but only upon such earnings or profits as were actually distributed among the
shareholders as dividends. It was purely a dividend tax, collected for
convenience in a lump sum from the company, but levied solely and
exclusively upon the distributed dividends. To deduct this tax from the
amount upon which the remuneration of the defendants was computed would
have made the defendants contributors to the tax levied upon the company-
shareholders. Article 30 does not require the defendants as employees of the
bank to contribute to the payment of the bank's taxes. The discrimination
made by article 30 between "expenses of administration" and other
disbursements is reasonable and in accordance with the principles of the
contract which existed between the bank and the defendants. That was a
contract of employment in which one of the contracting parties agreed to
supply the capital and the other his services, and to divide in a stipulated
proportion the proceeds of the application of the services of the one to the
capital of the other. Since it was incumbent upon the bank to furnish the
capital, so it was incumbent upon it to maintain the same. Any tax which
tended directly to impair the amount of the capital should consequently have
been paid by the hirer of the services and not by the servant. There could be
no real difference in principle between the failure to furnish the capital in the
921
first place and the failure to replace any part of it which disappears by reason
of a tax levied thereon. We, therefore, conclude that the method employed by
the defendants for the liquidation of the bank's business, in so far as the
industrial tax (internal-revenue tax) is concerned, was strictly in accordance
with article 30 of the by-laws.
DEDUCTION OF AMOUNTS TO COVER BAD ACCOUNTS
When the defendant Orozco took over the management of the bank, he
reported to the board of directors its financial situation, embracing among
other thins a loss from bad accounts for the past of over P500,000. It
probably would have been possible to cover this entire amount of losses from
funds in the reserve, existing for just such purposes, but to have done so
would have left the bank without a present reserve. It was decided to
preserve the reserve fund intact, and carry the bad accounts as accounts in
suspense until the same could be gradually and conveniently wiped out.
Consequently, in each half yearly liquidation the dividends distributed to the
shareholders were strictly limited to 4 per cent per semester, and the
earnings after payment of the expenses of administration, the remuneration
of defendants, the taxes, and the said dividends were applied pro tanto to the
extinction of the ad accounts held in suspense. It does not clearly appear
whether these funds, which were used for that purpose, first went into the
voluntary reserve fund and were then applied to the extinction of the bad
accounts in suspense or were applied directly by the semiannual liquidation's
from the profit and loss accounts. The process followed is immaterial since
the result must be the same. The important fact is that in each semester
there was an excess of net profits over and above the 4 per cent provided in
article 31 of the by-laws. This excess of net profits was divisible under that
article, one-half to the shareholders and one-half to the legal reserve,
voluntary reserve, or additional dividends as the case might be. Instead, the
entire excess of net profits went to extinguish bad accounts whose extinction
would have exhausted the reserve fund and required its replenishment. To
the extent that one-half of the excess of net profits were not distributed as
dividends, but were put to the purposes of reserve, the shareholders made a
sacrifice for their own welfare. Whether this was validly done or not is of no
importance of this time for the reason that the remuneration of the
defendants was not affected in any way thereby. As to the remaining half of
the excess net profits, the application made was in direct accord with the by-
laws, since the application of the funds to the purposes of the reserve fund is
exactly the same as if the reserve fund had been employed for the purpose
and then replenishment by these funds.
According to article 30, the net profits belonged to the shareholders.
According to article 31, these not profits, belonging to the shareholders,
should be partially divided among them and partially kept intact in the bank,
according to the amount thereof, to the status of the legal reserve, and to the
wishes of the board of government respecting a voluntary reserve. From the
fact that part of either the legal or voluntary reserve, it cannot be said that
such portion of the net profits had ceased to belong to the share-holders.
these excess net profits are, in a sense, still in the bank and still belong to
the shareholders within the meaning of article 30. to hold that the bad
accounts of the bank should have been extinguished by the gross earnings
instead of the net profits, would, in effect, compel the defendants, as
employees, to contribute to the replenishing of the depleted reserves of the
bank.
It would be wholly unjust to include under "expenses of administration" during
the time the defendants were in charge, the losses previously sustained by
the defendants' predecessors in office. These defendants were in no wise
connected with the bank no were they in any way responsible for those
losses. To interpret article 30 so would result in the incoming manager
becoming an heir to an insolvent inheritance. Under such conditions no one
would be found to accept the office and the bank would have to cease its
operations.
As to the responsibility of the defendants for the losses which occurred
during the period covered by the complaint, it might be said in the first place
that the greater part of these losses constitutes the third cause of action of
appellant's complaint and was made the subject of a separate appeal to this
court. In the second place, it has not been shown that any part of such losses
were written off as bad debts during the period of time in question. And it is
upon this fact that we rest our holding on this point. Therefore, we are not
now called upon to decide whether the defendants could have treated these
922
losses in the same manner as they did those occurring prior to December 31, to render an account of his administration of the corporate affairs and assets:
1905. (2) to pay plaintiffs the value of t heir respective participation in said assets
on the basis of the value of the stocks held by each of them; and (3) to pay
The judgment appealed from is affirmed. 1 In this opinion it has been our the costs of suit. Plaintiffs also ask for such other remedy as may be and
intention to set forth at some length our reasons for affirming this judgment at equitable.
the close of the last session.
The complaint does not give plaintiffs' residence, but, but purposes of venue,
Arellano, C.J., Carson and Araullo, JJ., concur. alleges that defendant resides at 2112 Dewey Boulevard, corner Libertad
Street, Pasay, province of Rizal. Having been served with summons at that
place, defendant filed a motion for the dismissal of the complaint on the
ground of improper venue and also on the ground that the complaint did not
state a cause of action in favor of plaintiffs.
G.R. No. L-1721 May 19, 1950

In support of the objection to the venue, the motion, which is under oath,
JUAN D. EVANGELISTA ET AL., plaintiffs-appellants,
states that defendant is a resident of Iloilo City and not of Pasay, and at the
vs.
hearing of the motion defendant also presented further affidavit to the effect
RAFAEL SANTOS, defendant-appellee.
that while he has a house in Pasay, where members of his family who are
studying in Manila live and where he himself is sojourning for the purpose of
Antonio Gonzales for appellants. attending to his interests in Manila, yet he has permanent residence in the
Benjamin H. Tirol for appellee. City of Iloilo where he is registered as a voter for election purposes and has
been paying his residence certificate. Plaintiffs opposed the motion for
REYES, J.: dismissal but presented no counter proof and merely called attention to the
Sheriff's return showing service of summons on defendant personally at his
This is an action by the minority stockholders of a corporation against its alleged residence at No. 2112 Dewey Boulevard, Pasay.
principal officer for damages resulting from his mismanagement of its affairs
and misuse of its assets. After hearing, the lower court rendered its order, granting the motion for
dismissal upon the two grounds alleged by defendant, and reconsideration of
The complaint alleges that plaintiffs are minority stockholders of the Vitali this order having been denied, plaintiffs have appealed to this Court.
Lumber Company, Inc., a Philippine corporation organized for the exploitation
of a lumber concession in Zamboanga, Philippines; that defendant holds The appeal presents two questions. The first refers to venue and the second,
more than 50 per cent of the stocks of said corporation and also is and to the right of the plaintiffs to bring this action for their benefit.
always has been the president, manager, and treasurer thereof; and that
defendant, in such triple capacity, through fault, neglect, and abandonment As to the first question, it is important to remember that the laying of the
allowed its lumber concession to lapse and its properties and assets, among venue of an action is not left to plaintiff's caprice. The matter is regulated by
them machineries, buildings, warehouses, trucks, etc., to disappear, thus the Rules of Court. And in actions like the present, which is one in personam,
causing the complete ruin of the corporation and total depreciation of its
stocks. The complaint therefore prays for judgment requiring defendant: (1)

923
the regulation applicable is that contained in section 1 of Rule 5, which
provides:
Civil actions in Courts of First Instance may be commenced and tried
where the defendant or any of the defendant resides or may be
found, or where the plaintiff or any of the plaintiffs resides, at the
election of the plaintiff.
Objection to improper venue may be interposed at any time prior to the trial.
(Moran's Comments on the Rules of Court, Vol. I, 2nd ed., p. 108.)
Believing that defendant resided in the province of Rizal, herein plaintiffs
brought their action in the Court of First Instance of that province. But that
belief proved erroneous, for the lower court found after hearing that
defendant had his residence in Iloilo. The finding is based on defendant's
sworn statement not rebutted by any proof to the contrary.
There is nothing to the contention that defendant's motion to dismiss
necessarily presupposes a hypothetical admission of the allegations of the
complaint, among them the averment that defendant is a resident of Rizal
province, for the motion precisely denies that averment and alleges that his
real residence is in Iloilo City. This, defendant had the right to do in objecting
to the court's jurisdiction on the ground of improper venue.
Section 1 of Rule 5 may seem, at first blush, to authorize the laying of the
venue in the province where the defendant "may be found." But this phrase
has already been held to have a limited application. It is the same phrase
used in section 377 of Act 190 from which section 1 of Rule 5 was taken, and
as construed by this Court it applies only to cases where defendant has no
residence in the Philippine Islands. This was the construction adopted in the
case of Cohen vs. Benguet Commercial Co., Ltd., 34 Phil. 526, which was an
action brought in Manila by a nonresident against a corporation which had its
residence for legal purposes in Baguio but whose President was found in
Manila and there served with summons. This Court there said:
Section 377 provides that actions of this character "may be brought
in any province where the defendants or any necessary party
defendant may reside or be found, or in any province where the
plaintiff or one of the plaintiffs resides, at the election of the plaintiff."
The plaintiff in this action has no residence in the Philippine Islands.
Only one of the parties to the action resides here. There can be,
therefore, no election by plaintiff as to the trial. It must be in the
province where the defendant resides. The defendant resides, in the
eye of the law, in Baguio. Was it "found" in the city of Manila under
section 377, its president being in that city where the service of
summons was made? We think not. The word "found" as used
section 377 has a different meaning that belongs to it as used in
section 394, which refers exclusively to the place where the
summons may be served. As we have said a summons may be
legally served on a defendant wherever he may be "found," i. e.,
wherever he may be, provided he be in the Philippine Islands; but
the venue cannot be laid wherever the defendant may be "found."
There is an element entering in section 377 which is not present in
section 394, that is a residence. Residence of the plaintiff or
defendant does not affect the place where a summons may be
served; but residence is the vital thing when we deal with venue. The
venue must be laid in the province where one of the parties resides.
If the plaintiff is a nonresident the venue must laid in the province of
the defendant's residence. The venue can be laid in the province
where defendant is "found" only when defendant has no residence in
the Philippine Islands. A defendant can not have a residence in one
province and be "found" in another. As long as he has a residence in
the Philippine Islands he can be "found," for the purposes of section
377, only in the province of his residence. In such case the words
"residence" and "found" are synonymous. If he is a nonresident then
the venue may laid in the province where he is "found" at the time
venue the action is commenced or in the province of plaintiff's
residence. This applies also to a domestic corporation.
While the service of the summons was good in either Baguio or
Manila we are of the opinion that the objection of the defendant to
924
 the place of trial was proper in both cases and that the trial court
should have held that the venue was improperly laid.
And elaborating on the point when the case came up for reconsideration, the
Court further said:
The moving party contends that the venue was properly laid under
section 377 in that was laid in the province where the defendant was
found at the time summons was served on its president, he having
been found and served with process in the city of Manila. for the
purpose of the discussion we assumed in the main case, as the
plaintiff claimed, that the defendant was in fact and in law found in
the city of Manila; and proceeded to decide the cause upon the
theory that, even if the defendant were found in the city of Manila,
that did not justify, under the facts of the case, the laying of the
venue in the city of Manila.
We do not believe that the moving party's objection that our
construction deprives the word "found" of all significance and results,
in effect, in eliminating it from the statue, is sound. We do not deprive
it of all significance and effect and do not eliminate it from the statue.
We give it the only effect which can be given it and still accord with
the other provisions of the section which give defendant the right to
have the venue laid in the province of his residence, the effect which
it was intended by the legislature they should have. We held that the
word "found" was applicable in certain cases, and in such cases
gave it full significance and effect. We declared that it was applicable
and effective in cases where the defendant is a nonresident. In such
cases where the defendant is a nonresident. In such cases the
venue may be laid wherever he may be found in the Philippine
Islands at the time of the service of the process, but we also held
that where he is a resident of the Philippine Islands the word "found"
has no application and the venue must be laid in the province where
he resides.
The construction which the moving party asks us to place on that
provision of section 377 above quoted would result in the destruction
of the privilege conferred by the section upon a resident defendant
which requires the venue to be laid in the province where he resides.
This is clear; for, if the venue may be laid in any province where the
defendant, although a resident of some other province, any be found
at the time process is served on him, then the provision that it shall
be laid in the province where he resides is no value to him. If a
defendant residing in the province of Rizal is helpless when the
venue is laid in the province of Mindoro in an action in which the
plaintiff is a nonresident or resides in Manila, what is the value of a
residence in Rizal? If a defendant residing in Jolo is without remedy
when a nonresident plaintiff or a plaintiff residing in Jolo lays the
venue in Bontoc because the defendant happens to be found there,
of what significance is a residence in Jolo? The phrases "where the
defendant ... may reside" and "or be found" must be construed
together and in such manner that both may be given effect. The
construction asked for by the moving party would deprive the phrase
"where the defendant ... may reside" of all significance, as the
plaintiff could always elect to lay the venue in the province where the
defendant was "found" and not where he resided; whereas the
construction which we place upon these phrases permits both to
have effect. We declare that, when the defendant is a resident of the
Philippine Islands, the venue must be laid either in the province
where the plaintiff resides or in the province where the defendant
resides, and in no other province. Where, however, the defendant is
a nonresident the venue may be laid wherever defendant may be
found in the Philippine Islands. This construction gives both phrases
their proper and legitimate effect without doing violence to the spirit
which informs all laws relating to venue and which insists always that
the action shall tried in the place where the greater convenience of
the parties will be served. Ordinarily a defendant's witness are found
where the defendant resides; and plaintiff's witnesses are generally
found where he resides or where the defendant resides. It is,
therefore, generally desirable to have the action tried where on of the
resides. Where the plaintiff is a nonresident and the contract upon
which suit is brought was made in the Philippine Islands it may safely
925
 be asserted that the convenience of the defendant would be best
served by a trial in the province where he resides.
The fact that defendant was sojourning in Pasay t the time he was served
with summons does not make him a resident of that place for purposes of
venue. Residence is "the permanent home, the place to which, whenever
absent for business or pleasure, one intends to return, ..." (67 C.J., pp. 123-
124.) A man can have but one domicile at a time (Alcantara vs. Secretary of
Interior, 61 Phil., 459), and residence is anonymous with domicile under
section 1 of Rule 5 (Moran's Comments, supra, p. 104).
In view of the foregoing, we hold that the objection to the venue was correctly
sustained by the lower court.
As to the second question, the complaint shows that the action is for
damages resulting from mismanagement of the affairs and assets of the
corporation by its principal officer, it being alleged that defendant's
maladministration has brought about the ruin of the corporation and the
consequent loss of value of its stocks. The injury complained of is thus
primarily to the corporation, so that the suit for the damages claimed should
be by the corporation rather than by the stockholders (3 Fletcher, Cyclopedia
of Corporation pp. 977-980). The stockholders may not directly claim those
damages for themselves for that would result in the appropriation by, and the
distribution among them of part of the corporate assets before the dissolution
of the corporation and the liquidation of its debts and liabilities, something
which cannot be legally done in view of section 16 of the Corporation Law,
which provides:
No shall corporation shall make or declare any stock or bond
dividend or any dividend whatsoever from the profits arising from its
business, or divide or distribute its capital stock or property other
than actual profits among its members or stockholders until after the
payment of its debts and the termination of its existence by limitation
or lawful dissolution.
But while it is to the corporation that the action should pertain in cases of this
nature, however, if the officers of the corporation, who are the ones called
upon to protect their rights, refuse to sue, or where a demand upon them to
file the necessary suit would be futile because they are the very ones to be
sued or because they hold the controlling interest in the corporation, then in
that case any one of the stockholders is allowed to bring suit (3 Fletcher's
Cyclopedia of Corporations, pp. 977-980). But in that case it is the
corporation itself and not the plaintiff stockholder that is the real property in
interest, so that such damages as may be recovered shall pertain to the
corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In other words, it
is a derivative suit brought by a stockholder as the nominal party plaintiff for
the benefit of the corporation, which is the real property in interest (13
Fletcher, Cyclopedia of Corporations, p. 295).
In the present case, the plaintiff stockholders have brought the action not for
the benefit of the corporation but for their own benefit, since they ask that the
defendant make good the losses occasioned by his mismanagement and pay
to them the value of their respective participation in the corporate assets on
the basis of their respective holdings. Clearly, this cannot be done until all
corporate debts, if there be any, are paid and the existence of the corporation
terminated by the limitation of its charter or by lawful dissolution in view of the
provisions of section 16 of the Corporation Law.
It results that plaintiff's complaint shows no cause of action in their favor so
that the lower court did not err in dismissing the complaint on that ground.
While plaintiffs ask for remedy to which they are not entitled unless the
requirement of section 16 of the Corporation Law be first complied with, we
note that the action stated in their complaint is susceptible of being converted
into a derivative suit for the benefit of the corporation by a mere change in
the prayer. Such amendment, however, is not possible now, since the
complaint has been filed in the wrong court, so that the same last to be
dismissed.
926
The order appealed from is therefore affirmed, but without prejudice to the
filing of the proper action in which the venue shall be laid in the proper
province. Appellant's shall pay costs. So ordered.

Moran, C.J., Ozaeta, Pablo, Bengzon, Tuason, and Montemayor, JJ., concur.

927
G.R. No. L-22399 March 30, 1967

REPUBLIC BANK, represented in this action by DAMASO P. PEREZ,

etc., plaintiff-appellant,
vs.
MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN,
THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE
MONETARY BOARD OF THE CENTRAL BANK OF THE
PHILIPPINES, defendants-appellees.
Crispin D. Baizas and Associates and Halili, Bolinao and Associates for
plaintiff-appellant.

928
N. M. Balboa, F.E. Evangelista and S. Malvar for defendant-appellee
Monetary Board.
Norberto J. Quisumbing and H.V. Quisumbing for other defendants-
appellees.
REYES, J.B.L., J.:
Direct appeal from an order of the Court of First Instance of Manila, in its civil
case No. 53936, dismissing the petitioner's complaint on the ground of failure
to state cause of action.
In the Court below, Damaso Perez, a stockholder of the Republic Bank, a
Philippine banking corporation domiciled in Manila, instituted a derivative suit
for and in behalf of said Bank, against Miguel Cuaderno, Bienvenido Dizon,
the Board of Directors of the Republic Bank, and the Monetary Board of the
Central Bank of the Philippines. Paragraph 6 of the Complaint (Rec. on
Appeal, p. 7) expressly pleaded the following: .
6. That the relator herein filed the present derivative suit without any
further demand on the Board of Directors of the Republic Bank for
the reason that such formal demand to institute the present
complaint would be a futile formality since the members of the board
are personally chosen by defendant Pablo Roman himself.
For a cause of action plaintiff alleged, inter alia, that Damaso Perez had
complained to the Monetary Board of the Central Bank against certain frauds
allegedly committed by defendant Pablo Roman, in that being chairman of
the Board of Directors of the Republic Bank, and of its Executive Loan
Committee, in 1957 to 1959, "in grave abuse of his fiduciary duty and taking
advantage of his said positions and in connivance with other officials of the
Republic Bank", Roman had fraudulently granted or caused to be granted
loans to fictitious and non-existing persons and to their close friends,
relatives and/or employees, who were in reality their dummies, on the basis
of fictitious and inflated appraised values of real estate properties; that said
loans amounted to almost 4 million pesos; that acting upon the complaint,
Miguel Cuaderno (then Governor of the Central Bank) and the Monetary
Board ordered an investigation, which was carried out by Bank Examiners;
that they and the Superintendent of Banks of the Central Bank reported that
certain mortgage loans amounting to P2,303,400.00 were granted in violation
of sections 77, 78 and 88 of the General Banking Act; that acting on said
reports, the Monetary Board, of which defendant Cuaderno was a member,
ordered a new Board of Directors of the Republic Bank to be elected, which
was done, and subsequently approved by the Monetary Board; that on
January 5, 1960, the latter accepted the offer of Pablo Roman to put up
adequate security for the questioned loans made by the Republic Bank, and
such security was made a condition for the resumption of the Bank's normal
operations; that subsequently, the Central Bank through its Governor, Miguel
Cuaderno, referred to special prosecutors of the Department of Justice on
July 22, 1960, the banking frauds and violations of the Banking Act, reported
by the Superintendent of Banks, for investigation and prosecution, but no
information was filed up to the time of the retirement of Cuaderno in 1961;
that other similar frauds were subsequently discovered; that to neutralize the
impending action against him, Pablo Roman engaged Miguel Cuaderno as
technical consultant at a compensation of P12,500.00 per month, and
selected Bienvenido Dizon as chairman of the Board of Directors of the
Republic Bank; that the Board of Directors composed of individuals
personally selected and chosen by Roman, connived and confederated in
approving the appointment and selection of Cuaderno and Dizon; that such
action was motivated by bad faith and without intention to protect the interest
of the Republic Bank but were prompted to protect Pablo Roman from
criminal prosecution; that the appointment of Cuaderno and his acceptance
of the position of technical consultant are immoral, anomalous and illegal,
and his compensation highly unconscionable, because court actions
involving the actuations of Cuaderno as Governor and Member or Chairman
of the Monetary Board are still pending in court; that as member of the
Monetary Board from 1961 to 1962, Bienvenido Dizon exercised supervision
over the Republic Bank; that the selection of Dizon as chairman of the Board
of the Republic Bank after he was forced to resign from the presidency of the
Philippine National Bank and from membership of the Monetary Board and
within one year thereafter is in violation of option 3, sub-paragraph (d) of the
Anti-Graft and Corrupt Practices Act; that both Cuaderno and Dizon
were alter egos of Pablo Roman; that the Monetary Board was about to
929
approve the appointment of Cuaderno and Dizon and would do so unless
enjoined.
The complaint, therefore, prayed for a writ of preliminary injunction against
the Monetary Board to prevent its confirmation of the appointments of Dizon
and Cuaderno; against the Board of Directors of the Republic Bank from
recognizing Cuaderno as technical consultant and Dizon as Chairman of the
Board; and against Pablo Roman from appointing or selecting officers or
directors of the Republic Bank, and against the recognition of any such
appointees until final determination of the action. And concluded by praying
that after due hearing, judgment be rendered,
a) making the writ of injunction permanent;
b) declaring the appointment of defendant Miguel Cuaderno as
technical consultant with monthly compensation of P12,500.00
unconscionable, immoral, illegal and null and void;
c) declaring the selection of defendant Bienvenido Dizon as
chairman of the Board of Directors of the Republic Bank violative of
Section 3, sub-paragraph (d) of Republic Act No. 5019, otherwise
known as the Anti-Graft and Corrupt Practices Act, and therefore,
illegal and null and void;
d) declaring that defendant Pablo Roman, in view of his criminal
liability for the fraudulent real estate mortgage loans in the Republic
Bank amounting to P4 million, has no right to select or to be allowed
to select person or persons who are his alter egos to manage the
Republic Bank, and enjoining the defendant Board of Directors of the
Republic Bank from recognizing any officers or directors appointed
or selected by defendant Pablo Roman;
e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to
return to the Republic Bank all amounts they may have received
either in the form of compensation, remuneration or emolument, with
an interest thereon at the rate of 6%; or to order defendant Pablo
Roman to refund the amounts paid to said defendant Miguel
Cuaderno and defendant Bienvenido Dizon, and to pay such
reasonable damages to the plaintiff Republic Bank;
f) ordering all the defendants to pay the sum of P25,000.00 as
attorney's fees, including all expenses of litigation and costs of this
suit.
The Monetary Board filed an answer with denials, admissions and affirmative
defenses; but the other defendants filed separate motions to dismiss on
practically the same grounds: no valid cause of action against the individual
movants; lack of legal capacity of plaintiff-relator to sue; and non-exhaustion
of intra-corporate remedies. These motions were duly opposed by plaintiff
Damaso Perez.1wph1.t
On October 24, 1963, the court, "taking into consideration the grounds
alleged in the motions to dismiss and the opposition for the issuance of a writ
of preliminary injunction and the affirmative defenses filed by the defendants
and the arguments in support thereof", and "that there are already eight
cases pending in the different branches of this court between practically the
same parties", denied the petition for a writ of preliminary injunction and
dismissed the case. The court in effect suggested that the matter at issue in
the case may be presented in any of the pending eight cases by means of
amended and supplemental pleadings.
Plaintiff Damaso Perez thereupon appealed to this Court.
The issue in this appeal, then, is whether or not the Court below erred in
dismissing the complaint. In this connection, it should be remembered that
the defenses of the Monetary Board of the Central Bank, being interposed in
an answer and not in a motion to dismiss, are not here at issue. Our sole
concern is with the motions to dismiss of the other defendants, Roman,
Cuaderno, Dizon, and the Board of Directors of the Republic Bank.
They mainly controvert the right of plaintiff to question the appointment and
selection of defendants Cuaderno and Dizon, which they contend to be the
930
result of corporate acts with which plaintiff, as stockholder, cannot interfere.
Normally, this is correct, but Philippine jurisprudence is settled that an
individual stockholder is permitted to institute a derivative or representative
suit on behalf of the corporation wherein he holds stock in order to protect or
vindicate corporate rights, whenever the officials of the corporation refuse to
sue, or are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest (Pascual vs. Del Saz Orozco, 19 Phil.
82, 85; Everett vs. Asia Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64
Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's action
here is precisely in conformity, with these principles. He is neither alleging
nor vindicating his own individual interest or prejudice, but the interest of the
Republic Bank and the damage caused to it. The action he has brought is a
derivative one, expressly manifested to be for and in behalf of the Republic
Bank, because it was futile to demand action by the corporation, since its
Directors were nominees and creatures of defendant Pablo Roman
(Complaint, p. 6). The frauds charged by plaintiff are frauds against the Bank
that redounded to its prejudice.
The complaint expressly pleads that the appointment of Cuaderno as
technical consultant, and of Bienvenido Dizon to head the Board of Directors
of the Republic Bank, were made only to shield Pablo Roman from criminal
prosecution and not to further the interests of the Bank, and avers that both
men are Roman's alter egos. There is no denying that the facts thus pleaded
in the complaint constitute a cause of action for the bank: if the questioned
appointments were made solely to protect Roman from criminal prosecution,
by a Board composed by Roman's creatures and nominees, then the
moneys disbursed in favor of Cuaderno and Dizon would be an unlawful
wastage or diversion of corporate funds, since the Republic Bank would have
no interest in shielding Roman, and the directors in approving the
appointments would be committing a breach of trust; the Bank, therefore,
could sue to nullify the appointments, enjoin disbursement of its funds to pay
them, and recover those paid out for the purpose, as prayed for in the
complaint in this case (Angeles vs. Santos, supra.).
Facts pleaded in the complaint are to be deemed accepted by the
defendants who file a motion to dismiss the complaint for failure to state a
cause of action. This is the cardinal principle in the matter. And, it has been
ruled that the test of sufficiency of the facts alleged is whether or not the
Court could render a valid judgment as prayed for, accepting as true the
exclusive facts set forth in the complaint.1So rigid is the norm prescribed that
if the Court should doubt the truth of the facts averred it must not dismiss the
complaint but require an answer and proceed to trial on the merits. 2
Defendants urge that the action is improper because the plaintiff was not
authorized by the corporation to bring suit in its behalf. Any such authority
could not be expected as the suit is aimed to nullify the action taken by the
manager and the board of directors of the Republic Bank; and any demand
for intra-corporate remedy would be futile, as expressly pleaded in the
complaint. These circumstances permit a stockholder to bring a derivative
suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has
chosen to make common cause with plaintiff Perez is irrelevant, since the
smallness of plaintiff's holdings is no ground for denying him relief
(Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in the
proceedings for the absence of other stockholders to be of any significance,
no issues having even been joined.
There remains the procedural question whether the corporation itself must be
made party defendant. The English practice is to make the corporation a
party plaintiff, while in the United States, the usage leans in favor of its being
joined as party defendant (see Editorial Note, 51 LRA [NS] 123). Objections
can be raised against either method. Absence of corporate authority would
seem to militate against making the corporation a party plaintiff, while joining
it as defendant places the entity in the awkward position of resisting an action
instituted for its benefit. What is important is that the corporation' should be
made a party, in order to make the Court's judgment binding upon it, and thus
bar future relitigation of the issues. On what side the corporation appears
loses importance when it is considered that it lay within the power of the trial
court to direct the making of such amendments of the pleadings, by adding or
dropping parties, as may be required in the interest of justice (Revised Rule
3, sec. 11). Misjoinder of parties is not a ground to dismiss an action. (Ibid.)
We see no reason to support the contention of defendant Bienvenido Dizon
that the action of plaintiff amounts to a quo warranto proceeding. Plaintiff
931
Perez is not claiming title to Dizon's position as head of the Republic Bank's
board of directors. The suit is aimed at preventing the waste or diversion of
corporate funds in paying officers appointed solely to protect Pablo Roman
from criminal prosecution, and not to carry on the corporation's bank
business. Whether the complaint's allegations to such effect are true or not
must be determined after due hearing.

Independently of the grounds advanced by the defendants in their motions to

dismiss, the Court a quo gave as a further pretext for the dismissal of the
action the pendency of eight other lawsuits between practically the same
parties; reasoning that the question at issue in the present case could be
incorporated in any one of the other actions by amended or supplemental
pleading. We fail to see that this justifies the dismissal of the case under
appeal. In the first place, there is no pretense that the cause of action here
was already included in any of the other pending cases. As a matter of fact,
dismissal of the present action was not sought on the ground of pendency of
another action between the same parties. Secondly, the amendment of a
complaint after a responsive pleading is filed, would rest upon the discretion
of the party and the Court. Hence, this case cannot be dismissed simply
because of the possibility that the cause of action here can be incorporated
or introduced in any of those of the pending cases.

In view of the foregoing, the order dismissing the complaint is reversed and
set aside. The case is remanded to the court of origin with instructions to
overrule the motions to dismiss and require the defendants to answer the
complaint. Thereafter, the case shall be tried and decided on its merits. Costs
against defendants-appellees. So ordered.

Concepcion, C.J., Dizon, Regala, Bengzon, J.P., Zaldivar, Sanchez and

Castro, JJ., concur.
Makalintal, J., took no part.

932
933
G.R. No. L-16982 September 30, 1961

CATALINA R. REYES, petitioner,

vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of
Manila, Branch XIII and FRANCISCA R. JUSTINIANI, respondents.

Jose W. Diokno for petitioner.

Norberto J. Quisumbing for respondents.

LABRADOR, J.:

This is a petition for certiorari to review and set aside an order of the Court of
First Instance of Manila, Hon. Bienvenido A. Tan, presiding, in Civil Case No.
42375, entitled "Francisca R. Justiniani vs. Wadhumal Dalamal, et al.",
appointing a receiver of the corporation Roxas-Kalaw Textile Mills, Inc. In
said action, plaintiff Justiniani asks the court to order the directors of the
corporation, jointly and severally, to repair the damage caused to the
corporation, of which all the plaintiff and defendants are members. The action
was filed about January of 1960 and the order for the appointment of the
receiver issued on February 15, 1960, while the designation of the receiver
was made in an order of the court dated April 30, 1960.

In the complaint in said Civil Case No. 42375, it is alleged that the
corporation, Roxas-Kalaw Textile Mills, Inc., was organized on June 5, 1954
by defendants Cesar K. Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose
Ma. Barcelona and Morris Wilson, for and on behalf of the following primary
principals with the following shareholdings: Adelia K. Roxas, 1200 Class A
shares; I. Sherman, 900 Class A shares; Robert W. Born, 450 Class A shares
and Morris Wilson, 450 Class A shares; that the plaintiff holds both Class A
and Class B shares and number and value thereof are is follows: Class A
50 shares, Class B 1,250 shares; that on May 8, 1957, the Board of

934
Directors approved a resolution designating one Dayaram as co-manager
with the specific understanding that he was to act as defendant Wadhumal
Dalamal's designee, Morris Wilson was likewise designated as co-manager
with responsibilities for the management of the factory only, that an office in
New York was opened for the purpose of supervising purchases, which
purchases must have the unanimous agreement of Cesar K. Roxas, New
York resident member of the board of directors, Robert Born and Wadhumal
Dalamal or their respective representatives; that several purchases
aggregating $289,678.86 were made in New York for raw materials such as
greige cloth, rayon and grey goods for the textile mill and shipped to the
Philippines, which shipment were found out to consist not of raw materials
but already finished products, such as, West Point Khaki rayon suiting
materials dyed in the piece, finished rayon tafetta in cubes, cotton eyelets,
etc., for which reasons the Central Bank of the Philippines stopped all dollar
allocations for raw materials for the corporation which necessarily led to the
paralyzation of the operation of the textile mill and its business; that the
supplier of the aforesaid finished goods was the United Commercial
Company of New York in which defendant Dalamal had interests and the
letter of credit for said goods were guaranteed by the Indian Commercial
Company and the Indian Traders in which firms defendant Dalamal likewise
held interests; that the resale of the finished goods was the business of the
Indian Commercial Company of Manila, which company could not obtain
dollar allocations for importations of finished goods under the Central Bank
regulations; that plaintiff and some members of the board of directors urged
defendants to proceed against Dalamal, exposing his offense to the Central
Bank, and to initiate suit against Dalamal for his fraud against the
corporation; that defendants refused to proceed against Dalamal and instead
continued to deal with the Indian Commercial Company to the damage and
prejudice of the corporation. The prayer asks for the appointment of a
receiver and a judgment marking defendants jointly and severally liable for
the damages.
After a denial of a motion to dismiss and the filing of an answer alleging that
the complaint states no cause of action, the motion for the appointment of a
receiver was set for hearing and subsequently the court entered the order for
the appointment of a receiver. The court found and held:
The second ground of the defendant's motion to dismiss and or deny
the petition is the allegedly want of a cause of action of the plaintiff's
complaint. Philippine jurisprudence is complete with authorities
upholding the principle that this ground for dismissal must appear in
the face of the complaint itself; and that to determine the sufficiency
of the cause of action, only the facts alleged in the complaint and no
other, should be considered; in fine, the test of sufficiency of cause of
action is whether or not, admitting the facts alleged in the complaint,
the Court could render a valid judgment upon the same in
accordance with the prayer of the petition (e.g., Paminsan v.
Costales, 29 Phil. 587, 489). The complaint in the instant case
abounds with arguments establishing and supporting plaintiff's cause
of action for and in behalf of the Roxas-Kalaw Textile Mills, Inc.
against all the defendants (See e.g. paragraphs 4, 5, 6 and 7 of the
Complaint). Taking these paragraphs of the complaint in context, it is
clear that the plaintiff has sufficient averred facts constituting a cause
or basis for a derivative suit for "injuries to the corporation, as by
negligence, mismanagement or fraud of its directors, are normally
dealt with as wrong to the whole group of share holders in their
corporate capacity, to be redressed in a suit by or on behalf of the
corporation.1awphl.nt
Evident from the defendants' motion to dismiss and/or to deny the
petition for receivership is their complete failure to come up with a
valid and substantial defense against or denial of the complaint's
allegations of mismanagement, if not the actual commission of ultra
vires and illegal acts. Invariably the props of defendants' motion
consist of the unconvincing countercharges of the plaintiff's non-
observance of the technicalities of our procedural law and disregard
of technical and evidently futile intracorporate remedies to redress
the violations charged against the defendants. It is clear that the
controlling majority did nothing for two years to protect the interests
of corporation. (See pars. 5-7, complaint.)
The defendants themselves having admitted in open court during the
oral discussion of their motion to dismiss and the plaintiff's motion for
receivership that the majority stockholders will under any condition
935
 entertain any suggestion of the minority shareholders, the
appointment of an independent third party in the management of the
corporation becomes imperative for the survival of the company.
(Order dated Feb. 15, 1960).
On April 30, 1960, the court issued mother order which reads as follows:
After this incident wherein it was clearly shown that the minority
stockholders, represented by the plaintiff, have no recourse
whatsoever before the majority stockholders of the company, and
after it has been shown that the majority has violated the law by
importing into the Philippines finished goods instead of raw materials
as stipulated in their license, and since these acts are prejudicial to
the company because it might result in the cancellation of their
license, the Court is of the opinion and so holds that the appointment
of a receiver is absolutely necessary for the protection not only of the
rights of the minority but also those of the majority stockholders of
the company.
In the first assignment of error, petitioner claims that respondent Justiniani
neither alleged nor proved the existence of an emergency requiring the
immediate appoinment of a receiver of the Roxas-Kalaw Textile Mill, Inc.; that
the alleged fraudulent transaction took place more than two years before the
application for receivership, and so was the refusal of the directors to sue or
prosecute Dalamal. This contention is not well founded. At the hearing of the
petition for the appointment of a receiver held on January 30, 1960, various
records of shipments of finished textile goods on dollar allocations for raw
materials were exhibited. Publicity had also been given to the importations of
textiles by the corporation, in place of cotton raw materials. The record
shows the list of the various documents proving the purchase of letters of
credit for textiles. These textiles were denied importation and had to be re-
exported. The fact of the importation of finished textiles on dollar allocations
for raw materials in violation of Central Bank regulations was, therefore,
conclusively shown.
It is also not denied by petitioner that the allocation of dollars to the
corporation for the importation of raw materials was suspended. In the eyes
of the court below, as well as in our own, the importation of textiles instead of
raw materials, as well as the failure of the Board of Directors to take action
against those directly responsible for the misuse of dollar allocations
constitute fraud, or consent thereto on the part of the directors. Therefore, a
breach of trust was committed which justified the derivative suit by a minority
stockholder on behalf of the corporation.
It is well settled in this jurisdiction that where corporate directors are
guilty of a breach of trust not of mere error of judgment or abuse
of discretion and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholders. An illustration of a suit of this kind is
found in the case of Pascual vs. Del Saz Orozco (19 Phil. 82),
decided by this Court as early as 1911. In that case, the Banco
Espaol-Filipino suffered heavy losses due to fraudulent connivance
between a depositor and an employee of the bank, which losses, it
was contended, could have been avoided if the president and
directors had been more vigilant in the administration of the affairs of
the bank. The stockholders constituting the minority brought a suit in
behalf of the bank against the directors to recover damages, and this
over the objection of the majority of the stockholders and the
directors. This court held that the suit could properly be maintained.
(64 Phil., Angeles vs. Santos [G.R. No. L-43413, prom. August 31,
1937] p. 697).
The claim that respondent Justiniani did not take steps to remedy the illegal
importation for a period of two years is also without merit. During that period
of time respondent had the right to assume and expect that the directors
would remedy the anomalous situation of the corporation brought about by
their own wrong doing. Only after such period of time had elapsed could
respondent conclude that the directors were remiss in their duty to protect
the corporation property and business.
936
Counsel for petitioner claims that respondent Justiniani was treasurer of the
corporation for sometime and had control of funds and this notwithstanding,
she had not taken the steps to remedy the situation. In answer we state that
the fraud consisted in importing finished textile instead of raw cotton for the
textile mill; the fraud, therefore, was committed by the manager of the
business and was consented to by the directors, evidently beyond reach of
respondent.
The directors permitted the fraudulent transaction to go unpunished and
nothing appears to have been done to remove the erring purchasing
managers. In a way the appointment of a receiver may have been thought of
by the court below so that the dollar allocation for raw material may be
revived and the textile mill placed on an operating basis. It is possible that if a
receiver in which the Central Bank may have confidence is appointed, the
dollar allocation for raw material may be restored. Claim is made that if a
receiver is appointed, the Philippine National Bank to which the corporation
owes considerable sums of money might be led to foreclose the mortgage.
Precisely the appointment of a receiver in whom the bank may have had
confidence might rehabilitate the business and bring a restoration of the
dollar allocation much needed for raw material and an improvement in the
business and assets the corporation, thus insuring the collection of the
bank's loan.
Considering the above circumstances we are led to agree with the judge
below that the appointment of a receiver was not only expedient but also
necessary to restore the faith and confidence of the Central Bank authorities
in the administration of the affairs of the corporation, thus ultimately leading
to a restoration of the dollar allocation so essential to the operation of the
textile mills. The first assignment of error is, therefore, overruled.
In the second assignment of error, petitioner claims that the management
has been changed and the new management has not been afforded a
chance to show what it can do. This ground of the petition was not mentioned
or raised as a ground of defense or objection to the appointment of a receiver
in the court below. It is only raised for the first time before Us in the petition
for certiorari. The principle has long ago been enunciated by Us that an
appellate court may not consider any ground of objection that was not raised
in the court below. (Tan Machan v. Trinidad, 3 Phil. 684; Ramiro v. Grao, 54
Phil. 744; Vda. de Villaruel, et al. v. Manila Motor Co., Inc., et al., G.R. No. L-
10394, Dec. 13, 1958; Collector of Internal Revenue v. Estate of F. P. Buan,
et al., G.R. Nos. L-11438-39, and L-11542-46, July 31, 1958; S.V.S. Pictures,
Inc., et al. v. The Court of Appeals, et al., G.R. No. L-7075, January 29, 1960;
Elena Peralta Vda. de Caina vs. Hon. Andres Reyes, et al., G.R. No. L-
15792, May 30, 1960).
The supposed new management, alleged as a ground for the reversal of the
order of the court below appointing a receiver, is not in itself a ground of
objection to the appointment of a receiver. The parties found to be guilty of
the fraud, as a cause of which receivership proceedings were instituted, were
the Board of Directors, which took no action to stop the anomalies being
perpetrated by the management. But it appears that the management must
have acted directly under orders of the Board of Directors. The appointment
of a new management, therefore, would not remedy the anomalous situation
in which the corporation is found, because such situation was not due to the
management alone but principally because of direction of the Board of
Directors.
The second ground for the petition is, therefore, also without merit.
WHEREFORE, the court finds that the court below did not commit an abuse
of discretion in appointing a receiver for the corporation and the petition to
set aside the order for the appointment of a receiver should be, as it is
hereby, dismissed. With costs against the petitioner.
Bengzon, C.J., Padilla, Reyes, J.B.L., Paredes and De Leon, JJ., concur.
937
938
 When a bank, by its acts and failure to act, has clearly clothed its manager
with apparent authority to sell an acquired asset in the normal course of
business, it is legally obliged to confirm the transaction by issuing a board
resolution to enable the buyers to register the property in their names. It has
a duty to perform necessary and lawful acts to enable the other parties to
enjoy all benefits of the contract which it had authorized.

The Case

Before this Court is a Petition for Review on Certiorari challenging the

December 18, 1998 Decision of the Court of Appeals 1 (CA) in CA-GR SP
No. 46246, which affirmed the May 20, 1997 Decision 2 of the Regional Trial
Court (RTC) of Naga City (Branch 28). The CA disposed as follows:

Wherefore, premises considered, the Judgment appealed from is

hereby AFFIRMED. Costs against the respondent-appellant. 3

The dispositive portion of the judgment affirmed by the CA ruled in this wise:

WHEREFORE, in view of all the foregoing findings, decision is

hereby rendered whereby the [petitioner] Rural Bank of Milaor
(Camarines Sur), Inc. through its Board of Directors is hereby
ordered to immediately issue a Board Resolution confirming the
Deed of Sale it executed in favor of Renato Ocfemia marked Exhibits
C, C-1 and C-2); to pay [respondents] the sum of FIVE HUNDRED
G.R. No. 137686 February 8, 2000 (P500.00) PESOS as actual damages; TEN THOUSAND
(P10,000.00) PESOS as attorney's fees; THIRTY THOUSAND
RURAL BANK OF MILAOR (CAMARINES SUR), petitioner, (P30,000.00) PESOS as moral damages; THIRTY THOUSAND
vs. (P30,000.00) PESOS as exemplary damages; and to pay the costs. 4
FRANCISCA OCFEMIA, ROWENA BARROGO, MARIFE O. NIO,
FELICISIMO OCFEMIA, RENATO OCFEMIA JR, and WINSTON Also assailed is the February 26, 1999 CA Resolution 5 which denied
OCFEMIA, respondents. petitioner's Motion for Reconsideration.

PANGANIBAN, J.: The Facts

939
The trial court's summary of the undisputed facts was reproduced in the CA
Decision as follows:
This is an action for mandamus with damages. On April 10, 1996,
[herein petitioner] was declared in default on motion of the
[respondents] for failure to file an answer within the reglementary-
period after it was duly served with summons. On April 26, 1996,
[herein petitioner] filed a motion to set aside the order of default with
objection thereto filed by [herein respondents].
On June 17, 1996, an order was issued denying [petitioner's] motion
to set aside the order of default. On July 10, 1996, the defendant
filed a motion for reconsideration of the order of June 17, 1996 with
objection thereto by [respondents]. On July 12, 1996, an order was
issued denying [petitioner's] motion for reconsideration. On July 31,
1996, [respondents] filed a motion to set case for hearing. A copy
thereof was duly furnished the [petitioner] but the latter did not file
any opposition and so [respondents] were allowed to present their
evidence ex-parte. A certiorari case was filed by the [petitioner] with
the Court of Appeals docketed as CA GR No. 41497-SP but the
petition was denied in a decision rendered on March 31, 1997 and
the same is now final.
The evidence presented by the [respondents] through the testimony
of Marife O. Nio, one of the [respondents] in this case, show[s] that
she is the daughter of Francisca Ocfemia, a co-[respondent] in this
case, and the late Renato Ocfemia who died on July 23, 1994. The
parents of her father, Renato Ocfemia, were Juanita Arellano
Ocfemia and Felicisimo Ocfemia. Her other co-[respondents]
Rowena O. Barrogo, Felicisimo Ocfemia, Renato Ocfemia, Jr. and
Winston Ocfemia are her brothers and sisters.1wphi1.nt
Marife O. Nio knows the five (5) parcels of land described in
paragraph 6 of the petition which are located in Bombon, Camarines
Sur and that they are the ones possessing them which [were]
originally owned by her grandparents, Juanita Arellano Ocfemia and
Felicisimo Ocfemia. During the lifetime of her grandparents,
[respondents] mortgaged the said five (5) parcels of land and two (2)
others to the [petitioner] Rural Bank of Milaor as shown by the Deed
of Real Estate Mortgage (Exhs. A and A-1) and the Promissory Note
(Exh. B).
The spouses Felicisimo Ocfemia and Juanita Arellano Ocfemia were
not able to redeem the mortgaged properties consisting of seven (7)
parcels of land and so the mortgage was foreclosed and thereafter
ownership thereof was transferred to the [petitioner] bank. Out of the
seven (7) parcels that were foreclosed, five (5) of them are in the
possession of the [respondents] because these five (5) parcels of
land described in paragraph 6 of the petition were sold by the
[petitioner] bank to the parents of Marife O. Nio as evidenced by a
Deed of Sale executed in January 1988 (Exhs. C, C-1 and C-2).
The aforementioned five (5) parcels of land subject of the deed of
sale (Exh. C), have not been, however transferred in the name of the
parents of Merife O. Nio after they were sold to her parents by the
[petitioner] bank because according to the Assessor's Office the five
(5) parcels of land, subject of the sale, cannot be transferred in the
name of the buyers as there is a need to have the document of sale
registered with the Register of Deeds of Camarines Sur.
In view of the foregoing, Marife O. Nio went to the Register of
Deeds of Camarines Sur with the Deed of Sale (Exh. C) in order to
have the same registered. The Register of Deeds, however, informed
her that the document of sale cannot be registered without a board
resolution of the [petitioner] Bank. Marife Nio then went to the bank,
showed to if the Deed of Sale (Exh. C), the tax declaration and
receipt of tax payments and requested the [petitioner] for a board
resolution so that the property can be transferred to the name of
Renato Ocfemia the husband of petitioner Francisca Ocfemia and
the father of the other [respondents] having died already.
940
The [petitioner] bank refused her request for a board resolution and
made many alibi[s]. She was told that the [petitioner] bank ha[d] a
new manager and it had no record of the sale. She was asked and
she complied with the request of the [petitioner] for a copy of the
deed of sale and receipt of payment. The president of the [petitioner]
bank told her to get an authority from her parents and other
[respondents] and receipts evidencing payment of the consideration
appearing in the deed of sale. She complied with said requirements
and after she gave all these documents, Marife O. Nio was again
told to wait for two (2) weeks because the [petitioner] bank would still
study the matter.
After two (2) weeks, Marife O. Nio returned to the [petitioner] bank
and she was told that the resolution of the board would not be
released because the [petitioner] bank ha[d] no records from the old
manager. Because of this, Marife O. Nio brought the matter to her
lawyer and the latter wrote a letter on December 22, 1995 to the
[petitioner] bank inquiring why no action was taken by the board of
the request for the issuance of the resolution considering that the
bank was already fully paid [for] the consideration of the sale since
January 1988 as shown by the deed of sale itself (Exh. D and D-1 ).
On January 15, 1996 the [petitioner] bank answered [respondents']
lawyer's letter (Exh. D and D-1) informing the latter that the request
for board resolution ha[d] already been referred to the board of
directors of the [petitioner] bank with another request that the latter
should be furnished with a certified machine copy of the receipt of
payment covering the sale between the [respondents] and the
[petitioner] (Exh. E). This request of the [petitioner] bank was already
complied [with] by Marife O. Nio even before she brought the matter
to her lawyer.
On January 23, 1996 [respondents'] lawyer wrote back the branch
manager of the [petitioner] bank informing the latter that they were
already furnished the receipts the bank was asking [for] and that the
[respondents] want[ed] already to know the stand of the bank
whether the board [would] issue the required board resolution as the
deed of sale itself already show[ed] that the [respondents were]
clearly entitled to the land subject of the sale (Exh. F). The manager
of the [petitioner] bank received the letter which was served
personally to him and the latter told Marife O. Nio that since he was
the one himself who received the letter he would not sign anymore a
copy showing him as having already received said letter (Exh. F).
After several days from receipt of the letter (Exh. F) when Marife O.
Nio went to the [petitioner] again and reiterated her request, the
manager of the [petitioner] bank told her that they could not issue the
required board resolution as the [petitioner] bank ha[d] no records of
the sale. Because of this Merife O. Nio already went to their lawyer
and ha[d] this petition filed.
The [respondents] are interested in having the property described in
paragraph 6 of the petition transferred to their names because their
mother and co-petitioner, Francisca Ocfemia, is very sickly and they
want to mortgage the property for the medical expenses of Francisca
Ocfemia. The illness of Francisca Ocfemia beg[a]n after her husband
died and her suffering from arthritis and pulmonary disease already
became serious before December 1995.
Marife O. Nio declared that her mother is now in serious condition
and they could not have her hospitalized for treatment as they do not
have any money and this is causing the family sleepless nights and
mental anguish, thinking that their mother may die because they
could not submit her for medication as they do not have money. 6
The trial court granted the Petition. As noted earlier, the CA affirmed the RTC
Decision.
Hence, this recourse. 7 In a Resolution dated June 23, 1999, this Court
issued a Temporary Restraining Order directing the trial court "to refrain and
desist from executing [pending appeal] the decision dated May 20, 1997 in
Civil Case No. RTC-96-3513, effective immediately until further orders from
this Court." 8
941
 Ruling of the Court of Appeals
The CA held that herein respondents were "able to prove their present cause
of action" against petitioner. It ruled that the RTC had jurisdiction over the
case, because (1) the Petition involved a matter incapable of pecuniary
estimation; (2) mandamus fell within the jurisdiction of RTC; and (3)
assuming that the action was for specific performance as argued by the
petitioner, it was still cognizable by the said court.
Issues
In its Memorandum, 9 the bank posed the following questions:
1. Question of Jurisdiction of the Regional Trial Court. Has a
Regional Trial Court original jurisdiction over an action involving title
to real property with a total assessed value of less than P20,000.00?
2. Question of Law. May the board of directors of a rural banking
corporation be compelled to confirm a deed of absolute sale of real
property owned by the corporation which deed of sale was executed
by the bank manager without prior authority of the board of directors
of the rural banking corporation? 10
This Court's Ruling
The present Petition has no merit.
First Issue:
Jurisdiction of the Regional Trial Court
Petitioner submits that the RTC had no jurisdiction over the case. Disputing
the ruling of the appellate court that the present action was incapable of
pecuniary estimation, petitioner argues that the matter in fact involved title to
real property worth less than P20,000. Thus, under RA 7691, the case should
have been filed before a metropolitan trial court, a municipal trial court or a
municipal circuit trial court.
We disagree. The well-settled rule is that jurisdiction is determined by the
allegations of the complaint. 11 In the present case, the Petition for
Mandamus filed by respondents before the trial court prayed that petitioner-
bank be compelled to issue a board resolution confirming the Deed of Sale
covering five parcels of unregistered land, which the bank manager had
executed in their favor. The RTC has jurisdiction over such action pursuant to
Section 21 of BP 129, which provides:
Sec. 21. Original jurisdiction in other cases. Regional Trial Courts
shall exercise original jurisdiction;
(1) in the issuance of writ of certiorari, prohibition, mandamus, quo
warranto, habeas corpus and injunction which may be enforced in
any part of their respective regions; and
(2) In actions affecting ambassadors and other public ministers and
consuls.
A perusal of the Petition shows that the respondents did not raise any
question involving the title to the property, but merely asked that petitioner's
board of directors be directed to issue the subject resolution. Moreover, the
bank did not controvert the allegations in the said Petition. To repeat, the
issue therein was not the title to the property; it was respondents' right to
compel the bank to issue a board resolution confirming the Deed of Sale.
Second Issue:
Authority of the Bank Manager
Respondents initiated the present proceedings, so that they could transfer to
their names the subject five parcels of land; and subsequently, to mortgage
said lots and to use the loan proceeds for the medical expenses of their ailing
mother. For the property to be transferred in their names, however, the
register of deeds required the submission of a board resolution from the bank
confirming both the Deed of Sale and the authority of the bank manager, Fe
S. Tena, to enter into such transaction. Petitioner refused. After being given
the runaround by the bank, respondents sued in exasperation.
942
Allegations in the Petition for Mandamus Deemed Admitted
Respondents based their action before the trial court on the Deed of Sale,
the substance of which was alleged in and a copy thereof was attached to
the Petition for Mandamus. The Deed named Fe S. Tena as the
representative of the bank. Petitioner, however, failed to specifically deny
under oath the allegations in that contract. In fact, it filed no answer at all, for
which reason it was declared in default. Pertinent provisions of the Rules of
Court read:
Sec. 7. Action or defense based on document. Whenever an
action or defense is based upon a written instrument or document,
the substance of such instrument or document shall be set forth in
the pleading, and the original or a copy thereof shall be attached to
the pleading as an exhibit, which shall be deemed to be a part of the
pleading, or said copy may with like effect be set forth in the
pleading.
Sec. 8. How to contest genuineness of such documents. When an
action or defense is founded upon a written instrument, copied in or
attached to the corresponding pleading as provided in the preceding
section, the genuineness and due execution of the instrument shall
be deemed admitted unless the adverse party, under oath,
specifically denies them, and sets forth what he claims to be the
facts; but this provision does not apply when the adverse party does
not appear to be a party to the instrument or when compliance with
an order for an inspection of the original instrument is refused. 12
In failing to file its answer specifically denying under oath the Deed of Sale,
the bank admitted the due execution of the said contract. Such admission
means that it acknowledged that Tena was authorized to sign the Deed of
Sale on its behalf. 13 Thus, defenses that are inconsistent with the due
execution and the genuineness of the written instrument are cut off by an
admission implied from a failure to make a verified specific denial.
Other Acts of the Bank
In any event, the bank acknowledged, by its own acts or failure to act, the
authority of Fe S. Tena to enter into binding contracts. After the execution of
the Deed of Sale, respondents occupied the properties in dispute and paid
the real estate taxes due thereon. If the bank management believed that it
had title to the property, it should have taken some measures to prevent the
infringement or invasion of its title thereto and possession thereof.
Likewise, Tena had previously transacted business on behalf of the bank,
and the latter had acknowledged her authority. A bank is liable to innocent
third persons where representation is made in the course of its normal
business by an agent like Manager Tena, even though such agent is abusing
her authority. 14 Clearly, persons dealing with her could not be blamed for
believing that she was authorized to transact business for and on behalf of
the bank. Thus, this Court has ruled in Board of Liquidators v. Kalaw: 15
Settled jurisprudence has it that where similar acts have been
approved by the directors as a matter of general practice, custom,
and policy, the general manager may bind the company without
formal authorization of the board of directors. In varying language,
existence of such authority is established, by proof of the course of
business, the usages and practices of the company and by the
knowledge which the board of directors has, or must be presumed to
have, of acts and doings of its subordinates in and about the affairs
of the corporation. So also,
. . . authority to act for and bind a corporation may be presumed from
acts of recognition in other instances where the power was in fact
exercised.
. . . Thus, when, in the usual course of business of a corporation, an
officer has been allowed in his official capacity to manage its affairs,
his authority to represent the corporation may be implied from the
manner in which he has been permitted by the directors to manage
its business.
943
Notwithstanding the putative authority of the manager to bind the bank in the
Deed of Sale, petitioner has failed to file an answer to the Petition below
within the reglementary period, let alone present evidence controverting such
authority. Indeed, when one of herein respondents, Marife S. Nino, went to
the bank to ask for the board resolution, she was merely told to bring the
receipts. The bank failed to categorically declare that Tena had no authority.
This Court stresses the following:
. . . Corporate transactions would speedily come to a standstill were
every person dealing with a corporation held duty-bound to
disbelieve every act of its responsible officers, no matter how regular
they should appear on their face. This Court has observed
in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655, that
In passing upon the liability of a corporation in cases of this
kind it is always well to keep in mind the situation as it
presents itself to the third party with whom the contract is
made. Naturally he can have little or no information as to
what occurs in corporate meetings; and he must necessarily
rely upon the external manifestation of corporate consent.
The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability
fixed upon it by its agents in accordance with law; and we
would be sorry to announce a doctrine which would permit
the property of man in the city of Paris to be whisked out of
his hands and carried into a remote quarter of the earth
without recourse against the corporation whose name and
authority had been used in the manner disclosed in this
case. As already observed, it is familiar doctrine that if a
corporation knowingly permits one of its officers, or any other
agent, to do acts within the scope of an apparent authority,
and thus holds him out to the public as possessing power to
do those acts, the corporation will, as against any one who
has in good faith dealt with the corporation through such
agent, be estopped from denying his authority; and where it
is said "if the corporation permits this means the same as "if
the thing is permitted by the directing power of the
corporation." 16

In this light, the bank is estopped from questioning the authority of the bank
manager to enter into the contract of sale. If a corporation knowingly permits
one of its officers or any other agent to act within the scope of an apparent
authority, it holds the agent out to the public as possessing the power to do
those acts; thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the agent's
authority. 17

Unquestionably, petitioner has authorized Tena to enter into the Deed of

Sale. Accordingly, it has a clear legal duty to issue the board resolution
sought by respondent's. Having authorized her to sell the property, it

944
behooves the bank to confirm the Deed of Sale so that the buyers may enjoy
its full use.

The board resolution is, in fact, mere paper work. Nonetheless, it is paper
work necessary in the orderly operations of the register of deeds and the full
enjoyment of respondents' rights. Petitioner-bank persistently and
unjustifiably refused to perform its legal duty. Worse, it was less than candid
in dealing with respondents regarding this matter. In this light, the Court finds
it proper to assess the bank treble costs, in addition to the award of
damages.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision and
Resolution AFFIRMED. The Temporary Restraining Order issued by this
Court is hereby LIFTED. Treble costs against petitioner.

SO ORDERED.

Melo, Purisima and Gonzaga-Reyes, JJ., concur.

Vitug, J., please see concurring opinion.

945

G.R. No. L-23428 November 29, 1968
DETECTIVE & PROTECTIVE BUREAU, INC., petitioner,
vs.
THE HONORABLE GAUDENCIO CLORIBEL, in his capacity as Presiding
Judge of Branch VI, Court of First Instance of Manila, and FAUSTINO S.
ALBERTO, respondents.
Crispin D. Biazas and Associates and Jose S. Sarte for petitioner.
Gaudencio T. Bocobo for respondents.
ZALDIVAR, J.:
The complaint, in Civil Case No. 56949 of the Court of First Instance of
Manila, dated May 4, 1964, filed by Detective and Protective Bureau, Inc.,
therein plaintiff (petitioner herein) against Fausto S. Alberto, therein
defendant (respondent herein), for accounting with preliminary injunction and
receivership, alleged that plaintiff was a corporation duly organized and
existing under the laws of the Philippines; that defendant was managing
director of plaintiff corporation from 1952 until January 14, 1964; that in June,
1963, defendant illegally seized and took control of all the assets as well as
the books, records, vouchers and receipts of the corporation from the
accountant-cashier, concealed them illegally and refused to allow any
member of the corporation to see and examine the same; that on January
14, 1964, the stockholders, in a meeting, removed defendant as managing
director and elected Jose de la Rosa in his stead; that defendant not only
had refused to vacate his office and to deliver the assets and books to Jose
de la Rosa, but also continued to perform unauthorized acts for and in behalf
of plaintiff corporation; that defendant had been required to submit a financial
statement and to render an accounting of his administration from 1952 but
defendant has failed to do so; that defendant, contrary to a resolution
adopted by the Board of Directors on November 24, 1963, had been illegally
disposing of corporate funds; that defendant, unless immediately
restrained ex-parte, would continue discharging the functions of managing
director; and that it was necessary to appoint a receiver to take charge of the
assets and receive the income of the corporation. Plaintiff prayed that a
preliminary injunction ex-parte be issued restraining defendant from
exercising the functions of managing director and from disbursing and
disposing of its funds; that Jose M. Barredo be appointed receiver; that, after
judgment, the injunction be made permanent and defendant be ordered to
render an accounting.
Herein respondent Judge, the Honorable Gaudencio Cloribel, set for hearing
plaintiff's prayer for ancillary relief and required the parties to submit their
respective memoranda. On June 18, 1964, respondent Judge granted the
writ of preliminary injunction prayed for, conditioned upon plaintiff's filing a
bond of P5,000.00. Plaintiff filed the bond, but while the same was pending
approval defendant Fausto S. Alberto filed, on July 1, 1964, a motion to admit
a counter-bond for the purpose of lifting the order granting the writ of
preliminary injunction. Inspite of the opposition filed by plaintiff, respondent
Judge issued, on August 5, 1964, an order admitting the counterbond and
setting aside the writ of preliminary injunction.
On the belief that the order approving the counter-bond and lifting the writ of
preliminary injunction was contrary to law and the act of respondent Judge
constituted a grave abuse of discretion, and that there was no plain, speedy
and adequate remedy available to it, plaintiff filed with this Court the instant
petition for certiorari, praying that a writ of preliminary injunction enjoining
defendant Fausto S. Albert from exercising the functions of managing
director be issued, and that the order dated August 5, 1964 of respondent
Judge approving the counter-bond and lifting the writ of preliminary injunction
he had previously issued be set aside and declared null and void. The Court
gave due course to the petition but did not issue a preliminary injunction.
In his answer, now respondent Fausto S. Alberto traversed the material
allegations of the petition, justified the order complained of, and prayed for
the dismissal of the petition.
From the pleadings, it appears that the only issue to be resolved is whether
the order of respondent Judge dated August 5, 1964, admitting and
946
approving the counter-bond of P5,000 and setting aside the writ of
preliminary injunction granted in his order dated June 18, 164, was issued
contrary to law and with grave abuse of discretion.
Now petitioner contends that the setting aside of the order granting the writ
was contrary to law and was done with a grave abuse of discretion, because:
(1) the motion to admit defendant's counter-bond was not supported by
affidavits showing why the counter-bond should be admitted, as required by
Section 6 of Rule 58; (2) the preliminary injunction was not issued ex-
parte but after hearing, and the admission of the counter-bond rendered said
writ ineffective; (3) the writ was granted in accordance with Rule 58 of the
Rules of Court and established precedents' (4) public interest required that
the writ be not set aside because respondent had arrogated unto himself all
the powers of petitioning corporation, to the irreparable damage of the
corporation; and that (5) the counter-bond could not compensate petitioner's
damage.
1. The first reason given by petitioner in support of its contention that the
dissolution of the writ of preliminary injunction was contrary to law is that the
motion to admit respondent's counter-bond for the dissolution of the writ was
not supported by affidavits as required by section 6 of Rule 58 of the Rules of
Court. The controverted motion, however, does not appear in the record.
However, the record shows that respondent Alberto had filed a verified
answer to the complaint and a verified opposition to the issuance of the writ
of preliminary injunction.
Regarding the necessity of verification of the motion for dissolution of a writ
of preliminary injunction, this Court has ruled that the requirement of
verification is not absolute but is dependent on the circumstances obtaining
in a particular case. In the case of Sy Sam Bio, et al. vs. Barrios and Buyson
Lampa,1 the only question raised was whether the respondent Judge
exceeded his jurisdiction and abused his discretion in setting aside an order
directing the issuance of a writ of preliminary injunction. In maintaining the
affirmative, petitioners in that case alleged that the questioned order was
issued in violation of the provisions of Section 169 of Act 190(which is one of
the sources of Sec. 6 of Rule 58 of the revised Rules of Court)inasmuch as
the Judge set aside said order and directed the dissolution of the preliminary
injunction without any formal petition of the parties and without having
followed the procedure prescribed by the statute. There was, however, a
verbal application for the dissolution of the writ, based upon the ground of the
in suficiency of the complaint which was the basis of the application for the
issuance of said writ of preliminary injunction. This Court said:
Section 169 of Act 1909 does not prescribe the manner of filing the
application to annul or modify a writ of preliminary injunction. It
simply states that if a temporary injunction be granted without notice,
the defendant, at any time before trial, may apply, upon reasonable
notice to the adverse party, to the judge who granted the injunction,
or to the judge of the court of which the action was brought, to
dissolve or modify the same.
On the strength of the decision in the above-cited case, this Court in Caluya,
et al. vs. Ramos, et al.,2 said;
Petitioners' criticism that the motion to dissolve filed by the
defendants in Civil Case No. 4634 was not verified, is also
groundless inasmuch as even an indirect verbal application for the
dissolution of an ex parteorder of preliminary injunction has been
held to be a sufficient compliance with the provisions of Section 6 of
Rule 60 (Moran, Comments on the Rules of Court, Second Edition,
Vol. II, p. 65, citing the case of Sy Yam Bio v. Barrios, etc., 63 Phil.
206), the obvious reason being that said rule does not prescribe the
form by which an application for the dissolution or modification of an
order of preliminary injunction should be presented.
If according to the above rulings, Section 6 of Rule 60 (now sec. 6, Rule 58)
of the Rules of Court did not require any form for the application for the
dissolution of the writ of preliminary injunction, then respondent Fausto
Alberto's motion to lift the preliminary injunction in the court below need not
be verified, and much less must the motion be supported by affidavits, as
urged by petitioner.
947
However, in Canlas, et al. vs. Aquino, et al.,3 this Court ruled that a motion for
the dissolution of a writ of preliminary injunction should be verified. In that
case, respondent Tayag filed an unverified motion for the dissolution of a writ
of preliminary injunction, alleging that the same "would work great damage to
the defendant who had already spend a considerable sum of money" and
that petitioners "can be fully compensated for any damages that they may
suffer." The court granted the motion and dissolved the preliminary injunction.
In an original action for a writ of certiorari filed with this Court to annual said
order, this Court remarked in part:
Petitioners herein are entitled to the writ prayed for. The motion of
respondent Tayag for the dissolution of the writ of preliminary
injunction issued on October 22, 1959, was unverified....
From the precedents quoted above, as well as from the terminology of
Section 6 of Rule 58 of the new Rules of Court, it is evident that whether the
application for the dissolution of the writ of preliminary injunction must be
verified or not depends upon the ground upon which such application is
based. If the application is based on the insufficiency of the complaint, the
motion need not be verified. If the motion is based on the ground that the
injunction would cause great damage to defendant while the plaintiff can be
fully compensated for such damages as he may suffer, the motion should be
verified.
In the instant case, it is alleged by petitioner that the motion for the
dissolution of the writ of preliminary injunction was not verified. This
allegation was not denied in the answer. But because said motion does not
appear in the record of the case now before this Court, We cannot determine
what are the grounds for the dissolution that are alleged therein, and so We
cannot rule on whether the motion should have been verified or not. This
Court, therefore, has to rely on the order of respondent Judge, dated August
5, 1964, which states that "the filing of the counter-bond is in accordance with
law." Consequently, the first ground alleged by petitioner must be brushed
aside.
2. The second and third reasons alleged by petitioner in its petition for
certiorari assume that a preliminary injunction issued after hearing and in
accordance with Rule 58 cannot be set aside. This contention is untenable.
The provision of Section 6 of Rule 58 that "the injunction may be refused, or,
if granted ex parte, may be dissolved" can not be construed as putting
beyond the reach of the court the dissolution of an injunction which was
granted after hearing. The reason is because a writ of preliminary injunction
is an interlocutory order, and as such it is always under the control of the
court before final judgment. Thus, in Caluya, et al. vs. Ramos, et al.,4this
Court said:
The first contention of the petitioners is that, as said injunction was
issued after a hearing, the same cannot be dissolved, specially on
the strength of an unverified motion for dissolution and in the
absence to support it. Reliance is placed on Section 6 of Rule 60 of
the Rules of Court which provides that "the injunction may be
reduced, or, if granted ex parte, maybe dissolved," thereby arguing
that if an injunction is not issued ex parte the same cannot be
dissolved. The contention is clearly erroneous. Although said section
prescribes the grounds for objecting to, or for moving the dissolution
of, a preliminary injunction prior to its issuance or after its granting ex
parte, it does not thereby outlaw a dissolution if the injunction has
been issued after a hearing. This is to be so, because a writ of
preliminary injunction is an interlocutory order which is always under
the control of the court before final judgment. (Manila Electric
Company vs. Artiaga and Green, 50 Phil. 144, 147).
This Court has also ruled that the dissolution of a writ of preliminary
injunction issued after hearing, even if the dissolution is ordered without
giving the other party an opportunity to be heard, does not constitute an
abuse of discretion and may be cured not by certiorari but by appeal.
In Clarke vs. Philippine Ready Mix Concrete Co., Inc., et al.,5 one of the
issues presented was whether a writ of preliminary injunction granted the
plaintiff by a trial court after hearing, might be dissolved upon an ex parte
application by the defendant, and this Court ruled that:
948
 The action of a trial court in dissolving a writ of preliminary injunction
already issued after hearing, without giving petitioner an opportunity
to be heard, does not constitute lack or excess of jurisdiction or an
abuse of discretion, and any irregularity committed by the trial court
on this score may be cured not by certiorari but by appeal.
3. The fourth reason alleged by petitioner in support of its stand is that public
interest demanded that the writ enjoining respondent Fausto Alberto from
exercising the functions of managing director be maintained. Petitioner
contended that respondent Alberto had arrogated to himself the power of the
Board of Directors of the corporation because he refused to vacate the office
and surrender the same to Jose de la Rosa who had been elected managing
director by the Board to succeed him. This assertion, however, was disputed
by respondent Alberto who stated that Jose de la Rosa could not be elected
managing director because he did not own any stock in the corporation.
There is in the record no showing that Jose de la Rosa owned a share of
stock in the corporation. If he did not own any share of stock, certainly he
could not be a director pursuant to the mandatory provision of Section 30 of
the Corporation Law, which in part provides:
There is in the record no showing that Jose de la Rosa owned a share of
stock in the corporation. If he did not own any share of stock, certainly he
could not be a director pursuant to the mandatory provision of Section 30 of
the Corporation Law, which in part provides:
Sec. 30. Every director must own in his own right at least one share
of the capital stock of the stock corporation of which he is a director,
which stock shall stand in his name on the books of the
corporations....
If he could not be a director, he could also not be a managing director of the
corporation, pursuant to Article V, Section 3 of the By-Laws of the
Corporation which provides that:
The manager shall be elected by the Board of Directors from among
its members.... (Record, p. 48)
If the managing director-elect was not qualified to become managing director,
respondent Fausto Alberto could not be compelled to vacate his office and
cede the same to the managing director-elect because the by-laws of the
corporation provides in Article IV, Section 1 that "Directors shall serve until
the election and qualification of their duly qualified successor."
4. The fifth reason alleged by herein petitioner in support of its contention
that respondent Judge gravely abused his discretion when he lifted the
preliminary injunction upon the filing of the counter-bond was that said
counter-bond could not compensate for the irreparable damage that the
corporation would suffer by reason of the continuance of respondent Fausto
Alberto as managing director of the corporation. Respondent Alberto, on the
contrary, contended that he really was the owner of the controlling interest in
the business carried on the name of the petitioner, having invested therein a
total of P57,727.29 as against the sum of P4,000 only invested by one other
director, Jose M. Barredo. We find that there was a question as to who own
the controlling interest in the corporation. Where ownership is in dispute, the
party in control or possession of the disputed interest is presumed to have
the better right until the contrary is adjudged, and hence that party should not
be deprived of the control or possession until the court is prepared to
adjudicate the controverted right in favor of the other party.6
Should it be the truth that respondent Alberto is the controlling stockholder,
then the damages said respondent would suffer would be the same, if not
more, as the damages that the corporation would suffer if the injunction were
maintained. If the bond of P5,000 filed by petitioner for the injunction would
be sufficient to answer for the damages that would be suffered by respondent
Alberto by reason of the injunction, there seems to be no reason why the
same amount would not be sufficient to answer for the damages that might
be suffered by the petitioning corporation by reason of the lifting of the
injunction. The following ruling of this Court has a persuasive application in
this case:
949
 The rule that a court should not, by means of a preliminary It being our considered view that respondent Judge had not committed grave
injunction, transfer property in litigation from the possession of one abuse of discretion in issuing the order dated August 5, 1964 lifting the writ of
party to another is more particularly applicable where the legal title is preliminary injunction which had previously been granted in the order dated
in dispute and the party having possession asserts ownership in June 18, 1964, and the herein petition for certiorari having been filed without
himself.7 previously complying with a well settled procedural requirement, there is no
alternative for this Court but to order its dismissal.
Let it be stated, in relation to all the reason given by petitioner, that it is a
settled rule that the issuance of the writ of preliminary injunction as an WHEREFORE, the instant petition for certiorari with preliminary injunction is
ancillary or preventive remedy to secure the rights of a party in a pending dismissed, with costs againsts the petitioner. It is so ordered.
case is entirely within the discretion of the court taking cognizance of the
case the only limitation being that this discretion should be exercised Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro,
based upon the grounds and in the manner provided by law,8 and it is equally Fernando and Capistrano, JJ., concur.
well settled that a wide latitude is given under Section 7 of Rule 58 of the
Rules of Court to the trial court to modify or dissolve the injunction as justice
may require. The court which is to exercise that discretion is the trial court,
not the appellate court.9 The exercise of sound judicial discretion by the lower
court in injunctive matters should not be interfered with except in cases of
manifest abuse.10 In the instant case, We find that petitioner failed to show
manifest abuse of discretion by respondent Judge in setting aside the writ of
preliminary injunction.

There is, however, one vital reason why the instant petition for certiorari
should be denied. And it is, that from the order dissolving the writ of
preliminary injunction, the petitioner has gone directly to this Court without
giving the respondent Judge (or trial court) a chance or opportunity to correct
his error, if any, in an appropriate motion for reconsideration. An omission to
comply with this procedural requirement justifies a denial of the writ applied
for.11

The instant case is not one of the exceptions in the application of this rule,
which are: where the questions of jurisdiction has been squarely raised,
argued before, submitted to, and met and decided by the respondent court;
where the questioned order is a patent nullity; and where there is a
deprivation of the petitioner's fundamental right to due process. 12

950
 THE COURT OF APPEALS, GRACE VILLAGE ASSOCIATION, INC.,
ALEJANDRO G. BELTRAN, and ERNESTO L. GO, respondents.

MENDOZA, J.:

The question for decision in this case is the right of petitioner's representative
to sit in the board of directors of respondent Grace Village Association, Inc.
as a permanent member thereof. For fifteen years from 1975 until 1989
petitioner's representative had been recognized as a "permanent director" of
the association. But on February 13, 1990, petitioner received notice from the
association's committee on election that the latter was "reexamining"
(actually, reconsidering) the right of petitioner's representative to continue as
an unelected member of the board. As the board denied petitioner's request
to be allowed representation without election, petitioner brought an action
for mandamus in the Home Insurance and Guaranty Corporation. Its action
was dismissed by the hearing officer whose decision was subsequently
affirmed by the appeals board. Petitioner appealed to the Court of Appeals,
which in turn upheld the decision of the HIGC's appeals board. Hence this
petition for review based on the following contentions:

1. The Petitioner herein has already acquired a vested right

to a permanent seat in the Board of Directors of Grace
Village Association;

2. The amended By-laws of the Association drafted and

promulgated by a Committee on December 20, 1975 is valid
and binding; and

3. The Practice of tolerating the automatic inclusion of

petitioner as a permanent member of the Board of Directors
G.R. No. 108905 October 23, 1997
of the Association without the benefit of election is allowed
under the law. 1
GRACE CHRISTIAN HIGH SCHOOL, petitioner,
vs.
Briefly stated, the facts are as follows:

951
Petitioner Grace Christian High School is an educational institution offering
preparatory, kindergarten and secondary courses at the Grace Village in
Quezon City. Private respondent Grace Village Association, Inc., on the other
hand, is an organization of lot and/or building owners, lessees and residents
at Grace Village, while private respondents Alejandro G. Beltran and Ernesto
L. Go were its president and chairman of the committee on election,
respectively, in 1990, when this suit was brought.
As adopted in 1968, the by-laws of the association provided in Article IV, as
follows:
The annual meeting of the members of the Association shall
be held on the first Sunday of January in each calendar year
at the principal office of the Association at 2:00 P.M. where
they shall elect by plurality vote and by secret balloting, the
Board of Directors, composed of eleven (11) members to
serve for one (1) year until their successors are duly elected
and have qualified. 2
It appears, that on December 20, 1975, a committee of the board of directors
prepared a draft of an amendment to the by-laws, reading as follows: 3
VI. ANNUAL MEETING
The Annual Meeting of the members of the Association shall
be held on the second Thursday of January of each year.
Each Charter or Associate Member of the Association is
entitled to vote. He shall be entitled to as many votes as he
has acquired thru his monthly membership fees
onlycomputed on a ratio of TEN (P10.00) PESOS for one
vote.
The Charter and Associate Members shall elect the Directors
of the Association. The candidates receiving the first
fourteen (14) highest number of votes shall be declared and
proclaimed elected until their successors are elected and
qualified. GRACE CHRISTIAN HIGH SCHOOL
representative is a permanent Director of the
ASSOCIATION.
This draft was never presented to the general membership for approval.
Nevertheless, from 1975, after it was presumably submitted to the board, up
to 1990, petitioner was given a permanent seat in the board of directors of
the association. On February 13, 1990, the association's committee on
election in a letter informed James Tan, principal of the school, that "it was
the sentiment that all directors should be elected by members of the
association" because "to make a person or entity a permanent Director would
deprive the right of voters to vote for fifteen (15) members of the Board," and
"it is undemocratic for a person or entity to hold office in perpetuity." 4For this
reason, Tan was told that "the proposal to make the Grace Christian High
School representative as a permanent director of the association, although
previously tolerated in the past elections should be reexamined." Following
this advice, notices were sent to the members of the association that the
provision on election of directors of the 1968 by-laws of the association
would be observed.
Petitioner requested the chairman of the election committee to change the
notice of election by following the procedure in previous elections, claiming
that the notice issued for the 1990 elections ran "counter to the practice in
previous years" and was "in violation of the by-laws (of 1975)" and
"unlawfully deprive[d] Grace Christian High School of its vested right [to] a
permanent seat in the board." 5
As the association denied its request, the school brought suit
for mandamus in the Home Insurance and Guaranty Corporation to compel
the board of directors of the association to recognize its right to a permanent
seat in the board. Petitioner based its claim on the following portion of the
proposed amendment which, it contended, had become part of the by-laws of
the association as Article VI, paragraph 2, thereof:
The Charter and Associate Members shall elect the Directors
of the Association. The candidates receiving the first
952
 fourteen (14) highest number of votes shall be declared and
proclaimed elected until their successors are elected and
qualified. GRACE CHRISTIAN HIGH SCHOOL
representative is a permanent Director of the
ASSOCIATION.
It appears that the opinion of the Securities and Exchange Commission on
the validity of this provision was sought by the association and that in reply to
the query, the SEC rendered an opinion to the effect that the practice of
allowing unelected members in the board was contrary to the existing by-
laws of the association and to 92 of the Corporation Code (B.P. Blg. 68).
Private respondent association cited the SEC opinion in its answer.
Additionally, the association contended that the basis of the petition
for mandamus was merely "a proposed by-laws which has not yet been
approved by competent authority nor registered with the SEC or HIGC." It
argued that "the by-laws which was registered with the SEC on January 16,
1969 should be the prevailing by-laws of the association and not the
proposed amended by-laws." 6
In reply, petitioner maintained that the "amended by-laws is valid and
binding" and that the association was estopped from questioning the by-
laws. 7
A preliminary conference was held on March 29, 1990 but nothing substantial
was agreed upon. The parties merely agreed that the board of directors of
the association should meet on April 17, 1990 and April 24, 1990 for the
purpose of discussing the amendment of the by-laws and a possible
amicable settlement of the case. A meeting was held on April 17, 1990, but
the parties failed to reach an agreement. Instead, the board adopted a
resolution declaring the 1975 provision null and void for lack of approval by
members of the association and the 1968 by-laws to be effective.
On June 20, 1990, the hearing officer of the HIGC rendered a decision
dismissing petitioner's action. The hearing officer held that the amended by-
laws, upon which petitioner based its claim, "[was] merely a proposed by-
laws which, although implemented in the past, had not yet been ratified by
the members of the association nor approved by competent authority"; that,
on the contrary, in the meeting held on April 17, 1990, the directors of the
association declared "the proposed by-law dated December 20, 1975
prepared by the committee on by-laws . . . null and void" and the by-laws of
December 17, 1968 as the "prevailing by-laws under which the association is
to operate until such time that the proposed amendments to the by-laws are
approved and ratified by a majority of the members of the association and
duly filed and approved by the pertinent government agency." The hearing
officer rejected petitioner's contention that it had acquired a vested right to a
permanent seat in the board of directors. He held that past practice in
election of directors could not give rise to a vested right and that departure
from such practice was justified because it deprived members of association
of their right to elect or to be voted in office, not to say that "allowing the
automatic inclusion of a member representative of petitioner as permanent
director [was] contrary to law and the registered by-laws of respondent
association." 8
The appeals board of the HIGC affirmed the decision of the hearing officer in
its resolution dated September 13, 1990. It cited the opinion of the SEC
based on 92 of the Corporation Code which reads:
92. Election and term of trustees. Unless otherwise
provided in the articles of incorporation or the by-laws, the
board of trustees of non-stock corporations, which may be
more than fifteen (15) in number as may be fixed in their
articles of incorporation or by-laws, shall, as soon as
organized, so classify themselves that the term of office of
one-third (1/3) of the number shall expire every year; and
subsequent elections of trustees comprising one-third (1/3)
of the board of trustees shall be held annually and trustees
so elected shall have a term of three (3) years. Trustees
thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the
unexpired period.
953
 The HIGC appeals board denied claims that the school "[was] being
deprived of its right to be a member of the Board of Directors of
respondent association," because the fact was that "it may nominate
as many representatives to the Association's Board as it may deem
appropriate." It said that "what is merely being upheld is the act of
the incumbent directors of the Board of correcting a long standing
practice which is not anchored upon any legal basis." 9
Petitioner appealed to the Court of Appeals but petitioner again lost as the
appellate court on February 9, 1993, affirmed the decision of the HIGC. The
Court of Appeals held that there was no valid amendment of the association's
by-laws because of failure to comply with the requirement of its existing by-
laws, prescribing the affirmative vote of the majority of the members of the
association at a regular or special meeting called for the adoption of
amendment to the by-laws. Article XIX of the by-laws provides: 10
The members of the Association by an affirmative vote of the
majority at any regular or special meeting called for the
purpose, may alter, amend, change or adopt any new by-
laws.
This provision of the by-laws actually implements 22 of the Corporation Law
(Act No. 1459) which provides:
22. The owners of a majority of the subscribed capital
stock, or a majority of the members if there be no capital
stock, may, at a regular or special meeting duly called for the
purpose, amend or repeal any by-law or adopt new by-laws.
The owners of two-thirds of the subscribed capital stock, or
two-thirds of the members if there be no capital stock, may
delegate to the board of directors the power to amend or
repeal any by-law or to adopt new by-laws: Provided,
however, That any power delegated to the board of directors
to amend or repeal any by-law or adopt new by-laws shall be
considered as revoked whenever a majority of the
stockholders or of the members of the corporation shall so
vote at a regular or special meeting. And provided, further,
That the Director of the Bureau of Commerce and Industry
shall not hereafter file an amendment to the by-laws of any
bank, banking institution or building and loan association,
unless accompanied by certificate of the Bank
Commissioner to the effect that such amendments are in
accordance with law.
The proposed amendment to the by-laws was never approved by the
majority of the members of the association as required by these provisions of
the law and by-laws. But petitioner contends that the members of the
committee which prepared the proposed amendment were duly authorized to
do so and that because the members of the association thereafter
implemented the provision for fifteen years, the proposed amendment for all
intents and purposes should be considered to have been ratified by them.
Petitioner contends: 11
Considering, therefore, that the "agents" or committee were
duly authorized to draft the amended by-laws and the acts
done by the "agents" were in accordance with such authority,
the acts of the "agents" from the very beginning were lawful
and binding on the homeowners (the principals) per
sewithout need of any ratification or adoption. The more has
the amended by-laws become binding on the homeowners
when the homeowners followed and implemented the
provisions of the amended by-laws. This is not merely
tantamount to tacit ratification of the acts done by duly
authorized "agents" but express approval and confirmation of
what the "agents" did pursuant to the authority granted to
them.
Corollarily, petitioner claims that it has acquired a vested right to a permanent
seat in the board. Says petitioner:
The right of the petitioner to an automatic membership in the
board of the Association was granted by the members of the
954
 Association themselves and this grant has been
implemented by members of the board themselves all
through the years. Outside the present membership of the
board, not a single member of the Association has registered
any desire to remove the right of herein petitioner to an
automatic membership in the board. If there is anybody who
has the right to take away such right of the petitioner, it
would be the individual members of the Association through
a referendum and not the present board some of the
members of which are motivated by personal interest.
Petitioner disputes the ruling that the provision in question, giving
petitioner's representative a permanent seat in the board of the
association, is contrary to law. Petitioner claims that that is not so
because there is really no provision of law prohibiting unelected
members of boards of directors of corporations. Referring to 92 of
the present Corporation Code, petitioner says:
It is clear that the above provision of the Corporation Code
only provides for the manner of election of the members of
the board of trustees of non-stock corporations which may
be more than fifteen in number and which manner of election
is even subject to what is provided in the articles of
incorporation or by-laws of the association thus showing that
the above provisions [are] not even mandatory.
Even a careful perusal of the above provision of the
Corporation Code would not show that it prohibits a non-
stock corporation or association from granting one of its
members a permanent seat in its board of directors or
trustees. If there is no such legal prohibition then it is
allowable provided it is so provided in the Articles of
Incorporation or in the by-laws as in the instant case.
xxx xxx xxx
If fact, the truth is that this is allowed and is being practiced
by some corporations duly organized and existing under the
laws of the Philippines.
One example is the Plus XII Catholic Center, Inc. Under the
by-laws of this corporation, that whoever is the Archbishop of
Manila is considered a member of the board of trustees
without benefit of election. And not only that. He also
automatically sits as the Chairman of the Board of Trustees,
again without need of any election.
Another concrete example is the Cardinal Santos Memorial
Hospital, Inc. It is also provided in the by-laws of this
corporation that whoever is the Archbishop of Manila is
considered a member of the board of trustees year after year
without benefit of any election and he also sits automatically
as the Chairman of the Board of Trustees.
It is actually 28 and 29 of the Corporation Law not 92 of the present
law or 29 of the former one which require members of the boards of
directors of corporations to be elected. These provisions read:
28. Unless otherwise provided in this Act, the corporate
powers of all corporations formed under this Act shall be
exercised, all business conducted and all property of such
corporations controlled and held by a board of not less than
five nor more than eleven directors to be elected from
among the holders of stock or, where there is no stock, from
the members of the corporation: Provided, however, That in
corporations, other than banks, in which the United States
has or may have a vested interest, pursuant to the powers
granted or delegated by the Trading with the Enemy Act, as
amended, and similar Acts of Congress of the United States
relating to the same subject, or by Executive Order No. 9095
of the President of the United States, as heretofore or
hereafter amended, or both, the directors need not be
955
 elected from among the holders of the stock, or, where there
is no stock from the members of the corporation. (emphasis
added)
29. At the meeting for the adoption of the original by-laws,
or at such subsequent meeting as may be then determined,
directors shall be elected to hold their offices for one year
and until their successors are elected and qualified.
Thereafter the directors of the corporation shall be elected
annually by the stockholders if it be a stock corporation or by
the members if it be a nonstock corporation, and if no
provision is made in the by-laws for the time of election the
same shall be held on the first Tuesday after the first
Monday in January. Unless otherwise provided in the by-
laws, two weeks' notice of the election of directors must be
given by publication in some newspaper of general
circulation devoted to the publication of general news at the
place where the principal office of the corporation is
established or located, and by written notice deposited in the
post-office, postage pre-paid, addressed to each
stockholder, or, if there be no stockholders, then to each
member, at his last known place of residence. If there be no
newspaper published at the place where the principal office
of the corporation is established or located, a notice of the
election of directors shall be posted for a period of three
weeks immediately preceding the election in at least three
public places, in the place where the principal office of the
corporation is established or located. (Emphasis added)
The present Corporation Code (B.P. Blg. 68), which took effect on May 1,
1980, 12 similarly provides:
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 electedfrom 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. (Emphasis added)
These provisions of the former and present corporation law leave no room for
doubt as to their meaning: the board of directors of corporations must be
elected from among the stockholders or members. There may be
corporations in which there are unelected members in the board but it is clear
that in the examples cited by petitioner the unelected members sit as ex
officio members, i.e., by virtue of and for as long as they hold a particular
office. But in the case of petitioner, there is no reason at all for its
representative to be given a seat in the board. Nor does petitioner claim a
right to such seat by virtue of an office held. In fact it was not given such seat
in the beginning. It was only in 1975 that a proposed amendment to the by-
laws sought to give it one.
Since the provision in question is contrary to law, the fact that for fifteen
years it has not been questioned or challenged but, on the contrary, appears
to have been implemented by the members of the association cannot
forestall a later challenge to its validity. Neither can it attain validity through
acquiescence because, if it is contrary to law, it is beyond the power of the
members of the association to waive its invalidity. For that matter the
members of the association may have formally adopted the provision in
question, but their action would be of no avail because no provision of the by-
laws can be adopted if it is contrary to law. 13
It is probable that, in allowing petitioner's representative to sit on the board,
the members of the association were not aware that this was contrary to law.
It should be noted that they did not actually implement the provision in
question except perhaps insofar as it increased the number of directors from
11 to 15, but certainly not the allowance of petitioner's representative as an
unelected member of the board of directors. It is more accurate to say that
the members merely tolerated petitioner's representative and tolerance
cannot be considered ratification.
956
Nor can petitioner claim a vested right to sit in the board on the basis of
"practice." Practice, no matter how long continued, cannot give rise to any
vested right if it is contrary to law. Even less tenable is petitioner's claim that
its right is "coterminus with the existence of the association." 14

Finally, petitioner questions the authority of the SEC to render an opinion on

the validity of the provision in question. It contends that jurisdiction over this
case is exclusively vested in the HIGC.

But this case was not decided by the SEC but by the HIGC. The HIGC
merely cited as authority for its ruling the opinion of the SEC chairman. The
HIGC could have cited any other authority for the view that under the law
members of the board of directors of a corporation must be elected and it
would be none the worse for doing so.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

Puno and Torres, Jr., JJ., concur.

957

G.R. No. L-5883 November 28, 1953
DOMINGO PONCE AND BUHAY L. PONCE, petitioners,
vs.
DEMETRIO B. ENCARNACION, Judge of the Court of First Instance of
Manila, Branch I, and POTENCIANO GAPOL, respondents.
Marcelino Lontok for petitioners.
Zavalla, Bautista and Nuevas for respondents.
PADILLA, J.:
This is a petition for a writ of certiorari to annul an order of the respondent
court granting Potenciano Gapol authority, pursuant to section 26, Act No.
1459, otherwise known as the Corporation Law, to call a meeting of the
stockholders of the Dagunoy Enterprises, Inc. and to preside at such meeting
by giving proper notice to the stockholders, as required by law or by laws of
the corporation, until after the majority of the stockholders present and
qualified to vote shall have chosen one of them to act as presiding officer of
the meeting; another order denying a motion of the petitioners to have the
previous order set aside; and a third order denying a motion to the same
effect as the one previously filed.
The petitioners aver that the Daguhoy Enterprises, Inc., was duly registered
as such on 24 June 1948; that on 16 April 1951 at a meeting duly called, the
voluntary dissolution of the corporation and the appointment of Potenciano
Gapol as receiver were agreed upon and to that end a petitioner Domingo
Ponce; that instead of filing the petition for voluntary dissolution of the of the
corporation as agreed upon, the respondent Potenciano Gapol, who is the
largest stockholder, charged his mind and filed a complaint in the Court of
First Instance of Manila (civil No. 13753) to compel the petitioners to render
an accounting of the funds and assets of the corporation, to reimburse it,
jointly and severally, in the sum of P4,500, the purchase price of a parcel of
land acquired by the corporation; P6,190 loaned to the wife of petitioner
Domingo Ponce; and P8,000 spent by the latter in his trip to the United
States, or a total sum of P18,690, plus interest, or such sum as may be found
after the accounting shall have been rendered to have been misspent,
misapplied, missappropriated and converted by the petitioner Domingo
Ponce to his own use and benefit; that on 18 May 1951 the plaintiff in that
case, the respondent Potenciano Gapol in this case, filed a motion praying
that the petitioners be removed as members of the board of directors which
was denied by the court; that on 3 January 1952 respondent Potenciano
Gapol filed a petition (civil No. 15445, Exhibit L), praying for an order
directing him to a call a meeting of the stockholders of the corporation and to
preside at such meeting in accordance with section 26 of the Corporation
law; that two days later, without notice to the petitioners and to the other
members of the board of directors and in violation of the Rules of Court
which require that the adverse parties be notified of the hearing of the motion
three days in advance, the respondent court issued the order as prayed for
(Exhibit M); that the petitioners learned only of this order of the court on 27
February, when the Bank of America refused to recognize the new board of
directors elected at such meeting and returned the checks drawn upon it by
the said board of directors; that the election of Juanito R. Tianzon as member
of the board of directors of the corporation he must be a member of
the Legionarios del Trabajo, as required and provided for in article 7 of the
by-laws of the corporation; that on 5 March the petitioners filed a petition in
the respondent court to have the order of 5 January set aside but on April,
the date set for the hearing of the petition, as the respondent judge was on
leave vacation judge directed its transfer to the branch of the respondent
judge; that without having set the motion for hearing, the respondent court
denied the motion of 5 March in its order of 7 May; that on 14 May the
petitioners filed another motion inviting the attention of the respondent court
to the irregularity and illegality of its procedure and setting the motion for
hearing on 21 May, but the court denied the motion by its order of 13 June.
The only question to determine in this case is whether under and pursuant to
section 26 of Act No. 1459, known as the Corporation law, the respondent
court may issue the order complained of. Said section provides:
Whenever, from any cause, there is no person authorized to call a
meeting, or when the officer authorized to do so refuses, fails or
958
 neglects to call a meeting, any judge of a Court of First Instance on
the showing of good cause therefor, may issue an order to any
stockholder or member of a corporation, directing him to call a
meeting of the corporation by giving the proper notice required by
this Act or by-laws; and if there be no person legally authorized to
preside at such meeting, the judge of the Court of First Instance may
direct the person calling the meeting to preside at the same until a
majority of the members or stockholders representing a majority of
the stock members or stockholders presenting a majority of the stock
present and permitted by law to be voted have chosen one of their
number to act as presiding officer for the purposes of the meeting.
On the showing of good cause therefor, the court may authorize a
stockholder to call a meeting and to preside threat until the majority
stockholders representing a majority strockholders representing a majority of
the stock present and permitted to be voted shall have chosen one among
them to preside it. And this showing of good cause therefor exists when the
court is apprised of the fact that the by-laws of the corporation require the
calling of a general meeting of the stockholders to elect the board of directors
but call for such meeting has not been done.
Article 9 of the by-laws of the Daguhoy Enterprises, Inc., provides:
The Board of Directors shall compose of five (5) members who shall
be elected by the stockholders in a general meeting called for that
purpose which shall be held every even year during the month of
January.
Article 20 of the by-laws in part provides:
. . . Regular general meetings are those which shall be called for
every even year, . . . .
The requirement that "on the showing of good cause therefor," the court may
grant to a stockholder the authority to call such meeting and to preside
thereat does not mean that the petition must be set for hearing with notice
served upon the board of directors. The respondent court was satisfied that
there was a showing of good cause for authorizing the respondent
Potenciano Gapol to call a meeting of the stockholders for the purpose of
electing the board of directors as required and provided for in the by-laws,
because the chairman of the board of directors called upon to do so had
failed, neglected, or refused to perform his duty. It may be likened to a writ of
preliminary injunction or of attachment which may be issued ex-parte upon
compliance with the requirements of the rules and upon the court being
satisfied that the same should be issue. Such provisional reliefs have not
been deemed and held as violative of the due process of law clause of the
Constitution.
In several state of the Union1 the remedy which may be availed of our
resorted to in a situation such as the one brought about in this case is
mandamus to compel the officer or incumbent board of directors to perform a
duties specifically enjoined by law or by-laws, to wit: to call a meeting of the
stockholders. Dela ware is the estate that has a law similar to ours and there
the chancellor of a chancery court may summarily issue or enter an order
authorizing a stockholder to call a meeting of the stockholders of the
corporation and preside thereat.2 It means that the chancellor may issue
such order without notice and hearing.
That the relief granted by the respondent court lies within its jurisdiction is not
disputed. Having the authority to grant the relief, the respondent court did not
exceed its jurisdiction; nor did it abuse its discretion in granting it.
With persistency petitioners claim that they have been deprived of their right
without due process of law. They had no right to continue as directors of the
corporation unless reflected by the stockholders in a meeting called for that
purpose every even year. They had no right to a hold-over brought about by
the failure to perform the duty incumbent upon one of them. If they felt that
they were sure to be reelected, why did they fail, neglect, or refuse to call the
meeting to elect the members of the board? Or, why did they not seek their
reelection at the meeting called to elect the directors pursuant to the order of
the respondent court.
959
The alleged illegality of the election of one member of the board of directors
at the meeting called by the respondent Potenciano Gapol as authorized by
the court being subsequent to the order complained of cannot affect the
validity and legality of the order. If it be true that one of the directors elected
at the meting called by the respondent Potenciano Gapol, as authorized by
the order of the court complained of, was not qualified in accordance with the
provisions of the by-laws, the remedy of an aggrieved party would be quo a
warranto. Also, the alleged previous agreement to dissolve the corporation
does not affect or render illegal the order issued by the respondent court. The
petition is denied, with costs against the petitioners.
G.R. No. L-26555 November 16, 1926
It appears that the Binalbagan Estate, Inc., is a corporation having its
principal plant in Occidental Negros where it is engaged in the manufacture
of raw sugar from canes grown upon farms accessible to its central. In July,
1924, the possessors of a majority of the shares of the Binalbagan Estate,
Inc., formed a voting trust composed of three members, namely, Salvador
Laguna, Segunda Monteblanco, and Arthur F. Fisher, as trustee. By the
document constituting this voting trust the trustees were authorized to
represent and vote the shares pertaining to their constituents, and to this end
the shareholders undertook to assign their shares to the trustees on the
books of the company. The total number of outstanding shares of the
corporation is somewhat over 5,500, while the number of shares controlled
by the voting trust is less than 3,000.

BALDOMERO ROXAS, ENRIQUE ECHAUS and ROMAN J. On February 1, 1926, the general annual meeting of the shareholders of the
LACSON, petitioners, Binalbagan Estate, Inc., took place, at which Mr. J. P. Heilbronn appeared as
vs. representative of the voting trust, his authority being recognized by the
Honorable MARIANO DE LA ROSA, Auxiliary Judge of First Instance of holders of all the other shares present at this meeting. Upon said occasion
Occidental Negros, AGUSTIN CORUNA, MAURO LEDESMA and Heilbronn, by virtue of controlling the majority of the shares, was able to
BINALBAGAN ESTATE, INC., respondents. nominate and elect a board of directors to his own liking, without opposition
from the minority. After the board of directors had been thus elected and had
Roman J. Lacson, for petitioners. qualified, they chose a set of officers constituting of Jose M. Yusay,
The respondent judge in his own behalf. president, Timoteo Unson, vice-president, Jose G. Montalvo, secretary-
The respondent corporation in its own behalf. treasurer, and H. W. Corp and Agustin Coruna, as members. Said officials
R. Nolan and Feria and La O for the respondents Coruna and Ledesma. immediately entered upon the discharged of their duties and have continued
in possession of their respective offices until the present time.

STREET, J.:
This is an original petition for the writ of certiorari whereby the petitioners,
Baldomeo Roxas, Enrique Echaus, and Roman J. Lacson, seek to procure
the abrogation of an order of the respondent judge granting a preliminary
injunction in an action in the Court of First Instance of Occidental Negros,
instituted by Agustin Coruna and Mauro Ledesma against the petitioners and
the Binalbagan Estate, Inc. The cause is now before us upon the issues
made by the answers filed by the respondents.
Since the creation of the voting trust there have been a number of vacancies
caused by resignation or the absence of members from the Philippine
Islands, with the result that various substitutions have been made in the
personnel of the voting trust. At the present time the petitioners Roxas,
Echaus, and Lacson presumably constitute its membership. We say
presumably, because in the present proceedings an issue of fact is made by
the respondents upon the point whether the three individuals named have
been regularly substituted for their several predecessors. In the view we take
of the case it is not necessary to determine this issue; and we shall assume
provisionally that the three petitioners are the lawful components of the
voting trust.

960
Although the present officers of the Binalbagan Estate, Inc., were elected by
the representative of the voting trust, the present trustee are apparently
desirous of ousting said officers, without awaiting the termination of their
official terms at the expiration of one year from the date of their election. In
other to effect this purpose the petitioners in their character as members of
the voting trust, on August 2, 1926, caused the secretary of the Binalbagan
Estate, Inc., to issue to the shareholders a notice calling for a special general
meeting of shareholders to be held at 10 a. m., on August 16, 1926, "for the
election of the board of directors, for the amendment of the By-Laws, and for
any other business that can be dealt with in said meeting."
Within a few days after said notice was issued Agustin Corua, as member of
the existing board, and Mauro Ledesma, as a simple shareholder of the
corporation, instituted a civil action (No. 3840) in the Court of First Instance
of Occidental Negros against the trustees and the Binalbagan Estate, Inc.,
for the purpose of enjoining the meeting completed in the notice above-
mentioned.
In response to a proper for a preliminary injunction, in connection with said
action, the respondent judge issued the restraining order, or preliminary
injunction, which gave rise to the present petition for the writ of certiorari. In
the dispositive part of said order the Binalbagan Estate, Inc., its lawyers,
agents, representatives, and all others who may be assisting or corroborating
with them, are restrained from holding the general shareholders' meeting
called for the date mentioned and from electing new directors for the
company in substitution of the present incumbents, said injunction to be
effective until further order of the court. it is now asserted here by the
petitioners that the making of this order was beyond the legitimate powers of
the respondent judge, and it is accordingly prayed that said order be set
aside.
We are of the opinion that this contention is untenable and that the
respondent judge acted within his legitimate powers in making the order
against which relief is sought. In order to expose the true inwardness of the
situation before us it is necessary to take not of the fact that under the law
the directors of a corporation can only be removed from office by a vote of
the stockholders representing at least two-thirds of the subscribed capital
stock entitled to vote (Act No. 1459, sec. 34); while vacancies in the board,
when they exist, can be filled by mere majority vote, (Act No. 1459, sec. 25).
Moreover, the law requires that when action is to be taken at a special
meeting to remove the directors, such purpose shall be indicated in the call
(Act No. 1459, sec. 34).
Now, upon examining into the number of shares controlled by the voting
trust, it will be seen that, while the trust controls a majority of the stock, it
does not have a clear two-thirds majority. It was therefore impolitic for the
petitioners, in forcing the call for the meeting of August 16, to come out
frankly and say in the notice that one of the purpose of the meeting was to
removed the directors of the corporation from office. Instead, the call was
limited to the election of the board of directors, it being the evident intention
of the voting trust to elect a new board as if the directorate had been then
vacant.
But the complaint in civil No. 3840 directly asserts that the members of the
present directorate were regularly elected at the general annual meeting held
in February, 1926; and if that assertion be true, the proposal to elect, another
directorate, as per the call of August 2, if carried into effect, would result in
the election of a rival set of directors, who would probably need the
assistance of judgment of court in an independent action of quo warrantoto
get them installed into office, even supposing that their title to the office could
be maintained. That the trial judge had jurisdiction to forestall that step and
enjoin the contemplated election is a matter about which there cannot be the
slightest doubt. The law contemplates and intends that there will be one of
directors at a time and that new directors shall be elected only as vacancies
occur in the directorate by death, resignation, removal, or
otherwise. lawphil.net
It is instituted that there was some irregularity or another in the election of the
present directorate. We see nothing upon which this suggestion can be
safely planted; And at any rate the present board of directors are de
factoincumbents of the office whose acts will be valid until they shall be
lawfully removed from the office or cease from the discharge of their
functions. In this case it is not necessary for us to agitate ourselves over the
question whether the respondent judge properly exercised his judicial
961
discretion in granting the order complained of. If suffices to know that in
making the order he was acting within the limits of his judicial powers.
It will be noted that the order in question enjoins the defendants from holding
the meeting called for August 16; and said order must not be understood as
constituting any obstacle for the holding of the regular meeting at the time
appointed in the by-laws of the corporation.
For the reasons stated the petition will be denied, and it is so ordered, with
costs.
Johnson, Malcom, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.
G.R. No. 152392 May 26, 2005
EXPERTRAVEL & TOURS, INC., petitioner,
vs.
COURT OF APPEALS and KOREAN AIRLINES, respondent.
DECISION
CALLEJO, SR., J.:
Before us is a petition for review on certiorari of the Decision1 of the Court of
Appeals (CA) in CA-G.R. SP No. 61000 dismissing the petition
for certiorari and mandamus filed by Expertravel and Tours, Inc. (ETI).
The Antecedents
Korean Airlines (KAL) is a corporation established and registered in the
Republic of South Korea and licensed to do business in the Philippines. Its
general manager in the Philippines is Suk Kyoo Kim, while its appointed
counsel was Atty. Mario Aguinaldo and his law firm.
On September 6, 1999, KAL, through Atty. Aguinaldo, filed a
Complaint2 against ETI with the Regional Trial Court (RTC) of Manila, for the
collection of the principal amount of P260,150.00, plus attorneys fees and
exemplary damages. The verification and certification against forum
shopping was signed by Atty. Aguinaldo, who indicated therein that he was
the resident agent and legal counsel of KAL and had caused the preparation
of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo
was not authorized to execute the verification and certificate of non-forum
shopping as required by Section 5, Rule 7 of the Rules of Court. KAL
opposed the motion, contending that Atty. Aguinaldo was its resident agent
and was registered as such with the Securities and Exchange Commission
(SEC) as required by the Corporation Code of the Philippines. It was further
alleged that Atty. Aguinaldo was also the corporate secretary of KAL.
Appended to the said opposition was the identification card of Atty.
Aguinaldo, showing that he was the lawyer of KAL.
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he had
been authorized to file the complaint through a resolution of the KAL Board of
Directors approved during a special meeting held on June 25, 1999. Upon
his motion, KAL was given a period of 10 days within which to submit a copy
of the said resolution. The trial court granted the motion. Atty. Aguinaldo
subsequently filed other similar motions, which the trial court granted.
Finally, KAL submitted on March 6, 2000 an Affidavit 3 of even date, executed
by its general manager Suk Kyoo Kim, alleging that the board of directors
conducted a special teleconference on June 25, 1999, which he and Atty.
Aguinaldo attended. It was also averred that in that same teleconference, the
962
board of directors approved a resolution authorizing Atty. Aguinaldo to
execute the certificate of non-forum shopping and to file the complaint. Suk
Kyoo Kim also alleged, however, that the corporation had no written copy of
the aforesaid resolution.
On April 12, 2000, the trial court issued an Order 4 denying the motion to
dismiss, giving credence to the claims of Atty. Aguinaldo and Suk Kyoo Kim
that the KAL Board of Directors indeed conducted a teleconference on June
25, 1999, during which it approved a resolution as quoted in the submitted
affidavit.
RESOLVED, that Mario A. Aguinaldo and his law firm M.A.
Aguinaldo & Associates or any of its lawyers are hereby
appointed and authorized to take with whatever legal action
necessary to effect the collection of the unpaid account of
Expert Travel & Tours. They are hereby specifically
authorized to prosecute, litigate, defend, sign and execute
any document or paper necessary to the filing and
prosecution of said claim in Court, attend the Pre-Trial
Proceedings and enter into a compromise agreement
relative to the above-mentioned claim.

ETI filed a motion for the reconsideration of the Order, contending that it was IN WITNESS WHEREOF, I have hereunto affixed my signature this
inappropriate for the court to take judicial notice of the said teleconference 10th day of January, 1999, in the City of Manila, Philippines.
without any prior hearing. The trial court denied the motion in its Order 5dated
August 8, 2000.
(Sgd.)
ETI then filed a petition for certiorari and mandamus, assailing the orders of
the RTC. In its comment on the petition, KAL appended a certificate signed MARIO A. AGUINALDO
by Atty. Aguinaldo dated January 10, 2000, worded as follows: Resident Agent

SECRETARYS/RESIDENT AGENTS CERTIFICATE

SUBSCRIBED AND SWORN to before me this 10 th day of January,

KNOW ALL MEN BY THESE PRESENTS:
1999, Atty. Mario A. Aguinaldo exhibiting to me his Community Tax
Certificate No. 14914545, issued on January 7, 2000 at Manila,
I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected and Philippines.
appointed Corporate Secretary and Resident Agent of KOREAN
AIRLINES, a foreign corporation duly organized and existing under
and by virtue of the laws of the Republic of Korea and also duly
registered and authorized to do business in the Philippines, with Doc. No. 119; (Sgd.)
office address at Ground Floor, LPL Plaza Building, 124 Alfaro St., Page No. 25; ATTY. HENRY D.
Salcedo Village, Makati City, HEREBY CERTIFY that during a Book No. XXIV Notary
special meeting of the Board of Directors of the Corporation held on Series of 2000. Until December 31,
June 25, 1999 at which a quorum was present, the said Board PTR #889583/MLA 1/3/20006
unanimously passed, voted upon and approved the following
resolution which is now in full force and effect, to wit:

963
On December 18, 2001, the CA rendered judgment dismissing the petition,
ruling that the verification and certificate of non-forum shopping executed by
Atty. Aguinaldo was sufficient compliance with the Rules of Court. According
to the appellate court, Atty. Aguinaldo had been duly authorized by the board
resolution approved on June 25, 1999, and was the resident agent of KAL.
As such, the RTC could not be faulted for taking judicial notice of the said
teleconference of the KAL Board of Directors.
ETI filed a motion for reconsideration of the said decision, which the CA
denied. Thus, ETI, now the petitioner, comes to the Court by way of petition
for review on certiorari and raises the following issue:
DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM
THE ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDINGS WHEN IT RENDERED ITS QUESTIONED
DECISION AND WHEN IT ISSUED ITS QUESTIONED
RESOLUTION, ANNEXES A AND B OF THE INSTANT PETITION?7
The petitioner asserts that compliance with Section 5, Rule 7, of the Rules of
Court can be determined only from the contents of the complaint and not by
documents or pleadings outside thereof. Hence, the trial court committed
grave abuse of discretion amounting to excess of jurisdiction, and the CA
erred in considering the affidavit of the respondents general manager, as
well as the Secretarys/Resident Agents Certification and the resolution of
the board of directors contained therein, as proof of compliance with the
requirements of Section 5, Rule 7 of the Rules of Court. The petitioner also
maintains that the RTC cannot take judicial notice of the said
teleconferencewithout prior hearing, nor any motion therefor. The petitioner
reiterates its submission that the teleconference and the resolution adverted
to by the respondent was a mere fabrication.
The respondent, for its part, avers that the issue of whether modern
technology is used in the field of business is a factual issue; hence, cannot
be raised in a petition for review on certiorari under Rule 45 of the Rules of
Court. On the merits of the petition, it insists that Atty. Aguinaldo, as the
resident agent and corporate secretary, is authorized to sign and execute the
certificate of non-forum shopping required by Section 5, Rule 7 of the Rules
of Court, on top of the board resolution approved during the teleconference
of June 25, 1999. The respondent insists that "technological advances in this
time and age are as commonplace as daybreak." Hence, the courts may take
judicial notice that the Philippine Long Distance Telephone Company, Inc.
had provided a record of corporate conferences and meetings through
FiberNet using fiber-optic transmission technology, and that such technology
facilitates voice and image transmission with ease; this makes constant
communication between a foreign-based office and its Philippine-based
branches faster and easier, allowing for cost-cutting in terms of travel
concerns. It points out that even the E-Commerce Law has recognized this
modern technology. The respondent posits that the courts are aware of this
development in technology; hence, may take judicial notice thereof without
need of hearings. Even if such hearing is required, the requirement is
nevertheless satisfied if a party is allowed to file pleadings by way of
comment or opposition thereto.
In its reply, the petitioner pointed out that there are no rulings on the matter of
teleconferencing as a means of conducting meetings of board of directors for
purposes of passing a resolution; until and after teleconferencing is
recognized as a legitimate means of gathering a quorum of board of
directors, such cannot be taken judicial notice of by the court. It asserts that
safeguards must first be set up to prevent any mischief on the public or to
protect the general public from any possible fraud. It further proposes
possible amendments to the Corporation Code to give recognition to such
manner of board meetings to transact business for the corporation, or other
related corporate matters; until then, the petitioner asserts, teleconferencing
cannot be the subject of judicial notice.
The petitioner further avers that the supposed holding of a special meeting
on June 25, 1999 through teleconferencing where Atty. Aguinaldo was
supposedly given such an authority is a farce, considering that there was no
mention of where it was held, whether in this country or elsewhere. It insists
that the Corporation Code requires board resolutions of corporations to be
submitted to the SEC. Even assuming that there was such a teleconference,
it would be against the provisions of the Corporation Code not to have any
record thereof.
964
The petitioner insists that the teleconference and resolution adverted to by
the respondent in its pleadings were mere fabrications foisted by the
respondent and its counsel on the RTC, the CA and this Court.
The petition is meritorious.
Section 5, Rule 7 of the Rules of Court provides:
SEC. 5. Certification against forum shopping. The plaintiff or
principal party shall certify under oath in the complaint or other
initiatory pleading asserting a claim for relief, or in a sworn
certification annexed thereto and simultaneously filed therewith: (a)
that he has not theretofore commenced any action or filed any claim
involving the same issues in any court, tribunal or quasi-judicial
agency and, to the best of his knowledge, no such other action or
claim is pending therein; (b) if there is such other pending action or
claim, a complete statement of the present status thereof; and (c) if
he should thereafter learn that the same or similar action or claim
has been filed or is pending, he shall report that fact within five (5)
days therefrom to the court wherein his aforesaid complaint or
initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be
curable by mere amendment of the complaint or other initiatory
pleading but shall be cause for the dismissal of the case without
prejudice, unless otherwise provided, upon motion and after hearing.
The submission of a false certification or non-compliance with any of
the undertakings therein shall constitute indirect contempt of court,
without prejudice to the corresponding administrative and criminal
actions. If the acts of the party or his counsel clearly constitute willful
and deliberate forum shopping, the same shall be ground for
summary dismissal with prejudice and shall constitute direct
contempt, as well as a cause for administrative sanctions.
It is settled that the requirement to file a certificate of non-forum shopping is
mandatory8 and that the failure to comply with this requirement cannot be
excused. The certification is a peculiar and personal responsibility of the
party, an assurance given to the court or other tribunal that there are no other
pending cases involving basically the same parties, issues and causes of
action. Hence, the certification must be accomplished by the party himself
because he has actual knowledge of whether or not he has initiated similar
actions or proceedings in different courts or tribunals. Even his counsel may
be unaware of such facts.9 Hence, the requisite certification executed by the
plaintiffs counsel will not suffice.10
In a case where the plaintiff is a private corporation, the certification may be
signed, for and on behalf of the said corporation, by a specifically authorized
person, including its retained counsel, who has personal knowledge of the
facts required to be established by the documents. The reason was
explained by the Court in National Steel Corporation v. Court of Appeals,11 as
follows:
Unlike natural persons, corporations may perform physical actions
only through properly delegated individuals; namely, its officers
and/or agents.
The corporation, such as the petitioner, has no powers except those
expressly conferred on it by the Corporation Code and those that are
implied by or are incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its duly-
authorized officers and agents. Physical acts, like the signing of
documents, can be performed only by natural persons duly-
authorized for the purpose by corporate by-laws or by specific act of
the board of directors. "All acts within the powers of a corporation
may be performed by agents of its selection; and except so far as
limitations or restrictions which may be imposed by special charter,
by-law, or statutory provisions, the same general principles of law
which govern the relation of agency for a natural person govern the
officer or agent of a corporation, of whatever status or rank, in
respect to his power to act for the corporation; and agents once
965
 appointed, or members acting in their stead, are subject to the same 1. I am the Resident Agent and Legal Counsel of the plaintiff in the
rules, liabilities and incapacities as are agents of individuals and above entitled case and have caused the preparation of the above
private persons." complaint;

2. I have read the complaint and that all the allegations contained
therein are true and correct based on the records on files;
For who else knows of the circumstances required in the
Certificate but its own retained counsel. Its regular officers, like its 3. I hereby further certify that I have not commenced any other action
board chairman and president, may not even know the details or proceeding involving the same issues in the Supreme Court, the
required therein. Court of Appeals, or different divisions thereof, or any other tribunal
or agency. If I subsequently learned that a similar action or
Indeed, the certificate of non-forum shopping may be incorporated in the proceeding has been filed or is pending before the Supreme Court,
complaint or appended thereto as an integral part of the complaint. The rule the Court of Appeals, or different divisions thereof, or any tribunal or
is that compliance with the rule after the filing of the complaint, or the agency, I will notify the court, tribunal or agency within five (5) days
dismissal of a complaint based on its non-compliance with the rule, is from such notice/knowledge.
impermissible. However, in exceptional circumstances, the court may allow
subsequent compliance with the rule. 12 If the authority of a partys counsel to
execute a certificate of non-forum shopping is disputed by the adverse party, (Sgd.)
the former is required to show proof of such authority or representation.
MARIO A. AGUINALDO
In this case, the petitioner, as the defendant in the RTC, assailed the Affiant
authority of Atty. Aguinaldo to execute the requisite verification and certificate CITY OF MANILA
of non-forum shopping as the resident agent and counsel of the respondent.
It was, thus, incumbent upon the respondent, as the plaintiff, to allege and
establish that Atty. Aguinaldo had such authority to execute the requisite
verification and certification for and in its behalf. The respondent, however, SUBSCRIBED AND SWORN TO before me this 30 th day of August,
failed to do so. 1999, affiant exhibiting to me his Community Tax Certificate No.
00671047 issued on January 7, 1999 at Manila, Philippines.
The verification and certificate of non-forum shopping which was
incorporated in the complaint and signed by Atty. Aguinaldo reads:
Doc. No. 1005; (Sgd.)
I, Mario A. Aguinaldo of legal age, Filipino, with office address at Page No. 198;
Suite 210 Gedisco Centre, 1564 A. Mabini cor. P. Gil Sts., Ermita, Book No. XXI ATTY. HENRY D. ADA
Manila, after having sworn to in accordance with law hereby deposes Series of 1999. Notary Pu
and say: THAT -
Until December 31, 20

966

PTR No. 320501 Mla. 1/4/9913
As gleaned from the aforequoted certification, there was no allegation that
Atty. Aguinaldo had been authorized to execute the certificate of non-forum
shopping by the respondents Board of Directors; moreover, no such board
resolution was appended thereto or incorporated therein.
While Atty. Aguinaldo is the resident agent of the respondent in the
Philippines, this does not mean that he is authorized to execute the requisite
certification against forum shopping. Under Section 127, in relation to Section
128 of the Corporation Code, the authority of the resident agent of a foreign
corporation with license to do business in the Philippines is to receive, for
and in behalf of the foreign corporation, services and other legal processes in
all actions and other legal proceedings against such corporation, thus:
SEC. 127. Who may be a resident agent. A resident agent may
either be an individual residing in the Philippines or a domestic
corporation lawfully transacting business in the Philippines: Provided,
That in the case of an individual, he must be of good moral character
and of sound financial standing.
SEC. 128. Resident agent; service of process. The Securities and
Exchange Commission shall require as a condition precedent to the
issuance of the license to transact business in the Philippines by any
foreign corporation that such corporation file with the Securities and
Exchange Commission a written power of attorney designating some
persons who must be a resident of the Philippines, on whom any
summons and other legal processes may be served in all actions or
other legal proceedings against such corporation, and consenting
that service upon such resident agent shall be admitted and held as
valid as if served upon the duly-authorized officers of the foreign
corporation as its home office.14
Under the law, Atty. Aguinaldo was not specifically authorized to execute a
certificate of non-forum shopping as required by Section 5, Rule 7 of the
Rules of Court. This is because while a resident agent may be aware of
actions filed against his principal (a foreign corporation doing business in the
Philippines), such resident may not be aware of actions initiated by its
principal, whether in the Philippines against a domestic corporation or private
individual, or in the country where such corporation was organized and
registered, against a Philippine registered corporation or a Filipino citizen.
The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent,
was not specifically authorized to execute the said certification. It attempted
to show its compliance with the rule subsequent to the filing of its complaint
by submitting, on March 6, 2000, a resolution purporting to have been
approved by its Board of Directors during a teleconference held on June 25,
1999, allegedly with Atty. Aguinaldo and Suk Kyoo Kim in attendance.
However, such attempt of the respondent casts veritable doubt not only on its
claim that such a teleconference was held, but also on the approval by the
Board of Directors of the resolution authorizing Atty. Aguinaldo to execute the
certificate of non-forum shopping.
In its April 12, 2000 Order, the RTC took judicial notice that because of the
onset of modern technology, persons in one location may confer with other
persons in other places, and, based on the said premise, concluded that Suk
Kyoo Kim and Atty. Aguinaldo had a teleconference with the respondents
Board of Directors in South Korea on June 25, 1999. The CA, likewise, gave
credence to the respondents claim that such a teleconference took place, as
contained in the affidavit of Suk Kyoo Kim, as well as Atty. Aguinaldos
certification.
Generally speaking, matters of judicial notice have three material requisites:
(1) the matter must be one of common and general knowledge; (2) it must be
well and authoritatively settled and not doubtful or uncertain; and (3) it must
be known to be within the limits of the jurisdiction of the court. The principal
guide in determining what facts may be assumed to be judicially known is
that of notoriety. Hence, it can be said that judicial notice is limited to facts
evidenced by public records and facts of general notoriety.[15] Moreover, a
judicially noticed fact must be one not subject to a reasonable dispute in that
967
it is either: (1) generally known within the territorial jurisdiction of the trial
court; or (2) capable of accurate and ready determination by resorting to
sources whose accuracy cannot reasonably be questionable. 16
Things of "common knowledge," of which courts take judicial matters coming
to the knowledge of men generally in the course of the ordinary experiences
of life, or they may be matters which are generally accepted by mankind as
true and are capable of ready and unquestioned demonstration. Thus, facts
which are universally known, and which may be found in encyclopedias,
dictionaries or other publications, are judicially noticed, provided, they are of
such universal notoriety and so generally understood that they may be
regarded as forming part of the common knowledge of every person. As the
common knowledge of man ranges far and wide, a wide variety of particular
facts have been judicially noticed as being matters of common
knowledge. But a court cannot take judicial notice of any fact which, in part,
is dependent on the existence or non-existence of a fact of which the court
has no constructive knowledge.17
In this age of modern technology, the courts may take judicial notice that
business transactions may be made by individuals through teleconferencing.
Teleconferencing is interactive group communication (three or more people in
two or more locations) through an electronic medium. In general terms,
teleconferencing can bring people together under one roof even though they
are separated by hundreds of miles.18 This type of group communication may
be used in a number of ways, and have three basic types: (1) video
conferencing - television-like communication augmented with sound; (2)
computer conferencing - printed communication through keyboard terminals,
and (3) audio-conferencing-verbal communication via the telephone with
optional capacity for telewriting or telecopying.19
A teleconference represents a unique alternative to face-to-face (FTF)
meetings. It was first introduced in the 1960s with American Telephone and
Telegraphs Picturephone. At that time, however, no demand existed for the
new technology. Travel costs were reasonable and consumers were unwilling
to pay the monthly service charge for using the picturephone, which was
regarded as more of a novelty than as an actual means for everyday
communication.20 In time, people found it advantageous to hold
teleconferencing in the course of business and corporate governance,
because of the money saved, among other advantages include:
1. People (including outside guest speakers) who wouldnt normally
attend a distant FTF meeting can participate.
2. Follow-up to earlier meetings can be done with relative ease and
little expense.
3. Socializing is minimal compared to an FTF meeting; therefore,
meetings are shorter and more oriented to the primary purpose of
the meeting.
4. Some routine meetings are more effective since one can audio-
conference from any location equipped with a telephone.
5. Communication between the home office and field staffs is
maximized.
6. Severe climate and/or unreliable transportation may necessitate
teleconferencing.
7. Participants are generally better prepared than for FTF meetings.
8. It is particularly satisfactory for simple problem-solving, information
exchange, and procedural tasks.
9. Group members participate more equally in well-moderated
teleconferences than an FTF meeting.21
On the other hand, other private corporations opt not to hold teleconferences
because of the following disadvantages:
1. Technical failures with equipment, including connections that arent
made.
968
 2. Unsatisfactory for complex interpersonal communication, such as
negotiation or bargaining.
3. Impersonal, less easy to create an atmosphere of group rapport.
4. Lack of participant familiarity with the equipment, the medium
itself, and meeting skills.
5. Acoustical problems within the teleconferencing rooms.
6. Difficulty in determining participant speaking order; frequently one
person monopolizes the meeting.
7. Greater participant preparation time needed.
8. Informal, one-to-one, social interaction not possible. 22
Indeed, teleconferencing can only facilitate the linking of people; it does not
alter the complexity of group communication. Although it may be easier to
communicate via teleconferencing, it may also be easier to miscommunicate.
Teleconferencing cannot satisfy the individual needs of every type of
meeting.23
In the Philippines, teleconferencing and videoconferencing of members of
board of directors of private corporations is a reality, in light of Republic Act
No. 8792. The Securities and Exchange Commission issued SEC
Memorandum Circular No. 15, on November 30, 2001, providing the
guidelines to be complied with related to such conferences. 24 Thus, the Court
agrees with the RTC that persons in the Philippines may have a
teleconference with a group of persons in South Korea relating to business
transactions or corporate governance.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated
in a teleconference along with the respondents Board of Directors, the Court
is not convinced that one was conducted; even if there had been one, the
Court is not inclined to believe that a board resolution was duly passed
specifically authorizing Atty. Aguinaldo to file the complaint and execute the
required certification against forum shopping.
The records show that the petitioner filed a motion to dismiss the complaint
on the ground that the respondent failed to comply with Section 5, Rule 7 of
the Rules of Court. The respondent opposed the motion on December 1,
1999, on its contention that Atty. Aguinaldo, its resident agent, was duly
authorized to sue in its behalf. The respondent, however, failed to establish
its claim that Atty. Aguinaldo was its resident agent in the Philippines. Even
the identification card25 of Atty. Aguinaldo which the respondent appended to
its pleading merely showed that he is the company lawyer of the
respondents Manila Regional Office.
The respondent, through Atty. Aguinaldo, announced the holding of the
teleconference only during the hearing of January 28, 2000; Atty. Aguinaldo
then prayed for ten days, or until February 8, 2000, within which to submit the
board resolution purportedly authorizing him to file the complaint and execute
the required certification against forum shopping. The court granted the
motion.26 The respondent, however, failed to comply, and instead prayed for
15 more days to submit the said resolution, contending that it was with its
main office in Korea. The court granted the motion per its Order 27 dated
February 11, 2000. The respondent again prayed for an extension within
which to submit the said resolution, until March 6, 2000. 28 It was on the said
date that the respondent submitted an affidavit of its general manager Suk
Kyoo Kim, stating, inter alia, that he and Atty. Aguinaldo attended the said
teleconference on June 25, 1999, where the Board of Directors supposedly
approved the following resolution:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo
& Associates or any of its lawyers are hereby appointed and
authorized to take with whatever legal action necessary to effect the
collection of the unpaid account of Expert Travel & Tours. They are
hereby specifically authorized to prosecute, litigate, defend, sign and
execute any document or paper necessary to the filing and
prosecution of said claim in Court, attend the Pre-trial Proceedings
and enter into a compromise agreement relative to the above-
mentioned claim.29
969
But then, in the same affidavit, Suk Kyoo Kim declared that the respondent
"do[es] not keep a written copy of the aforesaid Resolution" because no
records of board resolutions approved during teleconferences were kept.
This belied the respondents earlier allegation in its February 10, 2000 motion
for extension of time to submit the questioned resolution that it was in the
custody of its main office in Korea. The respondent gave the trial court the
impression that it needed time to secure a copy of the resolution kept in
Korea, only to allege later (via the affidavit of Suk Kyoo Kim) that it had no
such written copy. Moreover, Suk Kyoo Kim stated in his affidavit that the
resolution was embodied in the Secretarys/Resident Agents Certificate
signed by Atty. Aguinaldo. However, no such resolution was appended to the
said certificate.
The respondents allegation that its board of directors conducted a
teleconference on June 25, 1999 and approved the said resolution (with Atty.
Aguinaldo in attendance) is incredible, given the additional fact that no such
allegation was made in the complaint. If the resolution had indeed been
approved on June 25, 1999, long before the complaint was filed, the
respondent should have incorporated it in its complaint, or at least appended
a copy thereof. The respondent failed to do so. It was only on January 28,
2000 that the respondent claimed, for the first time, that there was such a
meeting of the Board of Directors held on June 25, 1999; it even represented
to the Court that a copy of its resolution was with its main office in Korea,
only to allege later that no written copy existed. It was only on March 6, 2000
that the respondent alleged, for the first time, that the meeting of the Board of
Directors where the resolution was approved was held via teleconference.
Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had
signed a Secretarys/Resident Agents Certificate alleging that the board of
directors held a teleconference on June 25, 1999. No such certificate was
appended to the complaint, which was filed on September 6, 1999. More
importantly, the respondent did not explain why the said certificate was
signed by Atty. Aguinaldo as early as January 9, 1999, and yet was notarized
one year later (on January 10, 2000); it also did not explain its failure to
append the said certificate to the complaint, as well as to its Compliance
dated March 6, 2000. It was only on January 26, 2001 when the respondent
filed its comment in the CA that it submitted the Secretarys/Resident Agents
Certificate30 dated January 10, 2000.
The Court is, thus, more inclined to believe that the alleged teleconference
on June 25, 1999 never took place, and that the resolution allegedly
approved by the respondents Board of Directors during the said
teleconference was a mere concoction purposefully foisted on the RTC, the
CA and this Court, to avert the dismissal of its complaint against the
petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The
Decision of the Court of Appeals in CA-G.R. SP No. 61000 is REVERSED
and SET ASIDE. The Regional Trial Court of Manila is hereby ORDERED to
dismiss, without prejudice, the complaint of the respondent.
SO ORDERED.
Puno, Acting C.J., (Chairman), Austria-Martinez, and Chico-Nazario,
JJ., concur.
Tinga, J., out of the country.
970
[G.R. No. 113032. August 21, 1997]
WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS,
DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F.
VILLASIS, petitioners, vs. RICARDO T. SALAS, SOLEDAD
SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS &
HON. JUDGE PORFIRIO PARIAN, respondents.
DECISION
HERMOSISIMA, JR., J.:
Up for review on certiorari are: (1) the Decision September 6, 1993 and
(2) the order dated November 23, 1993 of Branch 33 of the Regional Trial
Court of Iloilo City in Criminal Cases Nos. 37097 and 37098 for estafa and
falsification of a public document, respectively. The judgment acquitted the
private respondents of both charges, but petitioners seek to hold them civilly
liable.
Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad
Salas-Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the
same family, are the majority and controlling members of the Board of
Trustees of Western Institute of Technology, Inc. (WIT, for short), a stock
corporation engaged in the operation, among others, of an educational
institution. According to petitioners, the minority stockholders of WIT,
sometime on June 1, 1986 in the principal office of WIT at La Paz, Iloilo City,
a Special Board meeting was held. In attendance were other members of the
Board including one of the petitioners Reginald Villasis. Prior to aforesaid
Special Board Meeting, copies of notice thereof, dated May 24, 1986, were
distributed to all Board Members. The notice allegedly indicated that the
meeting to be held on June 1, 1986 included item No. 6 which states:
"Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of
Western Institute of Technology, Inc. on compensation of all officers of the
corporation." [1]
In said meeting, the Board of Trustees passed Resolution No. 48, s.
1986, granting monthly compensation to the private respondents as
corporate officers retroactive June 1, 1985, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly seconded by Mrs.
Soledad Tubilleja (accused), it was unanimously resolved that:
The Officers of the Corporation be granted monthly compensation for
services rendered as follows: Chairman - P9,000.00/month, Vice-Chairman
- P3,500.00/month, Corporate Treasurer - P3,500.00/month and Corporate
Secretary - P3,500.00/month, retroactive June 1, 1985 and the ten
percentum of the net profits shall be distributed equally among the ten
members of the Board of Trustees. This shall amend and superceed(sic) any
previous resolution.
There were no other business.
The Chairman declared the meeting adjourned at 5:11 P.M.
This is to certify that the foregoing minutes of the regular meeting of the
Board of Trustees of Western Institute of Technology, Inc. held on March 30,
1986 is true and correct to the best of my knowledge and belief.
(Sgd) ANTONIO
S. SALAS
Corporate
Secretary[2]
A few years later, that is, on March 13, 1991, petitioners Homero
Villasis, Preston Villasis, Reginald Villasis and Dimas Enriquez filed an
affidavit-complaint against private respondents before the Office of the City
Prosecutor of Iloilo, as a result of which two (2) separate criminal
informations, one for falsification of a public document under Article 171 of
971
the Revised Penal Code and the other for estafa under Article 315, par. 1(b) fact, as said accused well knew, no such Resolution No. 48, Series of 1986
of the RPC, were filed before Branch 33 of the Regional Trial Court of Iloilo was passed on March 30, 1986.
City. The charge for falsification of public document was anchored on the
private respondents submission of WITs income statement for the fiscal year CONTRARY TO LAW.
1985-1986 with the Securities and Exchange Commission (SEC) reflecting
therein the disbursement of corporate funds for the compensation of private Iloilo City, Philippines, November 22,1991.[3] [Underscoring ours].
respondents based on Resolution No. 4, series of 1986, making it appear
that the same was passed by the board on March 30, 1986, when in truth,
The Information, on the other hand, for estafa reads:
the same was actually passed on June 1, 1986, a date not covered by the
corporations fiscal year 1985-1986 (beginning May 1, 1985 and ending April
30, 1986). The information for falsification of a public document states: The undersigned City Prosecutor accuses RICARDO SALAS, SALVADOR T.
SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S.
SALAS (whose dates and places of birth cannot be ascertained) of the crime
The undersigned City Prosecutor accuses RICARDO T. SALAS, SALVADOR
of ESTAFA, Art. 315, par 1(b) of the Revised Penal Code, committed as
T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS and
follows:
RICHARD S. SALAS (whose dates and places of birth cannot be
ascertained) of the crime of FALSIFICATION OF A PUBLC DOCUMENT, Art.
171 of the Revised Penal Code, committed as follows: That on or about the 1st day of June, 1986, in the City of Iloilo, Philippines
and within the jurisdiction of this Honorable Court, the above-named
accused, being then the Chairman, Vice-Chairman, Treasurer, Secretary and
That on or about the 10th day of June, 1986, in the City of Iloilo, Philippines
Trustee (who later became the secretary), respectively, of the board of
and within the jurisdiction of this Honorable Court, the above-named
trustees of the Western Institute of Technology, Inc., a corporation duly
accused, being then the Chairman, Vice-Chairman, Treasurer, Secretary and
organized and existing under the laws of the Republic of the Philippines,
Trustee (who later became the secretary), respectively, of the board of
conspiring and confederating together and mutually helping one another, to
trustees of the Western Institute of Technology, Inc., a corporation duly
better realize their purpose, did then and there wilfully, unlawfully and
organized and existing under the laws of the Republic of the Philippines,
feloniously defraud the said corporation (and its stockholders) in the following
conspiring and confederating together and mutually helping one another, to
manner, to wit: herein accused, knowing fully well that they have no
better realized (sic) their purpose, did then and there wilfully, unlawfully and
sufficient, lawful authority to disburse--- let alone violation of applicable laws
criminally prepare and execute and subsequently cause to be submitted to
and jurisprudence, disbursed the funds of the corporation by effecting
the Securities and Exchange Commission an income statement of the
payment of their retroactive salaries in the amount of P186,470.70 and
corporation for the fiscal year 1985-1986, the same being required to be
subsequently paying themselves every 15th and 30th of the month starting
submitted every end of the corporation fiscal year by the aforesaid
June 15, 1986 until the present, in the amount of P19,500.00 per month, as if
Commission and therefore, a public document, including therein the
the same were their own, and when herein accused were informed of the
disbursement of the retroactive compensation of accused corporate officers
illegality of these disbursements by the minority stockholders by way of
in the amount of P186,470.70, by then and there making it appear that the
objections made in an annual stockholders meeting held on June 14, 1986
basis thereof Resolution No. 4, Series of 1986 was passed by the board of
and every year thereafter, they refused, and still refuse, to rectify the same to
trustees on March 30, 1986, a date covered by the corporations fiscal year
the damage and prejudice of the corporation (and its stockholders) in the
1985-1986 (i.e., from May 1, 1985 to April 30, 1986), when in truth and in
total sum of P1,453,970.79 as of November 15, 1991.

972
CONTRARY TO LAW.
Iloilo City, Philippines, November 22,1991.[4] [Underscoring ours]
Thereafter, trial for the two criminal cases, docketed as Criminal Cases
Nos. 37097 and 37098, was consolidated. After a full-blown hearing, Judge
Porfirio Parian handed down a verdict of acquittal on both counts [5] dated
September 6, 1993 without imposing any civil liability against the accused
therein.
Petitioners filed a Motion for Reconsideration [6] of the civil aspect of the
RTC Decision which was, however, denied in an Order dated November 23,
1993.[7]
Hence, the instant petition.
Significantly on December 8, 1994, a Motion for Intervention, dated
December 2, 1994, was filed before this Court by Western Institute of
Technology, Inc., supposedly one of the petitioners herein, disowning its
inclusion in the petition and submitting that Atty. Tranquilino R. Gale, counsel
for the other petitioners, had no authority whatsoever to represent the
corporation in filing the petition. Intervenor likewise prayed for the dismissal
of the petition for being utterly without merit. The Motion for Intervention was
granted on January 16, 1995.[8]
Petitioners would like us to hold private respondents civilly liable despite
their acquittal in Criminal Cases Nos. 37097 and 37098. They base their
claim on the alleged illegal issuance by private respondents of Resolution
No. 48, series of 1986 ordering the disbursement of corporate funds in the
amount of P186,470.70 representing the retroactive compensation as of
June 1, 1985 in favor of private respondents, board members of WIT,
plus P1,453,970.79 for the subsequent collective salaries of private
respondent every 15th and 30th of the month until the filing of the criminal
complaints against them on March 1991. Petitioners maintain that this grant
of compensation to private respondents is proscribed under Section 30 of the
Corporation Code. Thus, private respondents are obliged to return these
amounts to the corporation with interest.
We cannot sustain the petitioners. The pertinent section of the
Corporation Code provides:
Sec. 30. Compensation of directors.--- In the absence of any provision in the
by-laws fixing their compensation, the directors shall not receive any
compensation, as such directors, except for reasonable per diems: Provided,
however, That any such compensation (other than per diems) may be
granted to directors by the vote of the stockholders representing at least a
majority of the outstanding capital stock at a regular or special stockholders
meeting. In no case shall the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income before income tax of
the corporation during the preceding year. [Underscoring ours]
There is no argument that directors or trustees, as the case may be, are
not entitled to salary or other compensation when they perform nothing more
than the usual and ordinary duties of their office. This rule is founded upon a
presumption that directors /trustees render service gratuitously and that the
return upon their shares adequately furnishes the motives for service, without
compensation[9] Under the foregoing section, there are only two (2) ways by
which members of the board can be granted compensation apart from
reasonable per diems: (1) when there is a provision in the by-laws fixing their
compensation; and (2) when the stockholders representing a majority of the
outstanding capital stock at a regular or special stockholders meeting agree
to give it to them.
973
 This proscription, however, against granting compensation to
directors/trustees of a corporation is not a sweeping rule. Worthy of note is
the clear phraseology of Section 30 which states: xxx [T]he directors shall not
receive any compensation, as such directors, xxx. The phrase as such
directors is not without significance for it delimits the scope of the prohibition
to compensation given to them for services performed purely in their capacity
as directors or trustees. The unambiguous implication is that members of the
board may receive compensation, in addition to reasonable per diems, when
they render services to the corporation in a capacity other than as
directors/trustees.[10] In the case at bench, Resolution No. 48, s. 1986 granted
monthly compensation to private respondents not in their capacity as
members of the board, but rather as officers of the corporation, more
particularly as Chairman, Vice-Chairman, Treasurer and Secretary of
Western Institute of Technology. We quote once more Resolution No. 48, s.
1986 for easy reference, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly seconded by Mrs.
Soledad Tubilleja (accused), it was unanimously resolved that:
The Officers of the Corporation be granted monthly compensation for
services rendered as follows: Chairman - P9,000.00/month, Vice-
Chairman - P3,500.00/month, Corporate Treasurer - P3,500.00/month
and Corporate Secretary - P3,500.00/month, retroactive June 1, 1985 and
the ten percentum of the net profits shall be distributed equally among the
ten members of the Board of Trustees. This shall amend and superceed(sic)
any previous resolution.
There were no other business.
The Chairman declared the meeting adjourned at 5:11 P.M.
This is to certify that the foregoing minutes of the regular meeting of the
Board of Trustees of Western Institute of Technology, Inc. held on March 30,
1986 is true and correct to the best of my knowledge and belief.
(Sgd) ANTONI
O S. SALAS
Corporate
Secretary[11] [Underscoring ours]
Clearly, therefore , the prohibition with respect to granting compensation to
corporate directors/trustees as such under Section 30 is not violated in this
particular case. Consequently, the last sentence of Section 30 which
provides:
xxx xxx. In no case shall the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income before income tax of
the corporation during the preceding year. [Underscoring ours]
does not likewise find application in this case since the compensation is
being given to private respondents in their capacity as officers of WIT and not
as board members.
Petitioners assert that the instant case is a derivative suit brought by
them as minority shareholders of WIT for and on behalf of the corporation to
annul Resolution No. 48, s. 1986 which is prejudicial to the corporation.
We are unpersuaded. A derivative suit is an action brought by minority
shareholders in the name of the corporation to redress wrongs committed
against it, for which the directors refuse to sue. [12] It is a remedy designed by
equity and has been the principal defense of the minority shareholders
against abuses by the majority.[13] Here, however, the case is not a derivative
suit but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097
and 37098 filed with the RTC of Iloilo for estafa and falsification of public
document. Among the basic requirements for a derivative suit to prosper is
that the minority shareholder who is suing for and on behalf of the
corporation must allege his complaint before the proper forum that he is
suing on a derivative cause of action on behalf of the corporation and all
other shareholders similarly situated who wish to join. [14] This is necessary to
vest jurisdiction upon the tribunal in line with the rule that it is the allegations
974
in the complaint that vests jurisdiction upon the court or quasi-judicial body
concerned over the subject matter and nature of the action. [15] This was not
complied with by the petitioners either in their complaint before the court a
quo nor in the instant petition which, in part, merely states that this is a
petition for review on certiorari on pure questions of law to set aside a portion
of the RTC decision in Criminal Cases Nos. 37097 and 37098 [16] since the
trial courts judgment of acquittal failed to impose any civil liability against the
private respondents. By no amount of equity considerations, if at all
deserved, can a mere appeal on the civil aspect of a criminal case be treated
as a derivative suit.
Granting, for purposes of discussion, that this is a derivative suit as
insisted by petitioners, which it is not, the same is outrightly dismissible for
having been wrongfully filed in the regular court devoid of any jurisdiction to
entertain the complaint. The case should have been filed with the Securities
and Exchange Commission (SEC) which exercises original and exclusive
jurisdiction over derivative suits, they being intra-corporate disputes, per
Section 5(b) of P.D. No. 902-A:
In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and decide
cases involving:
xxx xxx xxx
b) Controversies arising out of intra-corporate or
partnership relations, between and among stockholders, members, or
associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association and
the State insofar as it concerns their individual franchise or right to exist as
such entity;
xxx xxx xxx. [Underscoring ours]
Once the case is decided by the SEC, the losing party may file a petition for
review before the Court of Appeals raising questions of fact, of law, or mixed
questions of fact and law.[17] It is only after the case has ran this course, and
not earlier, can it be brought to us via a petition for review on certiorari under
Rule 45 raising only pure questions of law.[18] Petitioners, in pleading that we
treat the instant petition as a derivative suit, are trying to short-circuit the
entire process which we cannot here sanction.
As an appeal on the civil aspect of Criminal Cases Nos. 37097 and
37098 for falsification of public document and estafa, which this petition truly
is, we have to deny the petition just the same. It will be well to quote the
respondent courts ratiocinations acquitting the private respondents on both
counts:
The prosecution wants this Court to believe and agree that there is
falsification of public document because, as claimed by the prosecution,
Resolution No. 48, Series of 1986 (Exh. 1-E-1) was not taken up and passed
during the Regular Meeting of the Board of Trustees of the western Institute
of Technology (WIT), Inc. on March 30, 1986, but on June 1, 1986 special
meeting of the same board of trustees.
This Court is reluctant to accept this claim of falsification. The prosecution
omitted to submit the complete minutes of the regular meeting of the Board
of Trustees on March 30, 1986. It only presented in evidence Exh. C, which
is page 5 or the last page of the said minutes. Had the complete minutes
(Exh. 1 consisting of five (5) pages, been submitted, it can readily be seen
and understood that Resolution No. 48, Series of 1986 (Exh. 1-E-1) giving
compensation to corporate officers, was indeed included in Other Business,
No. 6 of the Agenda, and was taken up and passed on March 30, 1986. The
mere fact of existence of Exh. C also proves that it was passed on March 30,
1986 for Exh,. C is a part and parcel of the whole minutes of the Board of
Trustees Regular Meeting on March 30, 1986. No better and more credible
proof can be considered other than the Minutes (Exh. 1) itself of the Regular
Meeting of the Board of Trustees on March 30, 1986. The imputation that
said Resolution No.48 was neither taken up nor passed on March 30, 1986
because the matter regarding compensation was not specifically stated or
written in the Agenda and that the words possible implementation of said
975
Resolution No. 48, was expressly written in the Agenda for the Special
Meeting of the Board on June 1, 1986, is simply an implication. This
evidence by implication to the mind of the court cannot prevail over the
Minutes (Exh. 1) and cannot ripen into proof beyond reasonable doubt which
is demanded in all criminal prosecutions.
This Court finds that under the Eleventh Article (Exh. 3-D-1) of the Articles of
Incorporation (Exh. 3-B) of the Panay Educational Institution, Inc., now the
Western Institute of Technology, Inc., the officers of the corporation shall
receive such compensation as the Board of Directors may provide. These
Articles of Incorporation was adopted on May 17, 1957 (Exh. 3-E). The
Officers of the corporation and their corresponding duties are enumerated
and stated in Sections 1, 2, 3 and 4 of Art. III of the Amended By-Laws of the
Corporation (Exh. 4-A) which was adopted on May 31, 1957. According to
Sec. 6, Art. III of the same By-Laws, all officers shall receive such
compensation as may be fixed by the Board of Directors.
It is the perception of this Court that the grant of compensation or salary to
the accused in their capacity as officers of the corporation, through
Resolution No. 48, enacted on March 30, 1986 by the Board of Trustees, is
authorized by both the Articles of Incorporation and the By-Laws of the
Corporation. To state otherwise is to depart from the clear terms of the said
articles and by-laws. In their defense the accused have properly and rightly
asserted that the grant of salary is not for directors, but for their being
officers of the corporation who oversee the day to day activities and
operations of the school.
xxx xxx xxx
xxx [O]n the question of whether or not the accused can be held liable for
estafa under Sec. 1 (b) of Art. 315 of the Revised Penal Code, it is perceived
by this Court that the receipt and the holding of the money by the accused as
salary on basis of the authority granted by the Articles and By-Laws of the
corporation are not tainted with abuse of confidence. The money they
received belongs to them and cannot be said to have been converted and/or
misappropriated by them.
xxx xxx xxx.[19] [Underscoring ours]
From the foregoing factual findings, which we find to be amply
substantiated by the records, it is evident that there is simply no basis to hold
the accused, private respondents herein, civilly liable. Section 2(b) of Rule
111 on the New Rules on Criminal Procedure provides:
SEC. 2. Institution of separate civil action.
xxx xxx xxx
(b) Extinction of the penal action does not carry with it extinction of the
civil, unless the extinction proceeds from a declaration in a final judgment
that the fact from which the civil might arise did not exist.[Underscoring ours]
Likewise, the last paragraph of Section 2, Rule 120 reads:
SEC. 2. Form and contents of judgment.
xxx xxx xxx
In case of acquittal, unless there is a clear showing that the act from which
the civil liability might arise did not exist, the judgment shall make a finding
on the civil liability of the accused in favor of the offended party.
[Underscoring ours]
The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely
based on reasonable doubt but rather on a finding that the accused-private
respondents did not commit the criminal acts complained of. Thus, pursuant
to the above rule and settled jurisprudence, any civil action ex delicto cannot
prosper. Acquittal in a criminal action bars the civil action arising therefrom
where the judgment of acquittal holds that the accused did not commit the
criminal acts imputed to them.[20]
976
 WHEREFORE, the instant petition is hereby DENIED with costs against
petitioners.

SO ORDERED.

Padilla, (Chairman), Bellosillo, Vitug, and Kapunan, JJ., concur.

[G.R. No. 119877. March 31, 1997]

BIENVENIDO ONGKINGCO, as President and GALERIA DE

MAGALLANES CONDOMINIUM ASSOCIATION,
INC., petitioners, vs. NATIONAL LABOR RELATIONS
COMMISSION and FEDERICO B. GUILAS, respondents.

DECISION

KAPUNAN, J.:

At fore, once again, is the jurisdictional tug of war between the National
Labor Relations Commission (NLRC) and the Securities & Exchange
Commission (SEC) in this special civil action for certiorari under Rule 65 of
the Revised Rules of Court. It seeks to set aside the Resolutions of the
NLRC in NLRC NCR Case No. 00-05-02780-92 (NLRC CA No. 004329-93)
dated 9 March 1995 and 4 April 1995 which reversed the decision of Labor
Arbiter Oswald Lorenzo and denied petitioners' motion for reconsideration,
respectively.

Petitioner Galeria de Magallanes Condominium Association, Inc.

(Galeria for brevity) is a non-stock, non-profit corporation formed in
accordance with R.A. No. 4726, otherwise known as the Condominium Act.
"Its primary purpose is to hold title to the common areas of the Galeria de
Magallanes Condominium Project and to manage and administer the same

977
for the use and convenience of the residents and/or owners." [1] Petitioner
Bienvenido Ongkingco was the president of Galeria at the time private
respondent filed his complaint.
On 1 September 1990, Galeria's Board of Directors appointed private
respondent Federico B. Guilas as Administrator/Superintendent. He was
given a "monthly salary of P10,000 subject to review after five (5) months
and subsequently thereafter as Galeria's finances improved." [2]
As Administrator, private respondent was tasked with the maintenance
of the "performance and elegance of the common areas of the condominium
and external appearance of the compound thereof for the convenience and
comfort of the residents as well as to keep up the quality image, and hence
the value of the investment for the owners thereof." [3]
However, on 17 March 1992, through a resolution passed by the Board
of Directors of Galeria, private respondent was not re-appointed as
Administrator.
As a result, on 15 May 1992, private respondent instituted a complaint
against petitioners for illegal dismissal and non-payment of salaries with the
NLRC.
In response, on 22 July 1992, petitioners filed a motion to dismiss
alleging that it is the SEC, and not the labor arbiter, which has jurisdiction
over the subject matter of the complaint.
Labor Arbiter Lorenzo granted the aforestated motion to dismiss in his
order dated 29 December 1992. He ruled, thus:
A judicious calibration of the position taken by the contending parties
preponderate clearly in favor of respondents, that this case is within the
jurisdiction of the Securities and Exchange Commission and not this Office
(Labor Arbiter).
Our reasons are as follows:
ONE. The Position of Administrator or Superintendent is a corporate position,
whose appointment depended on the Board of Directors. As such, the
position of the administrator is a corporate creation.
TWO. Clearly from the respondent corporation's Articles of Incorporation, Art.
V, Sec. 6 thereof, the appointment and removal of the administrator is a
prerogative that belongs to the Board, and thereby involves the exercise of
deliberate choice and faculty of discriminative selection.
THIRD. Thus, we find lacking of merit the argument of complainant that since
he is not a member of the condominium association where he was formerly
administrator, or is not a unit holder thereof, since a person's relationship to a
corporation is not determinative of the services performed but by the
incidents of the relationship as they exist. (PSBA vs. LEANO, 127 SCRA
778.)
The resolution, therefore, of the other pending incident, which is the MOTION
FOR SUBSTITUTION OF PARTIES is hereby deferred for action by the SEC.
WHEREFORE, in view of all the foregoing considerations, this Office hereby
orders the dismissal of the instant action for reason of lack of jurisdiction. The
complainant, if he is mindful should file this case with the Securities and
Exchange Commission.
SO ORDERED.[4]
The NLRC, however, reversed the Labor Arbiter's order in its resolution
dated 9 March 1995. It ruled in this wise:
We find merit in the appeal. It cannot be gainsaid that the complainant's
cause of action in his complaint is illegal dismissal which issue falls four
square within the jurisdiction of the NLRC. This is so, because while it may
be true that the termination of the complainant was effected allegedly by a
resolution of the Board of Directors of the respondent association, this did not
make the dispute intracorporate in nature. Moreover, We have taken note of
the fact that the complainant is neither a member of the association nor an
978
officer thereof. Hence, We are more convinced that he is an employee of the
respondent association occupying the position of administrator who is in (sic)
charged with the function of managing and administering the building or
condominium owned by the members. Indeed, there is a whale of difference
between a member of the association who is a part owner of the building and
a mere employee performing managerial and administrative functions which
are necessary in the usual undertaking of the respondent Association. The
complainant falls under the second category.
And, to the point of being repetitious, it needs to be stressed that the fact that
the complainant was removed by the Board of Directors did not change the
issue from an illegal dismissal case to an intracorporate one. For, what
remains to be resolved here is whether or not the complainant's removal
from his position as Administrator was for a just and valid cause and in
compliance with due process. And, as the facts now stand, the issue is within
the scope of authority of the National Labor Relations Commission to
resolve.
We simply could not agree with the conclusions of law made by the
Arbiter a quo on the applicability of the provisions of P.D. 902. Our view finds
basis in the case of Gregorio Araneta University Foundation vs. Antonio J.
Teodoro and NLRC (167 SCRA 79) wherein the Supreme Court had the
occasion to clarify the jurisdiction of the Securities and Exchange
Commission and that of the NLRC. It (Supreme Court) held, thus
"x x x Relying on Philippine School of Business Administration, et al., (127
SCRA 778) and Dy, et al., vs. National Labor Relations Commission, et al.,
(145 SCRA 211), Petitioner theorizes that since private respondent was a
corporate officer, the present controversy is within the jurisdiction of the
Securities and Exchange Commission, pursuant to P.D. 902-A, and not in the
public respondent.
Without need of applying the rule on estoppel by laches against petitioner, its
contention must fail on the ground of misplaced reliance. As explained in Dy,
the same is true with Philippine Business Administration, the controversies
therein were intra corporate in nature and squarely within the purview of
Section 5(c), PD. 902-A since the real question was the invalidity of the board
of director's meeting wherein corporate officers involved were not re-elected,
resulting in the termination of their services." (Underscoring ours.)
As obtaining in this case, no intracorporate controversy exists, hence, the
jurisdiction of the NLRC should be sustained.
WHEREFORE, finding merit on the appeal, the same is hereby, given due
course. Accordingly, the Order appealed from is declared Null and Void and
is hereby, VACATED and SET ASIDE. Accordingly, let the records of the case
be remanded to the Arbitration Branch of origin for further proceedings. With
the directive that the instant case be given priority in the calendar of the
Labor Arbiter for the speedy disposition hereon. Concomitant hereto, the
respondents are hereby directed to submit their position paper within ten (10)
days from receipt hereof.
SO ORDERED.[5]
Petitioners filed a motion for reconsideration but the same was denied in
the NLRC's resolution dated 4 April 1995.[6] Hence, the present recourse.
The petitioners raised a single issue:
THE PRIVATE RESPONDENT ACTED WITHOUT OR IN EXCESS OF
ITS JURISDICTION OR COMMITTED GRAVE ABUSE OF
DISCRETION IN TAKING COGNIZANCE OF A SUBJECT MATTER
THAT FELL WITHIN THE ORIGINAL AND EXCLUSIVE JURISDICTION
OF THE SEC.
The petition is granted.
Specifically delineated in P.D. 902-A are the cases over which the SEC
exercises exclusive jurisdiction:
SECTION 5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships and
979
other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board of directors,
business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between any or
all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
corporation, partnership or association and the State insofar as it concerns
their individual franchise or right to exist as such entity;
c) Controversies in the election or appointment of directors, trustees, officers,
or managers of such corporations, partnerships or associations.
d) Petitions of corporations, partnerships or associations to be declared in
the state of suspension of payments in cases where the corporation,
partnership or association possesses property to cover all of its debts but
foresees the impossibility of meeting them when they respectively fall due or
in cases where the corporation, partnership or association has no sufficient
assets to cover its liabilities, but is under the Management Committee
created pursuant to this Decree. (Underscoring ours.)
The Solicitor General contends that the case at bar falls outside the
purview of the aforequoted provision. He insists that private respondent was
a mere employee of petitioner corporation being tasked mainly, as
administrator/superintendent, with the upkeep of the condominium's common
areas. He, thus, maintains that private respondent cannot be deemed a
corporate officer because "it is the nature of one's functions and not the
nomenclature or title given to one's job which determines one's status in a
corporation."[7]
The contentions of public respondent lack merit. That private
respondent is an officer of petitioner corporation and not its mere employee
cannot be questioned. The by-laws of the Galeria de Magallanes
Condominium Association specifically includes the
Superintendent/Administrator in its roster of corporate officers:
ARTICLE IV
OFFICERS
Section 1. Executive Officers The Executive officers of the corporation shall
be a President, a Vice President, a Treasurer, all of whom shall be elected by
the Board of Directors. They may be removed with or without cause at any
meeting by the concurrence of four directors. The Board of Directors may
appoint a Superintendent or Administrator and such other officers and
employees and delineate their powers and duties as the Board shall find
necessary to manage the affairs of the corporation.[8] (Underscoring ours.)
xxx.
Section 6. The Superintendent or Administrator The Board of Directors may
appoint a Superintendent or Administrator for the condominium project if the
activities and financial condition of the Association so warrant. If one is so
appointed, he shall be the principal administrative officer of the Association.
He shall attend to routinary and day-to-day business and activities of the
Association and shall keep regular officer hours for the purpose. He shall
have such other duties and powers as may be conferred upon him by the
Board of Directors or delegated by the President of the Association.
At the discretion of the Board of Directors, the work and duties of
Superintendent or Administrator may be entrusted to a juridical entity which is
qualified and competent to perform such work.[9]
Closely approximating the dispute at bar is the recent case of Tabang v.
NLRC.[10] This Court, through Justice Florenz D. Regalado, ruled that:
980
Contrary to the contention of petitioner, a medical director and a hospital
administrator are considered as corporate officers under the by-laws of
respondent corporation. Section 2(i), Article I thereof states that one of the
powers of the Board of Trustees is "(t)o appoint a Medical Director,
Comptroller/Administrator, Chiefs of Services and such other officers as it
may deem necessary and prescribe their powers and duties."
The president, vice-president, secretary and treasurer are commonly
regarded as the principal or executive officers of a corporation, and modern
corporation statutes usually designate them as the officers of the corporation.
However, other offices are sometimes created by the charter or by-laws of a
corporation, or the board of directors may be empowered under the by-laws
of a corporation to create additional offices as may be necessary.
It has been held that an "office" is created by the charter of the corporation
and the officer is elected by the directors or stockholders. On the other hand,
an "employee" usually occupies no office and generally is employed not by
action of the directors or stockholders but by the managing officer of the
corporation who also determines the compensation to be paid to such
employee.
In the case at bar, considering that herein petitioner, unlike an ordinary
employee, was appointed by respondent corporation's Board of Trustees in
its memorandum of October 30, 1990, she is deemed an officer of the
corporation. Perforce, Section 5(c) of Presidential Decree No. 902-A, which
provides that the SEC exercises exclusive jurisdiction over controversies in
the election or appointment of directors, trustees, officers or managers of
corporations, partnerships or associations, applies in the present dispute.
Accordingly, jurisdiction over the same is vested in the SEC, and not in the
Labor Arbiter or the NLRC.
Supplementing the afore-quoted ruling, in Lozon v. NLRC[11] and
Espino v. NLRC,[12] citing Fortune Cement Corp. v. NLRC,[13] we declared
that:
A corporate officer's dismissal is always a corporate act and/or an intra-
corporate controversy and that nature is not altered by the reason or wisdom
which the Board of Directors may have in taking such action.
Based on the foregoing, we must rule that private respondent was
indeed a corporate officer. He was appointed directly by the Board of
Directors not by any managing officer of the corporation and his salary was,
likewise, set by the same Board. Having thus determined, his dismissal or
non-appointment is clearly an intra-corporate matter and jurisdiction,
therefore, properly belongs to the SEC and not the NLRC.
The respondents also attack the SEC's jurisdiction over the instant case
on grounds that Guilas was not elected by the Board of Directors but was
merely appointed.
This particular argument baffles us. P.D. 902-A cannot be any clearer.
Sec. 5(c) of said law expressly covers both election and appointment of
corporate directors, trustees, officers and managers.[14]
It is of no consequence, likewise, that the complaint of private
respondent for illegal dismissal includes money claims, jurisdiction remains
with the SEC as ruled in the case of Cagayan de Oro Coliseum, Inc. v. Office
of the MOLE:[15]
Although the reliefs sought by Chaves appear to fall under the jurisdiction of
the labor arbiter as they are claims for unpaid salaries and other
remunerations for services rendered, a close scrutiny thereof shows that said
claims are actually part of the perquisites of his position in, and therefore
interlinked with his relations with the corporation. In Dy vs. NLRC, the Court
said: "(t)he question of remuneration involving as it does, a person who is not
a mere employee but a stockholder and officer, an integral part, it might be
said, of the corporation, is not a simple labor problem but a matter that
comes within the area of corporate affairs and, management, and is in fact a
corporate controversy in contemplation of the Corporation Code."
981
 WHEREFORE, the petition for certiorari is given DUE COURSE, the
assailed resolutions of the NLRC are hereby REVERSED and the Order of
the Labor Arbiter dated 29 December 1992 REINSTATED.

SO ORDERED.

Bellosillo, Vitug, and Hermosisima, Jr., JJ., concur.

Padilla, (Chairman), no part; member of Magallanes Village Association.

[G.R. No. 121143. January 21, 1997]

PURIFICACION G. TABANG, petitioner, vs. NATIONAL LABOR

RELATIONS COMMISSION and PAMANA GOLDEN CARE
MEDICAL CENTER FOUNDATION, INC., respondents.

DECISION

REGALADO, J.:

This is a petition for certiorari which seeks to annul the resolution of the
National Labor Relations Commission (NLRC), dated June 26, 1995,
affirming in toto the order of the labor arbiter, dated April 26, 1994, which

982
dismissed petitioners complaint for illegal dismissal with money claims for
lack of jurisdiction.
The records show that petitioner Purificacion Tabang was a founding
member, a member of the Board of Trustees, and the corporate secretary of
private respondent Pamana Golden Care Medical Center Foundation, Inc., a
non-stock corporation engaged in extending medical and surgical services.
On October 30, 1990, the Board of Trustees issued a memorandum
appointing petitioner as Medical Director and Hospital Administrator of private
respondents Pamana Golden Care Medical Center in Calamba, Laguna.
Although the memorandum was silent as to the amount of remuneration
for the position, petitioner claims that she received a monthly retainer fee of
five thousand pesos (P5,000.00) from private respondent, but the payment
thereof was allegedly stopped in November, 1991.
As medical director and hospital administrator, petitioner was tasked to
run the affairs of the aforesaid medical center and perform all acts of
administration relative to its daily operations.
On May 1, 1993, petitioner was allegedly informed personally by Dr.
Ernesto Naval that in a special meeting held on April 30, 1993, the Board of
Trustees passed a resolution relieving her of her position as Medical Director
and Hospital Administrator, and appointing the latter and Dr. Benjamin
Donasco as acting Medical Director and acting Hospital Administrator,
respectively. Petitioner averred that she thereafter received a copy of said
board resolution.
On June 6, 1993, petitioner filed a complaint for illegal dismissal and
non-payment of wages, allowances and 13th month pay before the labor
arbiter.
Respondent corporation moved for the dismissal of the complaint on the
ground of lack of jurisdiction over the subject matter. It argued that petitioners
position as Medical Director and Hospital Administrator was interlinked with
her position as member of the Board of Trustees, hence, her dismissal is an
intra-corporate controversy which falls within the exclusive jurisdiction of the
Securities and Exchange Commission (SEC).
Petitioner opposed the motion to dismiss, contending that her position
as Medical Director and Hospital Administrator was separate and distinct
from her position as member of the Board of Trustees. She claimed that
there is no intra-corporate controversy involved since she filed the complaint
in her capacity as Medical Director and Hospital Administrator, or as an
employee of private respondent.
On April 26, 1994, the labor arbiter issued an order dismissing the
complaint for lack of jurisdiction. He ruled that the case falls within the
jurisdiction of the SEC, pursuant to Section 5 of Presidential Decree No. 902-
A. [1]
Petitioners motion for reconsideration was treated as an appeal by the
labor arbiter who consequently ordered the elevation of the entire records of
the case to public respondent NLRC for appellate review. [2]
On appeal, respondent NLRC affirmed the dismissal of the case on the
additional ground that the position of a Medical Director and Hospital
Administrator is akin to that of an executive position in a corporate ladder
structure, hence, petitioners removal from the said position was an intra-
corporate controversy within the original and exclusive jurisdiction of the
SEC. [3]
Aggrieved by the decision, petitioner filed the instant petition which we
find, however, to be without merit.
We agree with the findings of the NLRC that it is the SEC which has
jurisdiction over the case at bar. The charges against herein private
respondent partake of the nature of an intra-corporate controversy. Similarly,
the determination of the rights of petitioner and the concomitant liability of
private respondent arising from her ouster as a medical director and/or
983
hospital administrator, which are corporate offices, is an intra-corporate
controversy subject to the jurisdiction of the SEC.
Contrary to the contention of petitioner, a medical director and a hospital
administrator are considered as corporate officers under the by-laws of
respondent corporation. Section 2(i), Article I thereof states that one of the
powers of the Board of Trustees is (t)o appoint a Medical Director,
Comptroller/Administrator, Chiefs of Services and such other officers as it
may deem necessary and prescribe their powers and duties. [4]
The president, vice-president, secretary and treasurer are commonly
regarded as the principal or executive officers of a corporation, and modern
corporation statutes usually designate them as the officers of the corporation.
[5]
However, other offices are sometimes created by the charter or by-laws of
a corporation, or the board of directors may be empowered under the by-
laws of a corporation to create additional offices as may be necessary.[6]
It has been held that an office is created by the charter of the
corporation and the officer is elected by the directors or stockholders. [7] On
the other hand, an employee usually occupies no office and generally is
employed not by action of the directors or stockholders but by the managing
officer of the corporation who also determines the compensation to be paid to
such employee.[8]
In the case at bar, considering that herein petitioner, unlike an ordinary
employee, was appointed by respondent corporations Board of Trustees in
its memorandum of October 30, 1990, [9] she is deemed an officer of the
corporation. Perforce, Section 5(c) of Presidential Decree No. 902-A, which
provides that the SEC exercises exclusive jurisdiction over controversies in
the election or appointment of directors, trustees, officers or managers of
corporations, partnerships or associations, applies in the present
dispute. Accordingly, jurisdiction over the same is vested in the SEC, and not
in the Labor Arbiter or the NLRC.
Moreover, the allegation of petitioner that her being a member of the
Board of Trustees was not one of the considerations for her appointment is
belied by the tenor of the memorandum itself. It states: We hope that you will
uphold and promote the mission of our foundation, [10] and this cannot be
construed other than in reference to her position or capacity as a corporate
trustee.
A corporate officers dismissal is always a corporate act, or an intra-
corporate controversy, and the nature is not altered by the reason or wisdom
with which the Board of Directors may have in taking such action. [11] Also, an
intra-corporate controversy is one which arises between a stockholder and
the corporation. There is no distinction, qualification, nor any exemption
whatsoever. The provision is broad and covers all kinds of controversies
between stockholders and corporations. [12]
With regard to the amount of P5,000.00 formerly received by herein
petitioner every month, the same cannot be considered as compensation for
her services rendered as Medical Director and Hospital Administrator. The
vouchers[13] submitted by petitioner show that the said amount was paid to
her by PAMANA, Inc., a stock corporation which is separate and distinct from
herein private respondent. Although the payments were considered
advances to Pamana Golden Care, Calamba branch, there is no evidence to
show that the Pamana Golden Care stated in the vouchers refers to herein
respondent Pamana Golden Care Medical Center Foundation, Inc.
Pamana Golden Care is a division of Pamana, Inc., while respondent
Pamana Golden Care Medical Center Foundation, Inc. is a non-stock, non-
profit corporation. It is stated in the memorandum of petitioner that Pamana,
Inc. is a stock and profit corporation selling pre-need plan for education,
pension and health care. The health care plan is called Pamana Golden Care
Plan and the holders are called Pamana Golden Care Card Holders or,
simply, Pamana Members. [14]
It is an admitted fact that herein petitioner is a retained physician of
Pamana, Inc., whose patients are holders of the Pamana Golden Care
Card. In fact, in her complaint[15] filed before the Regional Trial Court of
Calamba, herein petitioner is asking, among others, for professional fees
and/or retainer fees earned for her treatment of Pamana Golden Care card
984
holders.[16]Thus, at most, said vouchers can only be considered as proof of
payment of retainer fees made by Pamana, Inc. to herein petitioner as a
retained physician of Pamana Golden Care.

Moreover, even assuming that the monthly payment of P5,000.00 was a

valid claim against respondent corporation, this would not operate to
effectively remove this case from the jurisdiction of the SEC. In the case of
Cagayan de Oro Coliseum, Inc. vs. Office of the Minister of Labor and
Employment, etc., et al.,[17] we ruled that (a)lthough the reliefs sought by
Chavez appear to fall under the jurisdiction of the labor arbiter as they are
claims for unpaid salaries and other remunerations for services rendered, a
close scrutiny thereof shows that said claims are actually part of the
perquisites of his position in, and therefore interlinked with, his relations with
the corporation. In Dy, et al., vs. NLRC, et al., the Court said: (t)he question
of remuneration involving as it does, a person who is not a mere employee
but a stockholder and officer, an integral part, it might be said, of the
corporation, is not a simple labor problem but a matter that comes within the
area of corporate affairs and management and is in fact a corporate
controversy in contemplation of the Corporation Code.

WHEREFORE, the questioned resolution of the NLRC is hereby

AFFIRMED, without prejudice to petitioners taking recourse to and seeking
relief through the appropriate remedy in the proper forum.

SO ORDERED.

Romero, Puno, Mendoza, and Torres, Jr., JJ., concur.

985
 In connection with this complaint, plaintiff moved for the issuance of a writ of
preliminary injunction to restrain defendant Jose Manuel Lezama from
managing the corporation pending the determination of this case, but after
hearing where parties presented testimonial and documentary evidence, the
court denied the motion. Thereafter, by agreement of the parties and without
any trial on the merits, the case was submitted for judgment on the sole legal
question of whether plaintiff could be legally removed as manager of the
corporation merely by resolution of the board of directors or whether the
affirmative vote of 2/3 of the paid shares of stocks was necessary for that
purpose. And passing upon this legal point, the trial court held that the
removal of plaintiff was legal and dismissed the complaint without
G.R. No. L-10556 April 30, 1958 pronouncement as to costs. Plaintiff appealed to the Court of Appeals but
finding that the question at issue is one of law, the latter certified the case to
RICARDO GURREA, plaintiff-appellant, us for decision.
vs.
JOSE MANUEL LEZAMA, ET AL., defendants-appellees. Section 33 of the Corporation Law provides: "Immediately after the election,
the directors of a corporation must organize by the election of a president,
Fulgencio Vega and Felix D. Bacabac for appellant. who must be one of their number, a secretary or clerk who shall be a resident
Jose Manuel Lezama for appellees. of the Philippines . . . and such other officers as may be provided for in the
Jose Manuel Lezama and Genivera F. de Lezama. Domingo B. Lauren for by-laws." The by-laws of the instant corporation in turn provide that in the
the other appellees. board of directors there shall be a president, a vice-president, a secretary
and a treasurer. These are the only ones mentioned therein as officers of the
BAUTISTA ANGELO, J.: corporation. The manager is not included although the latter is mentioned as
the person in whom the administration of the corporation is vested, and with
Plaintiff instituted this action in the Court of First Instance of Iloilo to have the exception of the president, the by-laws provide that the officers of the
Resolution No. 65 of the Board of Directors of the La Paz Ice Plant and Cold corporation may be removed or suspended by the affirmative vote of 2/3 of
Storage Co., Inc., removing him from his position of manager of said the corporation (Exhibit A).
corporation declared null and void and to recover damages incident thereto.
The action is predicated on the ground that said resolution was adopted in From the above the following conclusion is clear: that we can only regard as
contravention of the provisions of the by-laws of the corporation, of the officers of a corporation those who are given that character either by the
Corporation Law and of the understanding, intention and agreement reached Corporation Law or by its by-laws. The rest can be considered merely as
among its stockholders. employees or subordinate officials. And considering that plaintiff has been
appointed manager by the board of directors and as such does not have the
Defendant answered the complaint setting up as defense that plaintiff had character of an officer, the conclusion is inescapable that he can be
been removed by virtue of a valid resolution. suspended or removed by said board of directors under such terms as it may
see fit and not as provided for in the by-laws. Evidently, the power to appoint
carries with it the power to remove, and it would be incongruous to hold that

986
having been appointed by the board of directors he could only be removed
by the stockholders.
The above interpretation finds also support in the American authorities.
Fletcher, in his treatise, states the rule in the following wise: "It is sometimes
important to determine whether a person representing a corporation is to be
classed as an officer of the company or merely as an agent or employee,
especially in construing statutes renting only to 'officers' of corporations.
Generally the officers of a corporation are enumerated in its charter or by-
laws, and include a president, vice-president, secretary, treasurer and
sometimes others. The statutes in most of the states expressly provide for
the election of a president, secretary and treasurer, and then provide, that
there shall be such other officers, agents and factors as the corporation shall
authorize for that purpose. If the charter expressly enumerates who shall be
officers of the company, a person whose position is not enumerated is not an
officer as to members of the corporation, since the charter is conclusive upon
them" (Fletcher, Cyclopedia of the Law of Private Corporations, Vol. II, p. 19).
It has been likewise held "that the offices pertaining to a private corporation
are defined in its charter and by-laws, and that no other positions in the
service of the corporation are offices" (Ann. 53 A.L.R., 599).
Indeed, there are authorities galore that hold that a general manager is not
an officer of a corporation, even if his powers and influence may be as great
as those of any officer in said organization.
Officers Distinguished from Mere Employees. As already stated,
both officers and employees are agents of the corporation and the
difference between them is largely one of degree; the officers are the
most important employees exercising greater authority or power in
the management of the business. Ordinarily, too, the principal offices
are designated by statute, charter or by-law provisions, and specific
duties are imposed upon certain officers. Thus the state statute or a
by-law may provide that stock certificates shall be signed by the
president and countersigned by the secretary or treasurer. The
general manager of a corporation is not ordinarily classed as an
officer, but his powers and influence may be quite as great as those
of any person in the organization. (Grange, Corporation Law for
Officers and Directors, p. 432; Emphasis supplied.)
One distinction between officers and agents of a corporation lies in
the manner of their creation. An officer is created by the charter of
the corporation, and the officer is elected by the directors or the
stockholders. An agency is usually created by the officers, or one or
more of them, and the agent is appointed by the same authority. It is
clear that the two terms officers and agents are by no means
interchangeable. One, deriving its existence from the other, and
being dependent upon that other for its continuation, is necessarily
restricted in its powers and duties, and such powers and duties, are
not necessarily the same as those pertaining to the authority creating
it. The officers, as such, are the corporation. An agent is an
employee. "A mere employment, however liberally compensated,
does not rise to the dignity of an office."21 Am and Eng. Enc. Law
(2d Ed.) 836. In Wheeler and Wilson Mfg. Co. vs. Lawson, 57 Wis.
400, 15 N. W. 398, it was held that under a statute requiring an
affidavit to be made by an officer of a corporation, the general agent
or managing agent, within the state, of a foreign corporation is not an
officer. In Farmers' Loan and Trust Co. vs. Warring, 20 Wis. 305,
service was made upon the "principal agent" of a corporation holding
in trust a railroad, when the statute required service upon a "principal
officer." In answering the question whether or not the agent was a
principal officer the court said: "It is evident he was not, and must be
regarded only as an agent not an officer of any kind, much less a
principal officer." A ruling that a "general manager" of a corporation
was not authorized to verify pleadings, under a statute requiring
verification by "an officer" was made in Meton vs. Isham Wagon Co.
(Sup.) 4 N. Y. Supp. 215. In Raleigh, etc. R. Co. vs. Pullman Co., 122
Ga. 704, 5O S.E. 1008 (4), it was held that the term "general
manager." as applied to one representing a corporation, and
especially a railroad corporation, imported an agent of a very
extensive authority; but it was not ruled that even the term "general
manager" would import that the person holding that position was
necessarily an officer of the company. One distinction between an
officer and an agent suggested in Commonwealth vs. Christian, 9
987
 Phila. (Pa.) 558, is that on officer of a corporation, if illegally
excluded from his office, may by mandamus compel the corporation,
to reinstate him; while an agent may be dismissed without cause,
and his only remedy would be compensation in damages. It would
not be contended that the "general agent of the defendant at
Columbus," in the event of his discharge, could be reinstated by
mandamus. We do not think the general agent at Columbus was an
officer of the defendant company. Therefore his alleged waiver of a
condition in the policy was not binding upon the company.
(Vardeman vs. Penn. Mut. Life Ins. Co. 125 Ga. 117, 54 S.E. P. 66;
Emphasis supplied.)
The plaintiff-predicates this action on said contract, and claims that
the same being signed by the defendant through its "general
manager" if admitted evidence, would show sufficient authority prima
facie to do any act which the directors could authorize or ratify. The
instrument in question being signed by James W. Codle, "General
Manager" and no evidence in the trial being produced showing the
duties of said manager or what kind of an office he was general
manager of, the "general manager" without proof as to the nature of
services performed by the persons called "general manager", have
no meaning in law, excepting that the persons bearing the title is an
employee who has been designated with a title. It does not make
him an officer of the company employing him. (Studerbaker Bros.
Co. vs. R. M. Rose Co., 119 N.Y.S pp. 970, 97; Emphasis supplied.)
We therefore hold that plaintiff has been properly removed when the board of
directors of the instant corporation approved its Resolution No. 65 on June 3,
1948.
We will now clarify some of the points raised by the distinguished dissenter in
his dissenting opinion.
The fact that the "manager" of the corporation in the several statutes enacted
by Congress is held criminally liable for violation of any of the penal
provisions therein prescribed does not make him an "officer" of the
corporation. This liability flows from the nature of his duties which are
delegated to him by the board of directors. He is paid for them. Hence, he
has to answer for them should he use it in violation of law. In the case of
Robinson vs. Moark-Nemo Consol Mining Co., et al., 163 S. W. 889, in
connection with the liability of the manager, the court said:
Common justice and common sense demand that, where those in
charge and control of the management of a corporation direct it
along paths of wrongdoing, they should be held accountable by law. .
. . This doctrine will prevent many wrongs, and have a salutary
influence in bringing about the lawful and orderly management of
corporations.
It is claimed that the cases of Meton vs. Isham Wagon, 4 N.Y.S., 215 and
State vs. Bergs, 217 N. W., 736, supporting the theory that a manager is not
necessarily an officer, are in illo tempore.1 It is submitted that we do not
adopt a rule just because it is new nor reject another just because it is old.
We adopt a rule because it is a good and sound rule. The fact however is
that they are not the only authorities supporting that theory. Additional cases
are cited by Fletcher in support thereof, such as the cases of
Vardeman vs. Penn. Mut. Life Ins. Co., supraStudebaker Bros. Co. vs. R. M.
Rose Co., supra.
The dissenting opinion quotes from Thompson and Fletcher to support the
theory that the general manager of a corporation may be considered as its
principal officer even though not so mentioned in its charter or bylaws. We
have examined the cast cited in support of that theory but we have found that
they are not in point. Thus, we have found (1) that the parties involved are
mostly outsiders who press their transactions against the corporation; (2) that
the point raised is whether the acts of the manager bind the corporation; (3)
that the tendency of the courts is to hold the corporation liable for the acts of
the manager so long as they are within the powers granted, hence, the
courts emphasized the importance of the position of manager; and (4) the
position of manager was discussed from the point of view of an outsider and
not from the internal organization of the corporation, or in accordance with its
charter or by-laws. In the present case, however, the parties are the manager
and the corporation. And the solution of the problem hinges on the internal
988
government of the corporation where the charter and the by-laws are
necessarily involved in the determination of the rights of the parties. Indeed,
it has been held: "But it is urged that a corporation may have officers not
recognized by the charter and by-laws. It is possible this may be as to
matters arising between strangers and the corporation." [Com. vs. Christian,
9 Phila. (Pa.) 556; emphasis supplied].
The cases on all fours with the present are those of State ex rel
Blackwood vs. Brast, et al., 127 S. E. 507 and Denton Milling Co. vs. Blewitt,
254 S. W. 236, 238, where the parties involved are the manager and the
corporation. The issue raised is the relation of the manager towards the
corporation. The position of the manager is discussed from the point of view
of its internal government. And the holding of the court is that the manager is
the creation of the board of directors and the agent through whom the
corporate duties of the board are performed. Hence, the manager holds his
position at the pleasure of the board. This stipulation is well expressed in the
following words of Thompson:
The word "manager" implies agency, control, and presumptively
sufficient authority to bind a corporation in a case in which the
corporation was an actual party. It has been said that such agent
must have the same general supervision of the corporation as is
associated with the office of cashier or secretary. By whatever name
he may be called, such, managing agent is a mere employee of the
board of directors and holds his position subject to the particular
contract of employment; and unless the contract of employment fixes
his term of office, it may be terminated at the pleasure of the
board. . . . The manager, like any other appointed agent, is subject to
removal when his term expires and on the request of the proper
officer he should turn over his business to the corporation and,
where he refuses to comply, he may be restrained from the further
performance of work for the corporation. (Thompson on
Corporations, Vol. III, 3rd., pp. 209-210; Emphasis supplied.)
It is not correct to hold that the theory that a manager is not classed as an
officer of a corporation is only the minority view. If we consider the states that
hold that managers are merely agents or employees as among those that
hold the theory that managers are not necessarily officers, then our theory is
supported by the majority view. Indeed, this view is upheld by nine
states,2 whereas only six states adopt the view that managers are considered
principal officers of the corporation.3
The dissenting opinion quotes the provision of the bylaws relative to the
administration of the affairs of the instant corporation. It is there provided that
the affairs of the corporation shall be successively administered by (1) the
stockholders; (2) the board of directors; and(3) the manager. From this it
concludes that the manager should be considered an officer.
The above enumeration only emphasizes the different organs through which
the affairs of the corporation should be administered and the order in which
the powers should be exercised. The stockholders are the entity, composing
the whole corporation. The board of directors is the entity elected by the
stockholders to manage the affairs of the corporation. And the manager is the
individual appointed by the board of directors to carry out the powers
delegated to him. In other words, the manager is the creation of the board of
directors. He is an alter egoof the board. As our law provides that only those
enumerated in the charter or in the by-laws are considered officers, the
manager who has not been so enumerated therein, but only incidentally
mentioned in the order of management, cannot be considered an officer of
the corporation within their purview.
The mere fact that the directors are not mentioned in the by-laws as officers
does not deprive them of their category as such for their character as officer
is secured in the charter. The same is not true with the manager. Customs
and corporate usages cannot prevail over the express provisions of the
charter and the by-laws.
There is no comparison between an appointee of the President, especially
one in the judiciary, and the appointee of the board of directors of a
corporation. In the first case, removal is especially provided for by law and in
the second, the appointee holds office at the pleasure of the board. And with
regard to the powers of the board of director, to remove a manager of the
corporation, Thompson has the following to say:
989
 . . . Below the grade of director and such other officers as are elected [G.R. No. L-58468. February 24, 1984.]
by the corporation at large, the general rule is that the officers of
private corporations hold their offices during the will of the directors, PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION, MANILA,
and are hence removable by the directors without assigning any ANTONIO M. MAGTALAS, JOSE ARANAS, JUAN D. LIM, JOSE F.
cause for the removal, except so far as their power may be PERALTA and BENJAMIN P. PAULINO, Petitioners, v. LABOR ARBITER
restrained by contract with the particular officer, just as any other LACANDOLA S. LEANO of the National Labor Relations Commission
employer may discharge his employee. Speaking generally, it may and RUFINO R. TAN, Respondents.
be said that the power to appoint carries with it the power to
remove. . . . the directors who appoint a ministerial officer may De Santos, Balgos and Perez Law Office, for Petitioners.
undoubtedly remove him at pleasure, and he has no remedy other
than an action for damages against the corporation for a breach of The Solicitor General for respondent Arbiter.
contract. . . . The ordinary ministerial and other lesser officers,
however, hold their offices during the pleasure of the directors and Caparas, Ilagan, Alcantara & Gatmaytan Law Office for Private
may be removed at will, without assigned cause. Of this class of Respondent.
officers and agents are the secretary and treasurer of the
corporation, the general manager, the assistant manager, the field
manager, the attorney of the company, an assistant horticulturist, and
the bookkeepers. (Thompson on Corporations, Vol. III, 521-523.)
SYLLABUS
Wherefore, the decision appealed from is affirmed, with costs against
appellant.

Paras, C.J., Montemayor, Concepcion, Reyes, J.B.L. and Endencia,

JJ., concur.
1. COMMERCIAL LAW; CORPORATION LAW; SECURITIES AND
EXCHANGE COMMISSION; JURISDICTION THEREOF VIS-A-VIS THE
NATIONAL LABOR RELATIONS COMMISSION; CASE AT BAR. The
jurisdiction of the Securities and Exchange Commission (SEC) vis-a-vis the
National Labor Relations Commission (NLRC) is in issue. An intracorporate
controversy would call for SEC jurisdiction. A labor dispute, that of the NLRC.

2. ID.; ID.; INTRA-CORPORATE CONTROVERSIES; LEGALITY OF

ELECTION OF CORPORATE DIRECTORS, IN THE NATURE OF; CASE AT
BAR. Basically, therefore, the question is whether the election of directors
on August 1, 1981 and the election of officers on September 5, 1981, which
resulted in TANs failure to be re-elected, were validly held. This is the crux of
the question that TAN has raised before the SEC. Even in his position paper

990
before the NLRC, TAN alleged that the election on August 1, 1981 of the DECISION
three directors was in contravention of the PSBA By-Laws providing that any
vacancy in the Board shall be filled by a majority vote of the stockholders at a
meeting specially called for the purpose. Thus, he concludes, the Board
meeting on September 5, 1981 was tainted with irregularity on account of the
presence of illegally elected directors without whom the results could have MELENCIO-HERRERA, J.:
been different. TAN invoked the same allegations in his complaint filed with
the SEC. So much so, that on December 17, 1981, the SEC (Case No. 2145)
rendered a Partial Decision annulling the election of the three directors and
ordered the convening of a stockholders meeting for the purpose of electing
new members of the Board. 9 The correctness of said conclusion is not for
us to pass upon in this case. TAN was present at said meeting and again This Petition for Certiorari questions the jurisdiction of respondent Labor
sought the issuance of injunctive relief from the SEC. The foregoing Arbiter over the present controversy (No. NCR-9-20-81) involving private
indubitably show that, fundamentally, the controversy is intra-corporate in respondent-complainant, Rufino R. Tan (TAN), and petitioners, the Philippine
nature. School of Business Administration (PSBA), a domestic corporation, and
majority of its Directors.chanrobles lawlibrary : rednad
3. ID.; ID.; SECURITIES AND EXCHANGE COMMISSION; JURISDICTION;
ORIGINAL AND EXCLUSIVE OVER INTRA-CORPORATE TAN is one of the principal stockholders of PSBA. Before September 5, 1981,
CONTROVERSIES UNDER PRESIDENTIAL DECREE NO. 902-A; CASE AT he was a Director and the Executive Vice President enjoying salaries and
BAR. Presidential Decree No. 902-A vests in the Securities and Exchange allowances.
Commission original and exclusive jurisdiction to hear and decide
controversies involving the election of directors, officers, or managers of On August 1, 1981, at the PSBA Board of Directors regular meeting, three
corporations registered with the Commission, the relation between and members were elected to fill vacancies in the seven-man body.
among its stockholders, and between them and the corporation. The instant
case is not a case of dismissal. The situation is that of a corporate office On September 5, 1981, also during a regular meeting, the Board declared all
having been declared vacant, and of TANs not having been elected corporate positions vacant except those of the Chairman and President, and
thereafter. The matter of whom to elect is a prerogative that belongs to the at the same time elected a new set of officers. TAN was not re-elected as
Board, and involves the exercise of deliberate choice and the faculty of Executive Vice-President. 1
discriminative selection. Generally speaking, the relationship of a person to a
corporation, whether as officer or as agent or employee, is not determined by On September 16, 1981, TAN filed with the National Labor Relations
the nature of the services performed, but by the incidents of the relationship Commission (NLRC) (National Capital Region) a complaint for Illegal
as they actually exist. (Bruce v. Travelers Ins. Co., 266 F2d 781, cited in 19 Dismissal against petitioners alleging that he was "summarily, illegally,
Am. Jur. 2d 526). irregularly and improperly removed from his position as Executive Vice-
President . . . without cause, investigation or notice" (NLRC Case No. NCR-
9-20-81) (the Labor Case, in brief).

On September 21, 1981, TAN also filed a one-million-peso damage suit

991
against petitioners before the then Court of First Instance of Rizal, Quezon
City, for illegal and oppressive removal (Civil Case No. Q-33444).
And, on September 28, 1981, TAN lodged before the Securities and
Exchange Commission (SEC) another complaint against petitioners
essentially questioning the validity of the PSBA elections of August 1, 1981
and September 5, 1981, and of his "ouster" as Executive Vice-President
(SEC Case No. 2145).chanrobles lawlibrary : rednad
On October 13, 1981, SEC issued a subpoena duces tecum commanding
the production of corporate documents, books and records. 2
On October 15, 1981, respondent Labor Arbiter also issued a subpoena
duces tecum to submit the same books and documents. 3
Before the NLRC, petitioners moved for the dismissal of TANs complaint,
invoking the principle against split jurisdiction.
On October 22, 1981, petitioners availed of this Petition contending mainly
that:jgc:chanrobles.com.ph
"1. The respondent labor arbiter illegally assumed jurisdiction over the
complaint for Illegal Dismissal because the failure of the private respondent
to be re-elected to the corporate position of Executive Vice-President was an
intra-corporate question over which the Securities and Exchange
Commission had already assumed jurisdiction.
"2. The issuance by the respondent labor arbiter of a subpoena duces tecum
was likewise without jurisdiction especially if considered in the light of
procedural and substantial requirements therefor such that it is imperative
that the supervising authority of this Honorable Court should be exercised to
prevent a substantial wrong and to do substantial justice." 4
TAN counter-argues that his sole and exclusive cause of action is illegal
dismissal, falling within the jurisdiction of the NLRC, for he was dismissed
suddenly and summarily without cause in violation of his constitutional rights
to due process and security of tenure. He prays that his dismissal be
declared illegal and that his reinstatement be ordered with full backwages
and without loss of other benefits.chanroblesvirtualawlibrary
We issued a Temporary Restraining Order, enjoining respondent Labor
Arbiter from proceeding in any manner with the Labor Case, and
subsequently gave due course to the Petition.
The jurisdiction of the SEC vis-a-vis the NLRC is in issue. An intracorporate
controversy would call for SEC jurisdiction. A labor dispute, that of the NLRC.
Relevant and pertinent it is to note that the PSBA is a domestic corporation
duly organized and existing under our laws. General management is vested
in a Board of seven directors elected annually by the stockholders entitled to
vote, who serve until the election and qualification of their successors. Any
vacancy in the Board of Directors is filled by a majority vote of the subscribed
capital stock entitled to vote at a meeting specially called for the purpose,
and the director or directors so chosen hold office for the unexpired term. 5
Corporate officers are provided for, among them, the Executive Vice-
President, who is elected by the Board of Directors from their own number. 6
The officers receive such salaries or compensation as the Board of Directors
may fix. 7 The By-Laws likewise provide that should the position of any
officer of the corporation become vacant by reason of death, resignation,
disqualification, or otherwise, the Board of Directors, by a majority vote, may
choose a successor or successors who shall hold office for the expired term
of his predecessor. 8
It was at a board regular monthly meeting held on August 1, 1981, that three
directors were elected to fill vacancies. And, it was at the regular Board
Meeting of September 5, 1981 that all corporate positions were declared
vacant in order to effect a reorganization, and at the ensuing election of
officers, TAN was not re-elected as Executive Vice-President.
Basically, therefore, the question is whether the election of directors on
August 1, 1981 and the election of officers on September 5, 1981, which
resulted in TANs failure to be re-elected, were validly held. This is the crux of
the question that TAN has raised before the SEC. Even in his position paper
before the NLRC, TAN alleged that the election on August 1, 1981 of the
992
three directors was in contravention of the PSBA By-Laws providing that any
vacancy in the Board shall be filled by a majority vote of the stockholders at a
meeting specially called for the purpose. Thus, he concludes, the Board
meeting on September 5, 1981 was tainted with irregularity on account of the
presence of illegally elected directors without whom the results could have
been different.
TAN invoked the same allegations in his complaint filed with the SEC. So
much so, that on December 17, 1981, the SEC (Case No. 2145) rendered a
Partial Decision annulling the election of the three directors and ordered the
convening of a stockholders meeting for the purpose of electing new
members of the Board. 9 The correctness of said conclusion is not for us to
pass upon in this case. TAN was present at said meeting and again sought
the issuance of injunctive relief from the SEC.
The foregoing indubitably show that, fundamentally, the controversy is intra-
corporate in nature. It revolves around the election of directors, officers or
managers of the PSBA, the relation between and among its stockholders,
and between them and the corporation. Private respondent also contends
that his "ouster" was a scheme to intimidate him into selling his shares and to
deprive him of his just and fair return on his investment as a stockholder
received through his salary and allowances as Executive Vice-President. Vis-
a-vis the NLRC, these matters fall within the jurisdiction of the SEC.
Presidential Decree No. 902-A vests in the Securities and Exchange
Commission:jgc:chanrobles.com.ph
". . . original and exclusive jurisdiction to hear and decide cases
involving:jgc:chanrobles.com.ph
"a) Devices or schemes employed by or any acts, of the board of directors,
business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or stockholders, partners, members of associations or organizations
registered with the Commission.
"b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between any or
all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns
their individual franchise or right to exist as such entity;
"c) Controversies in the election or appointments of directors, trustees,
officers or managers of such corporations, partnerships or associations. 10
This is not a case of dismissal. The situation is that of a corporate office
having been declared vacant, and of TANs not having been elected
thereafter. The matter of whom to elect is a prerogative that belongs to the
Board, and involves the exercise of deliberate choice and the faculty of
discriminative selection. Generally speaking, the relationship of a person to a
corporation, whether as officer or as agent or employee, is not determined by
the nature of the services performed, but by the incidents of the relationship
as they actually exist. 11
With the foregoing conclusion, it follows that the issuance of a subpoena
duces tecum by the Labor Arbiter will have to be set aside.
WHEREFORE, judgment is hereby rendered (1) ordering respondent Labor
Arbiter to dismiss the complaint in NLRC Case No. NCR-9-20-81 for lack of
jurisdiction; (2) nullifying the subpoena duces tecum issued by him in said
case; and (3) declaring the Temporary Restraining Order heretofore issued
permanent.
No costs.
SO ORDERED.
Plana and Gutierrez, Jr., JJ., concur.
Teehankee, and Relova, JJ., concur in the result.
993
[G.R. No. 113928. February 1, 1996]

PEARSON & GEORGE, (S.E. ASIA), INC. petitioner, vs. NATIONAL

LABOR RELATIONS COMMISSION and LEOPOLDO
LLORENTE, respondents.

DECISION

DAVIDE, JR., J.:

In this special civil action for certiorari under Rule 65 of the Rules of
Court, the petitioner seeks the annulment of the decision of 22 April
1993[1] and order of 25 November 1993 [2] of public respondent National Labor
Relations Commission (NLRC) in NLRC CA No. 0034-07-92 which,
respectively, dismissed the petitioners appeal from the decision of the Labor
Arbiter in NLRC NCR Case No. 00-04-02127-90 and denied the petitioners
motion for reconsideration.

994
 The petitioner insists that the Labor Arbiter and the NLRC do not have
jurisdiction over the private respondents complaint for illegal dismissal arising
out of his removal as Managing Director of the petitioner due to his non-
reelection and the abolition of the said position. It claims that the matter is
intra-corporate and thus falls within the exclusive jurisdiction of the Securities
and Exchange Commission (SEC) pursuant to Section 5(c) of P.D. No. 902-
A.
In a Manifestation submitted in lieu of the required comment on the
petition, the Office of the Solicitor General agrees with the petitioner that the
NLRC has no jurisdiction over the private respondents complaint for illegal
dismissal and prays that the NLRC be granted a new period within which to
file its own comment should it desire to do so.
The NLRC filed its own comment contending that it has jurisdiction over
the case because the private respondent was not just an incorporator but
also a Managing Director and a line officer or an employee of the petitioner
with a salary of P33,000.00 a month; hence, his complaint for illegal
dismissal as such employee is within the jurisdiction of the NLRC.
The private respondent does not meet the substantive issues raised by
the petitioner but merely sets up the following defenses: (1) the petition was
filed long after the lapse often days provided for in Article 223 of the Labor
Code; (2) a special civil action for certiorari under Rule 65 is not the proper
remedy because of the aforementioned provision; (3) the petition is defective
because it does not allege when the petitioner received the NLRC decision;
and (4) the petition raises factual issues.
In its Reply, the petitioner refutes the foregoing arguments of the private
respondent by stating that (1) this Court may take cognizance of petitions
questioning the decisions of the NLRC on the ground of lack or excess of
jurisdiction or grave abuse of discretion inspite of Article 223 of the Labor
Code making final the said decisions after ten calendar days from receipt
thereof; (2) the only way by which a labor case may reach this Court is
through a petition for certiorari, which must be filed within a reasonable time
from receipt of the resolution denying the motion for reconsideration of the
decision of the Commission; (3) for purposes of showing the timeliness of the
petition, the petitioner has only to state, as it did, the date the order denying
the motion for reconsideration was received; and (4) in order to resolve the
main issue raised in this petition, viz., whether the NLRC has jurisdiction over
this case, it was necessary to state the factual circumstances of the case.
After deliberating on the pleadings submitted by the parties, we resolved
to give due course to this petition and to require the parties to submit their
respective memoranda.
The factual antecedents as culled from the pleadings are not in dispute:
Private respondent Leopoldo Llorente (hereinafter Llorente) was a
member of the Board of Directors of the petitioner. In its organizational
meeting on 12 January 1989, the Board of Directors elected among
themselves the corporate officers. Llorente was elected as Vice-Chairman of
the Board and as Managing Director for a term of one year and until his
successor should have been duly elected pursuant to the petitioners by-laws.
On 29 January 1990, Llorente was preventively suspended, with pay, by
reason of alleged anomalous transactions entered by him, which were
prejudicial to the interest of the petitioner.
In a letter dated 1 February 1990, Llorente demanded from the
petitioner access to his room which the latter allegedly sealed; compensation
for his suspension or termination; and delivery of his stock certificates for
9,998 shares.
On 17 February 1990, the petitioner sent Llorente a letter requiring him
to explain the acts enumerated therein which he allegedly committed.
On 27 February 1990, Llorente, through his counsel, protested his
suspension and requested an examination of the supporting documents to
enable him to explain the accusations leveled against him, but to no avail.
995
 At the regular stockholders meeting on 5 March 1990, the stockholders
of the petitioner elected a new set of directors. Llorente was not
reelected. On the same day, the new Board of Directors held a meeting
wherein it elected a new set of officers and abolished the position of
Managing Director.
On 12 March 1990, the petitioners counsel informed Llorente of his non-
reelection, the abolition of the position of Managing Director, and his
termination for cause.
On 11 April 1990, Llorente filed with the Labor Arbiter a complaint for
unfair labor practice, illegal dismissal, and illegal suspension alleging therein
that he was dismissed without due process of law. The case was docketed
as NLRC-NCR Case No. 00-04-02127-90.
Upon receipt of the summons, the petitioner filed a Motion to Dismiss
alleging therein that the case falls within the jurisdiction of the SEC and not of
the NLRC.
In his order of 1 March 1991, the Labor Arbiter denied the said motion
on the ground that Llorente was not merely acting as a Director but was
likewise doing the functions of a manager or line officer of the corporation.
The parties thereafter filed their respective position papers.
In a decision dated 18 May 1992, the Labor Arbiter found for Llorente,
ruled that he was illegally terminated from employment, and disposed as
follows:
WHEREFORE, premises considered, judgment is hereby rendered finding
the suspension and the eventual dismissal as illegal and ordering respondent
to:
1. Pay the complainant his full backwages from January 29, 1990 to date or
in the amount of Nine Hundred Twelve Thousand Seven Hundred Eighty
(P912,780.00) Pesos;
2. To pay complainant attorneys fees equivalent to ten (10%) percent of his
backwages;
3. This Office is cognizant of the fact that due to the instant case, the
relations between the parties is so strained that the reinstatement may no
longer be feasible. Besides, there may be no equivalent position as the
Office of the Managing Director had been abolished; and
4. To pay complainant moral damages in the amount of Fifty Thousand
(P50,000.00) Pesos.
The petitioner appealed to the NLRC from the said decision.
Relying on our decision in LEP International Philippines, Inc. vs.
National Labor Relations Commission,[3] the NLRC dismissed the petitioners
appeal and affirmed the decision of the Labor Arbiter. It likewise denied the
petitioners motion for reconsideration.
Hence, this petition for certiorari in support of which the petitioner
asserts as follows:
THE NLRC ACTED WITHOUT JURISDICTION AND WITH GRAVE ABUSE
OF DISCRETION IN ASSUMING JURISDICTION OVER THE PRESENT
CONTROVERSY BETWEEN PETITIONER AND PRIVATE RESPONDENT
WHO IS ADMITTEDLY ONE OF ITS INCORPORATORS/STOCKHOLDERS
AND A CORPORATE OFFICER.
II
THE NLRC COMMITTED SERIOUS ERRORS AND ACTED WITH GRAVE
ABUSE OF DISCRETION IN FINDING THAT THE REMOVAL FROM
OFFICE BY NON-REELECTION OF PRIVATE RESPONDENT IS ONE OF
ILLEGAL DISMISSAL CASE WHEREIN IT HAS JURISDICTION TO TRY
AND DECIDE.
996
III
THE NLRC COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE
ABUSE OF DISCRETION, ASSUMING WITHOUT CONCEDING THAT IT
HAS JURISDICTION OVER THE PRESENT CONTROVERSY, THAT
PRIVATE RESPONDENT WAS ILLEGALLY DISMISSED FROM SERVICE.
The pith issue thus raised is whether it is the SEC or the NLRC which
has jurisdiction over the complaint for illegal dismissal which the private
respondent had filed with the NLRC.
We agree with both the petitioner and the Office of the Solicitor General
that the removal of Llorente as Managing Director is purely an intra-corporate
dispute which falls within the exclusive jurisdiction of the SEC and not of the
NLRC.
In reality, Llorente was not dismissed. If he lost the position of Managing
Director, it was primarily because he was not reelected as Director during the
regular stockholders meeting on 5 March 1990. The office of Managing
Director presupposes that its occupant is a Director; hence, one who is not a
Director of the petitioner or who has ceased to be a Director cannot be
elected or appointed as a Managing Director. Elsewise stated, the holding of
the position of Director is a prerequisite for the election, appointment, or
designation of Managing Director. If a Managing Director should lose his
position because he ceased to be a Director for any reason, such as non-
reelection as in the case of Liorente, such loss is not dismissal but failure to
qualify or to maintain a prerequisite for that position. Then too, the position of
Managing Director was abolished.
Any question relating or incident to the election of the new Board of
Directors, the non-reelection of Liorente as a Director, his loss of the position
of Managing Director, or the abolition of the said office are intra-corporate
matters. Disputes arising therefrom are intra-corporate disputes which, if
unresolved within the corporate structure of the petitioner, may be resolved in
an appropriate action only by the SEC pursuant to its authority under
paragraphs (b) and (c), Section 5 of P.D. No. 902-A, [4] which provide as
follows:
SEC. 5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships and
other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
xxx xxx xxx
(b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between any or
all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns
their individual franchise or right to exist as such entity;
(c) Controversies in the election or appointments of directors, trustees,
officers or managers of such corporations, partnership or associations.
Thus, in Philippine School of Business Administration vs. Leano, [5] we
ruled that a complaint for illegal dismissal arising from a Board of Directors
action declaring vacant all corporate positions except that of Chairman and
President, and from the non-reelection of the former Executive Vice-
President during the ensuing election of officers is not cognizable by the
NLRC.Pertinent portions of our opinion therein read as follows:
Basically, therefore, the question is whether the election of directors
on August 1, 1981 and the election of officers on September 5, 1981, which
997
resulted in TANs failure to be re-elected, were validly held. This is the crux of
the question that TAN has raised before the SEC. Even in his position paper
before the NLRC, TAN alleged that the election on August 1, 1981 of the
three directors was in contravention of the PSBA By-Laws providing that any
vacancy in the Board shall be filled by a majority vote of the stockholders at a
meeting specially called for the purpose. Thus, he concludes, the Board
meeting on September 5, 1981 was tainted with irregularity on account of the
presence of illegally elected directors without whom the results could have
been different.
TAN invoked the same allegations in his complaint filed with the SEC.
So much so, that on December 17, 1981, the SEC (Case No. 2145) rendered
a Partial Decision annulling the election of the three directors and ordered
the convening of a stockholders meeting for the purpose of electing new
members of the Board. The correctness of said conclusion is not for us to
pass upon in this case. TAN was present at said meeting and again sought
the issuance of injunctive relief from the SEC.
The foregoing indubitably show that, fundamentally, the controversy is
intra-corporate in nature. It revolves around the election of directors, officers
or managers of the PSBA, the relation between and among its stockholders,
and between them and the corporation. Private respondent also contends
that his ouster was a scheme to intimidate him into selling his shares and to
deprive him of his just and fair return on his investment as a stockholder
received through his salary and allowances as Executive Vice-President. Vis-
a-vis the NLRC, these matters fall within the jurisdiction of the SEC.
xxx x x x xxx
This is not a case of dismissal. The situation is that of a corporate office
having been declared vacant, and of TANs not having been elected
thereafter. The matter of whom to elect is a prerogative that belongs to the
Board, and involves the exercise of deliberate choice and the faculty of
discriminative selection. Generally speaking, the relationship of a person to a
corporation, whether as officer or as agent or employee, is not determined by
the nature of the services performed, but by the incidents of the relationship
as they actually exist.
We reiterated this rule in Dy vs. National Labor Relation Commission,
[6]
which involved an action for illegal dismissal filed by a bank manager who
was not reelected as such, and in Fortune Cement Corporation vs. National
Labor Relations Commission,[7] which involved a complaint for illegal
dismissal instituted by an Executive Vice-President of the corporation who
lost that position when he was dismissed as such by the Board of Directors
for loss of trust and confidence.
The reliance by the NLRC on LEP International Philippines, Inc. vs.
National Labor Relations Commission is misplaced. What was challenged in
that case was not the jurisdiction of the respondent Commission but its act of
upholding the validity of the dismissal of LEPs Chief Executive, who was not
a stockholder, much less a director, of LEP but was merely a managerial
employee of the said company.
WHEREFORE, the instant petition is GRANTED. The challenged
decision of 22 April 1993 and order of 25 November 1993 of public
respondent National Labor Relations Commission in NLRC Case No. 0034-
07-92 and the decision of 18 May 1992 of the Labor Arbiter in NLRC NCR
Case No. 00-04-02 127-90 are hereby ANNULLED and SET ASIDE for
having been rendered without jurisdiction.
No pronouncement as to costs.
SO ORDERED.
998
 Narvasa, C. J. (Chairman), Melo, Francisco, and Panganiban,
JJ., concur.

[G.R. No. 117473. April 15, 1997]

REAHS CORPORATION, SEVERO CASTULO, ROMEO PASCUA, and

DANIEL VALENZUELA, petitioners, vs. NATIONAL LABOR
RELATIONS COMMISSION, BONIFACIO RED, VICTORIA
PADILLA, MA. SUSAN R. CALWIT, SONIA DELA CRUZ, SUSAN
DE LA CRUZ, EDNA WAHINGON, NANCY B. CENITA and
BENEDICTO A. TULABING, respondents.

DECISION

PADILLA, J.:

This is a petition for certiorari under Rule 65 of the Rules of Court to

annul and set aside the decision dated 29 April 1994 rendered by the
National Labor Relations Commission (NLRC) in NLRC Case No. 005024-93
entitled "Bonifacio Red, et al., v. Reah's Corporation, et. al.", which affirmed
the decision of the Labor arbiter holding individual petitioners jointly and
severally liable with petitioner Reah's Corporation to pay private respondents'
claims for underpayment of wages, holiday pay, 13th month pay and
separation pay.

The facts, as culled by the labor arbiter from the position papers of both
parties, are as follows:

"Complainant Bonifacio Red alleges that he started working as a supervisor

at the health and sauna parlor of respondents from September 5, 1977 to
November 6, 1990, with a salary of P50.00, that the said establishment was
closed by respondents on November 6, 1990, without any notice and without
paying his wages, separation pay and other benefits under the law; and that
he works a minimum of twelve (12) hours a day without being paid overtime.

999
Complainant Benedicto Tulabing alleges that he started on December 16,
1986 up to November 6, 1990 in the same establishment with a salary
of P26.00 a day; that he works thirteen (13) hours a day without payment of
overtime pay.
Complainant Nancy Cenita and Susan Calwit alleges [sic] that they were
hired as waitresses on May 20, 1990 up to November 6, 1990 and paid on
commission basis at P0.25 per bottle of beer sold to or consumed by the
customers and that they work ten (10) hours a day without being paid
overtime.
Complainants Edna Wahingon, Susan dela Cruz, Sonia dela Cruz and
Victoria Padilla claims [sic] working as attendants and were hired on different
dates until November 6, 1990. All were paid on commission basis at the rate
of twenty (20%) percent of the service fee paid by the customers, P90.00
and P110.00 respectively, for ordinary and VIP service; that they render(ed)
eleven (11) hours of work a day without being paid overtime; and that the
closure of the health parlor was illegal as they were not notified.
On the other hand, respondents allege that sometime in 1986, a certain Ms.
Soledad Domingo, the sole proprietress and operator of Rainbow Sauna
located at 316 Araneta Avenue, Quezon City, offered to sell her business to
respondent Reah's Corporation. After the sale, all the assets of Ms. Domingo
were turned over to respondent Reah's, which put a sing-along coffee shop
and massage clinic; that complainant Red started his employment on the first
week of December 1988 as a roomboy at P50.00/day and was given living
quarters inside the premises as he requested; that sometime in March 1989,
complainant Red asked permission to go to Bicol for a period of ten (10)
days, which was granted, and was given an advance money of P1,200.00 to
bring some girls from the province to work as attendants at the respondent's
massage clinic; that it was only on January 1, 1990 that complainant Red
returned and was re-hired under the same terms and conditions of his
previous employment with the understanding that he will have to refund
the P1,200.00 cash advance given to him; that due to poor business,
increase in the rental cost and the failure of Meralco to reconnect the
electrical services in the establishment, it suffered losses leading to its
closure."[1]
On 6 May 1993, the labor arbiter rendered judgment dismissing private
respondents' complaints for unfair labor practice and illegal dismissal but
upholding the claims for separation pay, underpayment of wages, holiday pay
and 13th month pay. All eight (8) private respondents were awarded
separation pay. However, only Bonifacio Red and Benedicto Tulabing were
declared entitled to the claimed labor standard benefits as the rest were
found to have been employed on commission basis. The labor arbiter further
awarded attorney's fees to private respondents Bonifacio Red and Benedicto
Tulabing amounting to ten (10%) percent of their adjudged money claims.
Petitioners appealed the labor arbiter's decision to the NLRC,
contending mainly that Article 283 of the Labor Code, "exempts
establishment(s) from payment of termination pay when the closure of
business is due to serious business losses or financial reverses"; that
petitioners Castulo, Pascua and Valenzuela, while admittedly the acting
chairman of the board, board member and accountant acting manager
respectively of Reah's Corporation, cannot be held jointly and severally liable
with Reah's "unless there is evidence to show that the cause of the closure of
the business was due to the criminal negligence of the [respondent] officers."
The NLRC dismissed the appeal based on the following dispositions:
"Anent the issue on separation pay, Article 283 of the Labor Code provides
that '[T]he employer may x x x terminate the employment of any employee
due to x x x the closing or cessation of operation of the establishment or
undertaking x x x by serving a written notice on the workers and the Ministry
of Labor and Employment at least one (1) month before the intended date
thereof. x x x.' This, respondents failed to comply. Neither did respondents
present any evidence to prove that Reah's closure was really due to
SERIOUS business losses or financial reverses. We only have respondents'
mere say-so on the matter.
The Supreme Court held in Basilio Balasbas vs. NLRC, et. al. (G.R. No.
85286, August 24, 1992, 3rd Division, Romero, J.) that -
1000
'Under Article 283 of the Labor Code, the closure of a business
establishment or reduction of personnel is a ground for the termination of the
services of any employee unless the closing or retrenching is for the purpose
of circumventing the provision of the law. But while business reverses can be
a just cause for terminating employees, these must be sufficiently proved by
the employer. (Indino vs. NLRC, G.R. No. 80352, September 29, 1989, 178
SCRA 168).'
Thus, we cannot but agree that complainants are entitled to the payment of
separation pay."[2]
Petitioners filed a motion for reconsideration but this was denied by the
NLRC on 30 August 1994. In the present petition, petitioners raise three (3)
issues which, for brevity and clarity, may be simplified as follows:
I.
WHETHER OR NOT PETITIONERS-OFFICERS CAN BE HELD JOINTLY
AND SEVERALLY LIABLE WITH THE CORPORATION IN THE PAYMENT
OF SEPARATION PAY TO PRIVATE RESPONDENTS UNDER ARTICLE
283 OF THE LABOR CODE.
II.
WHETHER OR NOT THE OFFICERS OF REAH'S CORPORATION CAN BE
HELD JOINTLY AND SEVERALLY LIABLE WITH THE CORPORATION IN
PAYMENT OF THE MONETARY CLAIMS AWARDED PRIVATE
RESPONDENTS IN THE ABSENCE OF ANY FINDING OF UNFAIR LABOR
PRACTICES OR ILLEGAL DISMISSAL.
III.
WHETHER OR NOT THERE IS LEGAL BASIS FOR THE NLRC TO AFFIRM
THE AWARD OF 10% ATTORNEY'S FEES TO PRIVATE RESPONDENTS.
Petitioners argue that since the charges of illegal dismissal and unfair
labor practices were dismissed by the labor arbiter, they cannot be held
solidarily liable with the corporation for the payment of separation pay and
labor standard benefits to private respondents, when they used their
business judgment to close the establishment because of serious business
losses.They contend that even if they were the top corporate officers of
Reah's corporation at the time they closed the business, the corporation has
a personality that is separate and distinct from its officers and
stockholders. Since there was no finding that they violated Sec. 31 of the
Corporation Code[3] they cannot be held solidarily liable with the
corporation. Petitioners further maintain that the corporation also cannot be
held liable because Article 283 of the Labor Code "orders payment of
separation pay only when the closure of the business is due to causes other
than serious business losses or financial reverses".
Petitioners have obviously resorted to a misreading of the last sentence
of Article 283 which provides that -
" x x x In case of retrenchment to prevent losses and in cases of closures or
cessation of operations of establishment or undertaking not due to serious
business losses or financial reverses, the separation pay shall be equivalent
to one (1) month pay or at least () month pay for every year of service,
whichever is higher. A fraction of at least six (6) months shall be considered
as one (1) whole year."
It is not the function of the law nor its intent to supplant the prerogative
of management in running its business, such as, to compel the latter to
operate at a continuing loss. Thus, Article 283 provides as an authorized
cause in the termination of employment the "closing or cessation of operation
of the establishment or undertaking". However, the burden of proving that the
termination was for a valid or authorized cause shall rest on the employer. [4] If
the business closure is due to serious losses or financial reverses, the
employer must present sufficient proof of its actual or imminent losses; it
must show proof that the cessation of or withdrawal from business operations
was bona fide in character.[5]
1001
 The grant of separation pay, as an incidence of termination of
employment under Article 283, is a statutory obligation on the part of the
employer and a demandable right on the part of the employee, except only
where the closure or cessation of operations was due to serious business
losses or financial reverses and there is sufficient proof of this fact or
condition. In the absence of such proof of serious business losses or
financial reverses, the employer closing his business is obligated to pay his
employees and workers their separation pay.
The rule, therefore, is that in all cases of business closure or cessation
of operation or undertaking of the employer, the affected employee is entitled
to separation pay. This is consistent with the state policy of treating labor as
a primary social economic force, affording full protection to its rights as well
as its welfare.[6] The exception is when the closure of business or cessation
of operations is due to serious business losses or financial reverses; duly
proved, in which case, the right of affected employees to separation pay is
lost for obvious reasons. In the case at bar, the corporation's alleged serious
business losses and financial reverses were not amply shown or proved.
We now proceed to rule on the corollary issue of whether or not
individual petitioners Castulo, Pascua and Valenzuela should be held
liable in solidum with the corporation (REAH's) in the payment to private
respondents of separation pay and labor standard benefits.
As a general rule established by legal fiction, the corporation has a
personality separate and distinct from its officers, stockholders and
members. Hence, officers of a corporation are not personally liable for their
official acts unless it is shown that they have exceeded their authority. This
fictional veil, however, can be pierced by the very same law which created it
when "the notion of the legal entity is used as a means to perpetrate fraud,
an illegal act, as a vehicle for the evasion of an existing obligation, and to
confuse legitimate issues". Under the Labor Code, for instance, when a
corporation violates a provision declared to be penal in nature, the penalty
shall be imposed upon the guilty officer or officers of the corporation. [7]
The Solicitor General, in behalf of private respondents, argues that the
doctrine laid down in the case of A.C. Ransom Labor Union - CCLU v.
NLRC[8] should be applied to the case at bar. In that case, a judgment against
a corporation (A.C. Ransom) to reinstate its dismissed employees with back
wages was declared to be a continuing solidary liability of the company
president and all who may have thereafter succeeded to said office after the
records failed to identify the officer or agents directly responsible for failure to
pay the back wages of its employees. The Court noted Ransom's subterfuge
in organizing another family corporation while the case was on litigation with
the intent to phase out the existing corporation in case of an adverse
decision, as what actually happened when it ceased operations a few months
after the labor arbiter ruled in favor of Ransom's employees.
The basis, said the Court, is found in Article 212(c) of the Labor Code
which provides that "an employer includes any person acting in the interest of
an employer, directly or indirectly.""Since Ransom is an artificial person, it
must have an officer who can be presumed to be the employer, x x x. The
corporation only in the technical sense is the employer."
This ruling was eventually applied by the Court in the following
cases: Maglutac v. NLRC[9] an illegal dismissal case, where the most ranking
officer of Commart, petitioner therein, was held solidarily liable with the
corporation which thereafter became insolvent and suspended
operations; Chua v. NLRC,[10] also an illegal dismissal case, where the vice-
president of a corporation was held solidarily liable with the corporation for
the payment of the unpaid salaries of its president; and in Gudez v. NLRC,
[11]
where the president and treasurer were held solidarily liable with the
corporation which had ceased operations but failed to pay the wage and
money claims of its employees.
These cases, however, should be construed still as exceptions to the
doctrine of separate personality of a corporation which should remain as the
guiding rule in determining corporate liability to its employees. At the very
least, as what we held in Pabalan v. NLRC,[12] to justify solidary liability, "there
must be an allegation or showing that the officers of the corporation
deliberately or maliciously designed to evade the financial obligation of the
corporation to its employees", or a showing that the officers indiscriminately
1002
stopped its business to perpetrate an illegal act, as a vehicle for the evasion
of existing obligations, in circumvention of statutes, and to confuse legitimate
issues.
In the case at bar, the thrust of petitioners' arguments was aimed at
confining liability solely to the corporation, as if the entity were an automaton
designed to perform functions at the push of a button. The issue, however, is
not limited to payment of separation pay under Article 283 but also payment
of labor standard benefits such as underpayment of wages, holiday pay and
13th month pay to two of the private respondents. While there is no sufficient
evidence to conclude that petitioners have indiscriminately stopped the
entity's business, at the same time, petitioners have opted to abstain from
presenting sufficient evidence to establish the serious and adverse financial
condition of the company.
As the NLRC aptly stated:
"Neither did respondents (petitioners) present any evidence to prove that
Reah's closure was really due to SERIOUS business losses or financial
reverses. We only have respondents mere say-so on the matter." [13]
This uncaring attitude on the part of the officers of Reah's gives
credence to the supposition that they simply ignored the side of the workers
who, more or less, were only demanding what is due them in accordance
with law. In fine, these officers were conscious that the corporation was
violating labor standard provisions but they did not act to correct these
violations; instead, they abruptly closed business. Neither did they offer
separation pay to the employees as they conveniently resorted to a lame
excuse that they suffered serious business losses, knowing fully well that
they had no substantial proof in their hands to prove such losses.
The findings of the NLRC did not indicate whether or not Reah's
Corporation has continued its personality after it had stopped operations
when it closed its sing-along, coffee shop, and massage clinic in November
1990. But in its petition, petitioners aver, among others, that the "company
totally folded for lack of patrons, (disconnection of) light and discontinuance
of the leased premises [sic] for failure to pay the increased monthly rentals
from P8,000 to P20,000."[14] Under the Rules of Evidence, petitioners are
bound by the allegations contained in their pleading. Since petitioners
themselves have admitted that they have dissolved the corporation de facto,
the Court presumes that Reah's Corporation had become insolvent and
therefore would be unable to satisfy the judgment in favor of its
employees. Under these circumstances, we cannot allow labor to go home
with an empty victory. Neither would it be oppressive to capital to hold
petitioners Castulo, Pascua and Valenzuela solidarily liable with Reah's
Corporation because the law presumes that they have acted in the latter's
interest when they obstinately refused to grant the labor standard benefits
and separation pay due private respondent-employees.
The last issue raised by petitioners is whether there is legal basis for the
payment of 10% attorney's fees out of the total amount awarded to private
respondents Red and Tulabing. The Court finds this portion of the assailed
decision to have been rendered with grave abuse of discretion as both the
labor arbiter and the NLRC failed to make an express finding of fact and cite
the applicable law to justify the grant of such award. Under Article 111 of the
Labor Code, 10% attorneys fees may be assessed only in cases where there
is an unlawful withholding of wages,[15] or under Article 222 those arising from
collective bargaining negotiations that may be charged against union funds in
an amount to be agreed upon by the parties. None of these situations exists
in the case at bar.
WHEREFORE, the decision of respondent National Labor Relations
Commission is hereby AFFIRMED in so far as it holds petitioners Castulo,
Pascua, and Valenzuela jointly and severally liable with Reah's Corporation
to pay all private respondents separation pay and private respondents Red
and Tulabing other monetary benefits but the award of ten percent (10%)
attorneys fees is hereby DELETED for lack of factual and legal basis.
SO ORDERED.
Bellosillo, Vitug, and Kapunan, JJ., concur. Hermosisima, Jr., J., on
leave.
1003
 [...]SMITH [...] 11
v.
[...] VAN GORKOM, [...] [...]

3 12

Supreme Court of Delaware. We hold: (1) that the Board's decision, reached September 20, 1980, to
[...] approve the proposed cash-out merger was not the product of an informed
Decided: January 29, 1985. business judgment; (2) that the Board's subsequent efforts to amend the
[...] Merger Agreement and take other curative action were ineffectual, both
legally and factually; and (3) that the Board did not deal with complete candor
45678 with the stockholders by failing to disclose all material facts, which they knew
or should have known, before securing the stockholders' approval of the
HORSEY, Justice (for the majority): merger.

9 13

This appeal from the Court of Chancery involves a class action brought by
shareholders of the defendant Trans Union Corporation ("Trans Union" or
"the Company"), originally seeking rescission of a cash-out merger of Trans
Union into the defendant New T Company ("New T"), a wholly-owned
subsidiary of the defendant, Marmon Group, Inc. ("Marmon"). Alternate relief
in the form of damages is sought against the defendant members of the
Board of Directors of Trans Union, [864] New T, and Jay A. Pritzker and
Robert A. Pritzker, owners of Marmon.[1]
10
Following trial, the former Chancellor granted judgment for the defendant
directors by unreported letter opinion dated July 6, 1982. [2] Judgment was
based on two findings: (1) that the Board of Directors had acted in an
informed manner so as to be entitled to protection of the business judgment
rule in approving the cash-out merger; and (2) that the shareholder vote
approving the merger should not be set aside because the stockholders had
been "fairly informed" by the Board of Directors before voting thereon. The
plaintiffs appeal.
[...]
141516
Trans Union was a publicly-traded, diversified holding company, the principal
earnings of which were generated by its railcar leasing business. During the
period here involved, the Company had a cash flow of hundreds of millions of
dollars annually. However, the Company had difficulty in generating sufficient
taxable income to offset increasingly large investment tax credits (ITCs). [...]
1718
Beginning in the late 1960's, and continuing through the 1970's, Trans Union
pursued a program of acquiring small companies in order to increase
available taxable income. In July 1980, Trans Union Management prepared
the annual revision of the Company's Five Year Forecast. This
report [...] referred to the ITC situation as a "nagging problem" and, given
that problem, the leasing company "would still appear to be constrained to a
tax breakeven." The report then listed four alternative uses of the projected

1004
1982-1985 equity surplus: (1) stock repurchase; (2) dividend increases; (3) a
major acquisition program; and (4) combinations of the above. The sale of
Trans Union was not among the alternatives. The report emphasized that,
despite the overall surplus, the operation of the Company would consume all
available equity for the next several years, and concluded: "As a result, we
have sufficient time to fully develop our course of action."
19
-B-
20
On August 27, 1980, Van Gorkom met with Senior Management of Trans
Union. Van Gorkom reported on his lobbying efforts in Washington and his
desire to find a solution to the tax credit problem more permanent than a
continued program of acquisitions. Various alternatives were suggested and
discussed preliminarily, including the sale of Trans Union to a company with
a large amount of taxable income.
21
Donald Romans, Chief Financial Officer of Trans Union, stated that his
department had done a "very brief bit of work on the possibility of a leveraged
buy-out." This work had been prompted by a media article which Romans
had seen regarding a leveraged buy-out by management. The work
consisted of a "preliminary study" of the cash which could be generated by
the Company if it participated in a leveraged buyout. As Romans stated, this
analysis "was very first and rough cut at seeing whether a cash flow would
support what might be considered a high price for this type of transaction."
22
On September 5, at another Senior Management meeting which Van Gorkom
attended, Romans again brought up the idea of a leveraged buy-out as a
"possible strategic alternative" to the Company's acquisition
program. [...] According to Romans: They did not "come up" with a price for
the Company. They merely "ran the numbers" at $50 a share and at $60 a
share with the "rough form" of their cash figures at the time. Their "figures
indicated that $50 would be very easy to do but $60 would be very difficult to
do under those figures." This work did not purport to establish a fair price for
either the Company or 100% of the stock. It was intended to determine the
cash flow needed to service the debt that would "probably" be incurred in a
leveraged buyout, based on "rough calculations" without "any benefit of
experts to identify what the limits were to that, and so forth." [...]
23
At this meeting, Van Gorkom stated that he would be willing to take $55 per
share for his own 75,000 shares. He vetoed the suggestion of a leveraged
buy-out by Management, however, as involving a potential conflict of interest
for Management. Van Gorkom, a certified public accountant and lawyer, had
been an officer of Trans Union [866] for 24 years, its Chief Executive Officer
for more than 17 years, and Chairman of its Board for 2 years. It is
noteworthy in this connection that he was then approaching 65 years of age
and mandatory retirement.
24
For several days following the September 5 meeting, Van Gorkom pondered
the idea of a sale. [...]
25
Van Gorkom decided to meet with Jay A. Pritzker, a well-known corporate
takeover specialist and a social acquaintance. However, rather than
approaching Pritzker simply to determine his interest in acquiring Trans
Union, Van Gorkom assembled a proposed per share price for sale of the
Company and a financing structure by which to accomplish the sale. Van
Gorkom did so without consulting either his Board or any members of Senior
Management except one: Carl Peterson, Trans Union's Controller. Telling
Peterson that he wanted no other person on his staff to know what he was
1005
doing, but without telling him why, Van Gorkom directed Peterson to calculate
the feasibility of a leveraged buy-out at an assumed price per share of $55.
Apart from the Company's historic stock market price, [5] and Van Gorkom's
long association with Trans Union, the record is devoid of any competent
evidence that $55 represented the per share intrinsic value of the Company.
26
Having thus chosen the $55 figure, based solely on the availability of a
leveraged buy-out, Van Gorkom multiplied the price per share by the number
of shares outstanding to reach a total value of the Company of $690 million.
Van Gorkom told Peterson to use this $690 million figure and to assume a
$200 million equity contribution by the buyer. Based on these assumptions,
Van Gorkom directed Peterson to determine whether the debt portion of the
purchase price could be paid off in five years or less if financed by Trans
Union's cash flow as projected in the Five Year Forecast, and by the sale of
certain weaker divisions identified in a study done for Trans Union by the
Boston Consulting Group ("BCG study"). Peterson reported that, of the
purchase price, approximately $50-80 million would remain outstanding after
five years. Van Gorkom was disappointed, but decided to meet with Pritzker
nevertheless.
27
Van Gorkom arranged a meeting with Pritzker at the latter's home on
Saturday, September 13, 1980. Van Gorkom prefaced his presentation by
stating to Pritzker: "Now as far as you are concerned, I can, I think, show
how you can pay a substantial premium over the present stock price and pay
off most of the loan in the first five years. * * * If you could pay $55 for this
Company, here is a way in which I think it can be financed."
28
Van Gorkom then reviewed with Pritzker his calculations based upon his
proposed price of $55 per share. Although Pritzker mentioned $50 as a more
attractive figure, no other price was mentioned. However, Van Gorkom stated
that to be sure that $55 was the best price obtainable, Trans Union should be
free to accept any better offer. Pritzker demurred, stating that his
organization would serve as a "stalking horse" for an "auction contest" only if
Trans Union would permit Pritzker to buy 1,750,000 shares of Trans Union
stock at market price which Pritzker could then sell to any higher bidder. After
further discussion on this point, Pritzker told Van Gorkom that he would give
him a more definite reaction soon.
29
[867] On Monday, September 15, Pritzker advised Van Gorkom that he was
interested in the $55 cash-out merger proposal and requested more
information on Trans Union. Van Gorkom agreed to meet privately with
Pritzker, accompanied by Peterson, Chelberg, and Michael Carpenter, Trans
Union's consultant from the Boston Consulting Group. The meetings took
place on September 16 and 17. Van Gorkom was "astounded that events
were moving with such amazing rapidity."
30
On Thursday, September 18, Van Gorkom met again with Pritzker. At that
time, Van Gorkom knew that Pritzker intended to make a cash-out merger
offer at Van Gorkom's proposed $55 per share. Pritzker instructed his
attorney, a merger and acquisition specialist, to begin drafting merger
documents. There was no further discussion of the $55 price. However, the
number of shares of Trans Union's treasury stock to be offered to Pritzker
was negotiated down to one million shares; the price was set at $38-75 cents
above the per share price at the close of the market on September 19. At this
point, Pritzker insisted that the Trans Union Board act on his merger proposal
within the next three days, stating to Van Gorkom: "We have to have a
decision by no later than Sunday [evening, September 21] [...]
31
Van Gorkom retained James Brennan, Esquire, to advise Trans Union on the
legal aspects of the merger. Van Gorkom did not consult with William
1006
Browder, a Vice-President and director of Trans Union and former head of its
legal department, or with William Moore, then the head of Trans Union's legal
staff.
32
On Friday, September 19, Van Gorkom called a special meeting of the Trans
Union Board for noon the following day. He also called a meeting of the
Company's Senior Management to convene at 11:00 a.m., prior to the
meeting of the Board. No one, except Chelberg and Peterson, was told the
purpose of the meetings. Van Gorkom did not invite Trans Union's investment
banker, Salomon Brothers or its Chicago-based partner, to attend.
33
Of those present at the Senior Management meeting on September 20, only
Chelberg and Peterson had prior knowledge of Pritzker's offer. Van Gorkom
disclosed the offer and described its terms, but he furnished no copies of the
proposed Merger Agreement. Romans announced that his department had
done a second study which showed that, for a leveraged buy-out, the price
range for Trans Union stock was between $55 and $65 per share. Van
Gorkom neither saw the study nor asked Romans to make it available for the
Board meeting.
34
Senior Management's reaction to the Pritzker proposal was completely
negative. [...] Romans objected to the price as being too low; [6] he was critical
of the timing and suggested that consideration should be given to the
adverse tax consequences of an all-cash deal for low-basis shareholders;
and he took the position that the agreement to sell Pritzker one million newly-
issued shares at market price would inhibit other offers, as would the
prohibitions against soliciting bids and furnishing inside information [868] to
other bidders. Romans argued that the Pritzker proposal was a "lock up" and
amounted to "an agreed merger as opposed to an offer." Nevertheless, Van
Gorkom proceeded to the Board meeting as scheduled without further delay.
35
Ten directors served on the Trans Union Board, five inside (defendants
Bonser, O'Boyle, Browder, Chelberg, and Van Gorkom) and five outside
(defendants Wallis, Johnson, Lanterman, Morgan and Reneker). All directors
were present at the meeting, except O'Boyle who was ill. [...]
36
Van Gorkom began the Special Meeting of the Board with a twenty-minute
oral presentation. Copies of the proposed Merger Agreement were delivered
too late for study before or during the meeting. [7] He reviewed the Company's
ITC and depreciation problems and the efforts theretofore made to solve
them. He discussed his initial meeting with Pritzker and his motivation in
arranging that meeting. Van Gorkom did not disclose to the Board, however,
the methodology by which he alone had arrived at the $55 figure, or the fact
that he first proposed the $55 price in his negotiations with Pritzker.
37
Van Gorkom outlined the terms of the Pritzker offer as follows: Pritzker would
pay $55 in cash for all outstanding shares of Trans Union stock upon
completion of which Trans Union would be merged into New T Company, a
subsidiary wholly-owned by Pritzker and formed to implement the merger; for
a period of 90 days, Trans Union could receive, but could not actively solicit,
competing offers; the offer had to be acted on by the next evening, Sunday,
September 21; [...]
38
Van Gorkom took the position that putting Trans Union "up for auction"
through a 90-day market test would validate a decision by the Board that $55
was a fair price. He told the Board that the "free market will have an
opportunity to judge whether $55 is a fair price." Van Gorkom framed the
decision before the Board not as whether $55 per share was the highest
1007
price that could be obtained, but as whether the $55 price was a fair price
that the stockholders should be given the opportunity to accept or reject. [8]
39
Attorney Brennan advised the members of the Board that they might be sued
if they failed to accept the offer and that a fairness opinion was not required
as a matter of law.
40
Romans attended the meeting as chief financial officer of the Company. He
told the Board that he had not been involved in the negotiations with Pritzker
and knew nothing about the merger proposal until [869] the morning of the
meeting; [...] Romans testified:
41
I told the Board that the study ran the numbers at 50 and 60,
and then the subsequent study at 55 and 65, and that was not the
same thing as saying that I have a valuation of the company at X
dollars. But it was a way a first step towards reaching that
conclusion.
42
Romans told the Board that, in his opinion, $55 was "in the range of a fair
price," but "at the beginning of the range."
43
[...]
44
The Board meeting of September 20 lasted about two hours. Based solely
upon Van Gorkom's oral presentation, Chelberg's supporting representations,
Romans' oral statement, Brennan's legal advice, and their knowledge of the
market history of the Company's stock,[9] the directors approved the proposed
Merger Agreement. [...]
45
The Merger Agreement was executed by Van Gorkom during the evening of
September 20 at a formal social event that he hosted for the opening of the
Chicago Lyric Opera. Neither he nor any other director read the agreement
prior to its signing and delivery to Pritzker.
46
[...]
47
On Monday, September 22, the Company issued a press release announcing
that Trans Union had entered into a "definitive" Merger Agreement with an
affiliate of the Marmon Group, Inc., a Pritzker holding company. Within 10
days of the public announcement, dissent among Senior Management over
the merger had become widespread. Faced with threatened resignations of
key officers, Van Gorkom met with Pritzker who agreed to several
modifications of the Agreement. [...]
48
Van Gorkom reconvened the Board on October 8 and secured the directors'
approval of the proposed amendments sight unseen. The Board also
authorized the employment of Salomon Brothers, its investment [870] banker,
to solicit other offers for Trans Union during the proposed "market test"
period.
49
1008
The next day, October 9, Trans Union issued a press release announcing: (1)
that Pritzker had obtained "the financing commitments necessary to
consummate" the merger with Trans Union; (2) that Pritzker had acquired
one million shares of Trans Union common stock at $38 per share; (3) that
Trans Union was now permitted to actively seek other offers and had
retained Salomon Brothers for that purpose; and (4) that if a more favorable
offer were not received before February 1, 1981, Trans Union's shareholders
would thereafter meet to vote on the Pritzker proposal.
50
It was not until the following day, October 10, that the actual amendments to
the Merger Agreement were prepared by Pritzker and delivered to Van
Gorkom for execution. As will be seen, the amendments were considerably at
variance with Van Gorkom's representations of the amendments to the Board
on October 8; and the amendments placed serious constraints on Trans
Union's ability to negotiate a better deal and withdraw from the Pritzker
agreement. Nevertheless, Van Gorkom proceeded to execute what became
the October 10 amendments to the Merger Agreement without conferring
further with the Board members and apparently without comprehending the
actual implications of the amendments.
51
[...]
5253545556
On February 10, the stockholders of Trans Union approved the Pritzker
merger proposal. Of the outstanding shares, 69.9% were voted in favor of the
merger; 7.25% were voted against the merger; and 22.85% were not voted.
57
II.
58
We turn to the issue of the application of the business judgment rule to the
September 20 meeting of the Board.
59
[...]
60616263646566
Under Delaware law, the business judgment rule is the offspring of the
fundamental principle, codified in 8 Del.C. 141(a), that the business and
affairs of a Delaware corporation are managed by or under its board of
directors.[...] In carrying out their managerial roles, directors are charged with
an unyielding fiduciary duty to the corporation and its shareholders. [...] The
business judgment rule exists to protect and promote the full and free
exercise of the managerial power granted to Delaware directors. [...] The rule
itself "is a presumption that in making a business decision, the directors of a
corporation acted on an informed basis, in good faith and in the honest belief
that the action taken was in the best interests of the company." Aronson,
supra at 812. Thus, the party attacking a board decision as uninformed must
rebut the presumption that its business judgment was an informed one. [...]
67
The determination of whether a business judgment is an informed one turns
on whether the directors have informed themselves "prior to making a
business decision, of all material information reasonably available to
them." Id.[12]
68
Under the business judgment rule there is no protection for directors who
have made "an unintelligent or unadvised judgment." [...] A director's duty to
inform himself in preparation for a decision derives from the fiduciary
1009
capacity in which he serves the corporation and its stockholders. [...] Since a
director is vested with the responsibility for the management of the affairs of
the corporation, he must execute that duty with the recognition that he acts
on behalf of others. Such obligation does not tolerate faithlessness or self-
dealing. But fulfillment of the fiduciary function requires more than the mere
absence of bad faith or fraud. Representation of the financial interests of
others imposes on a director an affirmative duty to protect those interests
and to proceed with a critical eye in assessing information of the type and
under the circumstances present here. [...]
69
Thus, a director's duty to exercise an informed business judgment is in [873]
the nature of a duty of care, as distinguished from a duty of loyalty. Here,
there were no allegations of fraud, bad faith, or self-dealing, or proof thereof.
Hence, it is presumed that the directors reached their business judgment in
good faith, [...] and considerations of motive are irrelevant to the issue before
us.
70
The standard of care applicable to a director's duty of care has also been
recently restated by this Court. In Aronson, supra, we stated:
71
While the Delaware cases use a variety of terms to describe
the applicable standard of care, our analysis satisfies us that under
the business judgment rule director liability is predicated upon
concepts of gross negligence. [...]
7273
We again confirm that view. We think the concept of gross negligence is also
the proper standard for determining whether a business judgment reached by
a board of directors was an informed one.[13]
74
In the specific context of a proposed merger of domestic corporations, a
director has a duty under 8 Del.C.251(b),[14] along with his fellow directors, to
act in an informed and deliberate manner in determining whether to approve
an agreement of merger before submitting the proposal to the stockholders.
Certainly in the merger context, a director may not abdicate that duty by
leaving to the shareholders alone the decision to approve or disapprove the
agreement. [...]
75
It is against those standards that the conduct of the directors of Trans Union
must be tested, as a matter of law and as a matter of fact, regarding their
exercise of an informed business judgment in voting to approve the Pritzker
merger proposal.
76
III.
77
The defendants argue that the determination of whether their decision to
accept $55 per share for Trans Union represented an informed business
judgment requires consideration, not only of that which they knew and
learned on September 20, but also of that which they subsequently learned
and did over the following four-month [874] period before the shareholders
met to vote on the proposal in February, 1981. The defendants thereby seek
to reduce the significance of their action on September 20 and to widen the
time frame for determining whether their decision to accept the Pritzker
proposal was an informed one. Thus, the defendants contend that what the
directors did and learned subsequent to September 20 and through January
26, 1981, was properly taken into account by the Trial Court in determining
whether the Board's judgment was an informed one. We disagree with
this post hoc approach.
1010
 78
The issue of whether the directors reached an informed decision to "sell" the
Company on September 20, 1980 must be determined only upon the basis of
the information then reasonably available to the directors and relevant to
their decision to accept the Pritzker merger proposal. This is not to say that
the directors were precluded from altering their original plan of action, had
they done so in an informed manner. What we do say is that the question of
whether the directors reached an informed business judgment in agreeing to
sell the Company, pursuant to the terms of the September 20 Agreement
presents, in reality, two questions: (A) whether the directors reached an
informed business judgment on September 20, 1980; and (B) if they did not,
whether the directors' actions taken subsequent to September 20 were
adequate to cure any infirmity in their action taken on September 20. We first
consider the directors' September 20 action in terms of their reaching an
informed business judgment.
79
-A-
80
On the record before us, we must conclude that the Board of Directors did
not reach an informed business judgment on September 20, 1980 in voting to
"sell" the Company for $55 per share pursuant to the Pritzker cash-out
merger proposal. Our reasons, in summary, are as follows:
81
The directors (1) did not adequately inform themselves as to Van Gorkom's
role in forcing the "sale" of the Company and in establishing the per share
purchase price; (2) were uninformed as to the intrinsic value of the Company;
and (3) given these circumstances, at a minimum, were grossly negligent in
approving the "sale" of the Company upon two hours' consideration, without
prior notice, and without the exigency of a crisis or emergency.
82
As has been noted, the Board based its September 20 decision to approve
the cash-out merger primarily on Van Gorkom's representations. None of the
directors, other than Van Gorkom and Chelberg, had any prior knowledge
that the purpose of the meeting was to propose a cash-out merger of Trans
Union. No members of Senior Management were present, other than
Chelberg, Romans and Peterson; and the latter two had only learned of the
proposed sale an hour earlier. Both general counsel Moore and former
general counsel Browder attended the meeting, but were equally uninformed
as to the purpose of the meeting and the documents to be acted upon.
83
Without any documents before them concerning the proposed transaction,
the members of the Board were required to rely entirely upon Van Gorkom's
20-minute oral presentation of the proposal. No written summary of the terms
of the merger was presented; the directors were given no documentation to
support the adequacy of $55 price per share for sale of the Company; and
the Board had before it nothing more than Van Gorkom's statement of his
understanding of the substance of an agreement which he admittedly had
never read, nor which any member of the Board had ever seen.
84
Under 8 Del.C. 141(e),[15] "directors are fully protected in relying in [875]
good faith on reports made by officers." [...] The term "report" has been
liberally construed to include reports of informal personal investigations by
corporate officers, [...]However, there is no evidence that any "report," as
defined under 141(e), concerning the Pritzker proposal, was presented to
the Board on September 20.[16] Van Gorkom's oral presentation of his
understanding of the terms of the proposed Merger Agreement, which he had
not seen, and Romans' brief oral statement of his preliminary study regarding
the feasibility of a leveraged buy-out of Trans Union do not qualify as
141(e) "reports" for these reasons: The former lacked substance because
Van Gorkom was basically uninformed as to the essential provisions of the
1011
very document about which he was talking. Romans' statement was
irrelevant to the issues before the Board since it did not purport to be a
valuation study. At a minimum for a report to enjoy the status conferred by
141(e), it must be pertinent to the subject matter upon which a board is called
to act, and otherwise be entitled to good faith, not blind, reliance. Considering
all of the surrounding circumstances hastily calling the meeting without
prior notice of its subject matter, the proposed sale of the Company without
any prior consideration of the issue or necessity therefor, the urgent time
constraints imposed by Pritzker, and the total absence of any documentation
whatsoever the directors were duty bound to make reasonable inquiry of
Van Gorkom and Romans, and if they had done so, the inadequacy of that
upon which they now claim to have relied would have been apparent.
85
The defendants rely on the following factors to sustain the Trial Court's
finding that the Board's decision was an informed one: (1) the magnitude of
the premium or spread between the $55 Pritzker offering price and Trans
Union's current market price of $38 per share; (2) the amendment of the
Agreement as submitted on September 20 to permit the Board to accept any
better offer during the "market test" period; (3) the collective experience and
expertise of the Board's "inside" and "outside" directors; [17] and (4) their
reliance on Brennan's legal advice that the directors might be sued if they
rejected the Pritzker proposal. [...]
86
(1)
87
A substantial premium may provide one reason to recommend a merger, but
in the absence of other sound valuation information, the fact of a premium
alone does not provide an adequate basis upon which to assess the fairness
of an offering price. Here, the judgment reached as to the adequacy of the
premium was based on a comparison between the historically depressed
Trans Union market price and the amount of the Pritzker offer. Using market
price as a basis for concluding that the premium adequately reflected the true
value [876] of the Company was a clearly faulty, indeed fallacious, premise,
as the defendants' own evidence demonstrates.
88
The record is clear that before September 20, Van Gorkom and other
members of Trans Union's Board knew that the market had consistently
undervalued the worth of Trans Union's stock, despite steady increases in
the Company's operating income in the seven years preceding the
merger. [...]
89
In the Proxy Statement, however, the directors reversed their position. There,
they stated that, although the earnings prospects for Trans Union were
"excellent," they found no basis for believing that this would be reflected in
future stock prices. With regard to past trading, the Board stated that the
prices at which the Company's common stock had traded in recent years did
not reflect the "inherent" value of the Company. But having referred to the
"inherent" value of Trans Union, the directors ascribed no number to it.
Moreover, nowhere did they disclose that they had no basis on which to fix
"inherent" worth beyond an impressionistic reaction to the premium over
market and an unsubstantiated belief that the value of the assets was
"significantly greater" than book value. By their own admission they could not
rely on the stock price as an accurate measure of value. Yet, also by their
own admission, the Board members assumed that Trans Union's market
price was adequate to serve as a basis upon which to assess the adequacy
of the premium for purposes of the September 20 meeting.
90
[...]
91
1012
Indeed, as of September 20, the Board had no other information on which to
base a determination of the intrinsic value of Trans Union as a going
concern. As of September 20, the Board had made no evaluation of the
Company designed to value the entire enterprise, nor had the Board ever
previously considered selling the Company or consenting to a buy-out
merger. Thus, the adequacy of a premium is indeterminate unless it is
assessed in terms of other competent and sound valuation information that
reflects the value of the particular business.
92
[...]
93
We do not imply that an outside valuation study is essential to support an
informed business judgment; nor do we state that fairness opinions by
independent investment bankers are required as a matter of law. Often
insiders familiar with the business of a going concern are in a better position
than are outsiders to gather relevant information; and under appropriate
circumstances, such directors may be fully protected in relying in good faith
upon the valuation reports of their management. [...]
94
Here, the record establishes that the Board did not request its Chief Financial
Officer, Romans, to make any valuation study or review of the proposal to
determine the adequacy of $55 per share for sale of the Company. On the
record before us: The Board rested on Romans' elicited response that the
$55 figure was within a "fair price range" within the context of a leveraged
buy-out. No director sought any further information from Romans. No director
asked him why he put $55 at the bottom of his range. No director asked
Romans for any details as to his study, the reason why it had been
undertaken or its depth. No director asked to see the study; and no director
asked Romans whether Trans Union's finance department could do a
fairness study within the remaining 36-hour [18] period available under the
Pritzker offer.
95
[...]
96979899
Thus, the record compels the conclusion that on September 20 the Board
lacked valuation information adequate to reach an informed business
judgment as to the fairness of $55 per share for sale of the Company.[20]
100
(2)
101
This brings us to the post-September 20 "market test" upon which the
defendants ultimately rely to confirm the reasonableness of their September
20 decision to accept the Pritzker proposal. In this connection, the directors
present a two-part argument: (a) that by making a "market test" of Pritzker's
$55 per share offer a condition of their September 20 decision to accept his
offer, they cannot be found to have acted impulsively or in an uninformed
manner on September 20; and (b) that the adequacy of the $17 premium for
1013
sale of the Company was conclusively established over the following 90 to
120 days by the most reliable evidence available the marketplace. Thus,
the defendants impliedly contend that the "market test" eliminated the need
for the Board to perform any other form of fairness test either on September
20, or thereafter.
102
Again, the facts of record do not support the defendants' argument. There is
no evidence: (a) that the Merger Agreement was effectively amended to give
the Board freedom to put Trans Union up for auction sale to the highest
bidder; or (b) that a public auction was in fact permitted to occur. T[...]
103
The Merger Agreement, specifically identified as that originally presented to
the Board on September 20, has never been produced by the defendants,
notwithstanding the plaintiffs' several demands for production before as well
as during trial. No acceptable explanation of this failure to produce
documents has been given to either the Trial Court or this Court.
Significantly, neither the defendants nor their counsel have made the
affirmative representation that this critical document has been produced.
Thus, the Court is deprived of the best evidence on which to judge the merits
of the defendants' position as to the care and attention which they gave to
the terms of the Agreement on September 20.
104
[...]Van Gorkom, conceding that he never read the Agreement, stated that he
was relying upon his understanding that, under corporate law, directors
always have an inherent right, as well as a fiduciary duty, to accept a better
offer notwithstanding an existing contractual commitment by the Board. [...]
105106
Several of Trans Union's outside directors resolutely maintained that the
Agreement as submitted was approved on the understanding that, "if we got
a better deal, we had a right to take it." Director Johnson so testified; but he
then added, "And if they didn't put that in the agreement, then the
management did not carry out the conclusion of the Board. And I just don't
know whether they did or not." The only clause in the Agreement as finally
executed to which the defendants can point as "keeping the door open" is the
following underlined statement found in subparagraph (a) of section 2.03 of
the Merger Agreement as executed:
107
The Board of Directors shall recommend to the stockholders
of Trans Union that they approve and adopt the Merger Agreement
(`the stockholders' approval') and to use its best efforts to obtain the
requisite votes therefor. GL acknowledges that Trans Union directors
may have a competing fiduciary obligation to the shareholders under
certain circumstances.
108
Clearly, this language on its face cannot be construed as incorporating either
of the two "conditions" described above: either the right to accept a better
offer or the right to distribute proprietary information to third parties. The
logical witness for the defendants to call to confirm their construction of this
clause of the Agreement would have been Trans Union's outside attorney,
James Brennan. The defendants' failure, without explanation, to call this
witness again permits the logical inference that his testimony would not have
been helpful to them. The further fact that the directors adjourned, rather
than recessed, the meeting without incorporating in the Agreement these
important "conditions" further weakens the defendants' position. As has been
noted, nothing in the Board's Minutes supports these claims. No reference to
either of the so-called "conditions" or of Trans Union's reserved right to test
the market appears in any notes of the Board meeting or in the Board
Resolution accepting the Pritzker offer or in the Minutes of the meeting itself.
That evening, in the midst of a formal party which he hosted for the opening
1014
of the Chicago Lyric Opera, Van Gorkom executed the Merger Agreement
without he or any other member of the Board having read the instruments.
109
[...]
110111112113
(4)
114
Part of the defense is based on a claim that the directors relied on legal
advice rendered at the September 20 meeting by James Brennan, Esquire,
who was present at Van Gorkom's request. Unfortunately, Brennan did not
appear and testify at trial even though his firm participated in the defense of
this action. [...]
115116117118119120
-B-
121
We now examine the Board's post-September 20 conduct for the purpose of
determining first, whether it was informed and not grossly negligent; and
second, if informed, whether it was sufficient to legally rectify and cure the
Board's derelictions of September 20.[...]
122123124125126127128129130131
made no reference to provisions allegedly reserving to the Board the rights to
perform a "market test" and to withdraw from the Pritzker Agreement if Trans
Union received a better offer before the shareholder meeting. The
defendants also concede that Trans Union never made a subsequent public
announcement stating that it had in fact reserved the right to accept alternate
offers, the Agreement notwithstanding.
132
The public announcement of the Pritzker merger resulted in an "en masse"
revolt of Trans Union's Senior Management. [...]
133134
Van Gorkom then advised Senior Management that the Agreement would be
amended to give Trans Union the right to solicit competing offers through
January, 1981, if they would agree to remain with Trans Union. Senior
Management was temporarily mollified; and Van Gorkom then called a
special meeting of Trans Union's Board for October 8.
135
Thus, the primary purpose of the October 8 Board meeting was to amend the
Merger Agreement, in a manner agreeable to Pritzker, to permit Trans Union
to conduct a "market test."[...] Van Gorkom presumably so represented the
amendments to Trans Union's Board members on October 8. In a brief
session, the directors approved Van Gorkom's oral presentation of the
substance of the proposed amendments, [883] the terms of which were not
reduced to writing until October 10. But rather than waiting to review the
amendments, the Board again approved them sight unseen and adjourned,
giving Van Gorkom authority to execute the papers when he received them. [...]
136137
The next day, October 9, and before the Agreement was amended, Pritzker
moved swiftly to off-set the proposed market test amendment. First, Pritzker
informed Trans Union that he had completed arrangements for financing its
acquisition and that the parties were thereby mutually bound to a firm
purchase and sale arrangement. Second, Pritzker announced the exercise of
1015
his option to purchase one million shares of Trans Union's treasury stock at 141
$38 per share 75 cents above the current market price. [...]
We conclude that the Board acted in a grossly negligent manner on October
138 8; [...]

The next day, October 10, Pritzker delivered to Trans Union the proposed
amendments to the September 20 Merger Agreement. Van Gorkom promptly
proceeded to countersign all the instruments on behalf of Trans Union
without reviewing the instruments to determine if they were consistent with
the authority previously granted him by the Board. The amending documents G.R. No. 6217 December 26, 1911
were apparently not approved by Trans Union's Board until a much later
date, December 2. The record does not affirmatively establish that Trans
CHARLES W. MEAD, plaintiff-appellant,
Union's directors ever read the October 10 amendments. [...]
vs.
E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING AND
139 CONSTRUCTION COMPANY,defendant-appellants.

The October 10 amendments to the Merger Agreement did authorize Trans
Union to solicit competing offers, but the amendments had more far-reaching
effects. [...] Under the October 10 amendments, a better offer was no longer
sufficient to permit Trans Union's withdrawal. Trans Union was now permitted
to terminate the Pritzker Agreement and abandon the merger only if, prior to
February 10, 1981, Trans Union had either consummated a merger (or sale
of assets) with a third party or had entered into a "definitive" merger
agreement more favorable than Pritzker's and for a greater consideration
subject only to stockholder approval. Further, the "extension" of the market
test period to February 10, 1981 was circumscribed by other amendments
which required Trans Union to file its preliminary proxy statement on the
Pritzker merger proposal by December 5, 1980 and use its best efforts to
mail the statement to its shareholders by January 5, 1981. Thus, the market
test period was effectively reduced, not extended. [...]
140
In our view, the record compels the conclusion that the directors' conduct on
October [884] 8 exhibited the same deficiencies as did their conduct on
September 20. [...]
Haussermann, Cohn & Fisher and A. D. Gibbs for plaintiff.
James J. Peterson and O'Brien & DeWitt for defendant McCullough.
TRENT, J.:
This action was originally brought by Charles W. Mead against Edwin C.
McCullough, Thomas L. Hartigan, Frank E. Green, and Frederick H. Hilbert.
Mead has died since the commencement of the action and the case is now
going forward in the name of his administrator as plaintiff.
The complaint contains three causes of action, which are substantially as
follows: The first, for salary; the second, for profits; and the third, for the
value of the personal effects alleged to have been left Mead and sold by the
defendants.
A joint and several judgment was rendered by default against each and all of
the defendants for the sum of $3,450.61 gold. The defendant McCullough

1016
alone having made application to have this judgment set aside, the court for the purpose of discussing the condition of the company at that time and
granted this motion, vacating the judgment as to him only, the judgment as to determining what course to pursue. They did on that date enter into the
the other three defendants remaining undisturbed.1awphi1.net following contract with the defendant McCullough, to wit:1awphil.net

At the new trial, which took place some two or three years later and after the For value received, this contract and all the rights and interests of the
death of Mead, the judgment was rendered upon merits, dismissing the case Philippine Engineering and construction Company in the same are
as to the first and second causes of action and for the sum of $1,200 gold in hereby assigned to E. C. McCullough of Manila, P. I.
the plaintiff's favor on the third cause of action. From this judgment both
parties appealed and have presented separate bills of exceptions. No appeal (Sgd.) E. C. McCULLOUGH,
was taken by the defendant McCullough from the ruling of the court denying President, Philippine Engineering and
a recovery on his cross complaint. Construction Company.

On March 15, 1902, the plaintiff (Mead will be referred to as the plaintiff in (Sgd.) F. E. GREEN, Treasurer.
this opinion unless it is otherwise stated) and the defendant organized the (Sgd.) THOMAS L. HARTIGAN, Secretary.
"Philippine Engineering and Construction Company," the incorporators being
the only stockholders and also the directors of said company, with general The contract reffered to in the foregoing document was known as the
ordinary powers. Each of the stockholders paid into the company $2,000 wrecking contract with the naval authorities.
mexican currency in cash, with the exception of Mead, who turned over to
the company personal property in lieu of cash.
On the 28th of the same month, McCullough executed and signed the
following instrumental:
Shortly after the organization, the directors held a meeting and elected the
plaintiff as general manager. The plaintiff held this position with the company
For value received, and having the above assignment from my
for nine months, when he resigned to accept the position of engineer of the
associates in the Philippine Engineering and Construction Company,
Canton and Shanghai Railway Company. Under the organization the
I hereby transfer my right, title, and interest in the within contract,
company began business about April 1, 102.itc-alf
with the exception of one sixth, which I hereby retain, to R. W.
Brown, H. D. C. Jones, John T. Macleod, and T. H. Twentyman.
The contract and work undertaken by the company during the management
of Mead were the wrecking contract with the Navy Department at Cavite for
The assignees of the wrecking contract, including McCullough, formed was
the raising of the Spanish ships sunk by Admiral Dewey; the contract for the
not known as the "Manila Salvage Association." This association paid to
construction of certain warehouses for the quartermaster department; the
McCullough $15,000 Mexican Currency cash for the assignment of said
construction of a wharf at Fort McKinley for the Government; The supervision
contract. In addition to this payment, McCullough retained a one-sixth
of the construction of the Pacific Oriental Trading Company's warehouse; and
interest in the new company or association.
some other odd jobs not specifically set out in the record.

The plaintiff insists that he was received as general manager of the first
Shortly after the plaintiff left the Philippine Islands for China, the other
company a salary which was not to be less than $3,500 gold (which amount
directors, the defendants in this case, held a meeting on December 24, 1903,
he was receiving as city engineer at the time of the corporation of the

1017
company), plus 20 per cent of the net profits which might be derived from the It is admitted that the plaintiff received $1.500 gold for his services, and
business; while McCullough contends that the plaintiff was to receive only his whether he is entitled to receive an additional amount depends upon the
necessary expenses unless the company made a profit, when he could result of the second cause of action.
receive $3,500 per year and 20 per cent of the profits. The contract entered
into between the board of directors and the plaintiffs as to the latter's salary The second cause of action is more difficult to determine. On this point
was a verbal one. The plaintiff testified that this contract was unconditional counsel for the plaintiff has filed a very able and exhaustive brief, dealing
and that his salary, which was fixed at $3,500 gold, was not dependent upon principally with the facts.
the success of the company, but that his share of the profits was to
necessarily depend upon the net income. On the other hand, McCullough, It is urged that the net profits accruing to the company after the completion of
Green and Hilbert testify that the salary of the plaintiff was to be determined all the contracts (except the salvage contract) made before the plaintiff
according to whether or not the company was successful in its operations; resigned as manager and up to the time the salvage contract was transferred
that if the company made gains, he was to receive $3,5000 gold, and a to McCullough and from him to the new company, amounted to $5,628.37
percentage, but that if the company did not make any profits, he was to gold. This conclusion is reached, according to the memorandum of counsel
receive only his necessary living expenses. for the plaintiff which appears on pages 38 and 39 of the record, in the
following manner:
It is strongly urged that the plaintiff would not have accepted the
management of the company upon such conditions, as he was receiving
from the city of Manila a salary of $3,500 gold. This argument is not only
answered by the positive and direct testimony of three of the defendants, but Profits from the construction of warehouses for the $6,962.54
also by the circumstances under which this company was organized and Government
principal object, which was the raising of the Spanish ships. The plaintiff put
no money into the organization, the defendants put but little: just sufficient to
get the work of raising the wrecks under way. This venture was a risky one.
All the members of the company realized that they were undertaking a most Profits from the construction of the wall at Fort 500.00
difficult and expensive project. If they were successful, handsome profits McKinley
would be realized; while if they were unsuccessful, all the expenses for the
hiring of machinery, launches, and labor would be a total loss. The plaintiff
was in complete charge and control of this work and was to receive,
according to the great preponderance of the evidence, in case the company
Profits from the inspection of the construction of the 1,000.00
made no profits, sufficient amount to cover his expenses, which included his
P. O. T. warehouse
room, board, transportation, etc. The defendants were to furnish money out
of their own private funds to meet these expenses, as the original $8,000
Mexican currency was soon exhausted in the work thus undertaken. So the
contract entered into between the directors and the plaintiff as to the latter's
salary was a contingent one. Profits obtained from the projects (according to 1,000.00
Mead's calculations)

1018

Total 9,462.54
In this same memorandum, the expense for the operation of the company
during Mead's management, consisting of rents, the hire of one muchacho,
the publication of various notices, the salary of an engineer for four months,
and plaintiff's salary for nine months, amounts to $3,834.17 gold. This
amount, deducted from the sum total of profits, leaves $5,628.37 gold.
Counsel for the plaintiff, in order to show conclusively as they assert that the
company, after paying all expenses and indebtedness, had a considerable
balance to its credit, calls attention to Exhibit K. This balance reads as
follows:
Abstract copy of ledger No. 3, folios 276-277. Philippine Engineering
and Construction Company.
Then follow the debits and credits, with a balance in favor of the company of
$10,728.44 Mexican currency. This account purports to cover the period from
July 1, 1902, to April 1, 1903. Ledger No. 3, above mentioned, is that the
defendant McCullough and not one of the books of the company.
It was this exhibit that the lower court based its conclusion when it found that
on January 25, 1903, after making the transfer of the salvage contract to
McCullough, the company was in debt $2,278.30 gold. The balance of
$10,728.44 Mexican currency deducted from the $16,439.40 Mexican
currency (McCullough's losses in the Manila Salvage Association) leaves
$2,278.30 United States currency at the then existing rate of exchange. In
Exhibit K, McCullough charged himself with the $15,000 Mexican currency
which he received from his associates in the new company, but did not credit
himself with the $16,439.40 Mexican currency, losses in said company, for
the reason that on April 1, 1903, said losses had not occurred. It must be
borne in mind that Exhibit K is an abstract from a ledger.
The defendant McCullough, in order to show in detail his transactions with
the old company, presented Exhibits 1 and 2. These accounts read as
follows:
Detailed account of the receipts and disbursements of E. C.
McCullough and the Philippine Engineering and Construction
Company.
Then follow the debits ad credits. These two accounts cover the period from
March 5 1902, to June 9, 1905. According to Exhibit No. 1, the old company
was indebted to McCullough in the sum of $14,918.75 Mexican currency, and
according to Exhibit No. 2 he indebtedness amounted to $6,358.15 Mexican
currency. The debits and credits in these two exhibits are exactly the me with
the following exceptions; I Exhibit No. 1, McCullough credits himself with the
$10,000 Mexican currency (the amount borrowed from the bank and
deposited with the admiral as a guarantee for the faithful performance of the
salvage contract); while in Exhibit No. 2 he credits himself with this $10,000
and at he same time charges himself with this amount. In the same exhibit
(No. 2) he credits himself with $16,439.40 Mexican currency, his losses in the
new company, received from said company. Eliminating entirely from these
two exhibits the $10,000 Mexican currency, the $15,000 Mexican currency,
and the $16,39.40 Mexican currency, the balance shown in McCullough's
favor is exactly the same in both exhibits. This balance amounts to $4,918.75
Mexian currency.
1019
According to McCullough's accounts in Exhibits 1 and 2 the profits derived
from the construction of the Government warehouse amounted to $4,005.02
gold, while the plaintiff contends that these profits amounted to $6,962.54 Feb. 2, 1903 McCullough 1,300.00
gold. The plaintiff, during his management of the old company, made a
contract with the Government for the construction of these are house and
commenced work. After he resigned and left for China, McCullough took
charge of and completed the said warehouse. McCullough gives a complete, Feb. 2, 1903 Green 1,027.92
detailed statements of express for the completion of this work, showing the
dates, to whom paid, and for what purpose. He also gives the various
amounts he received from the Government with the amounts of the receipt of
the same. On the first examination, McCullough testified that the total amount Feb. 19, 1905 P. O. T. Co. note 2,236.80
received from the Government for the construction of these warehouse was
$1,123 gold. The case was suspended for the purpose of examination the
records of the Auditor and the quater master, to determine the exact amount
paid for this work. As a result of this examination, the vouchers show an May 23, 1905 Hilbert 1,856.02
additional amount of about $5,000 gold, paid in checks. These checks show
that the same were endorsed by the plaintiff and collected by him from the
Hongkong and Shanghai Banking Corporation. This money was not handled
by McCullough and as it was collected by the plaintiff, it must be presumed,
June 9, 1905 Hartigan 1,225.00
in the absence of proof, that it was disbursed by him. McCullough did not
charge himself with the $2,5000 gold, alleged to have been profits from the
construction of the wall at Fort McKinley, the inspection of the construction of
the P. O. T. warehouse, and other projects. This work was done under the
McCullough says that these amounts represents cash borrowed from the
management of the plaintiff and it is not shown that the profits from these
evidence parties to carry on the operations of the old company while it was
contracts ever reached the ands of McCullough. McCullough was not the
trying to raise the sunken vessels. There is no proof to the contrary, and
treasurer of the company at that time. The other items which the plaintiff
McCullough's testimony on this point is strongly corroborated by the fact that
insist that McCullough had no right to credit himself with are the following:
the work done by the company in attempting to raise theses vessels was it
first undertaking. The company had made no profits while tat work was going
on under the management of the plaintiff, but its expenses greatly exceeded
that of the original $8,000 Mexican currency. It was necessary to borrow
Date To whom paid. Amount (Mex. currency).
money to continue that work. These amounts, having been borrowed, were
outstanding debts when McCullough took charge for the purpose of
completing the warehouses and winding up the business of the old company.
These amounts do not represent payments or refunds of the original capital.
Jan. 30, 1903 Green $2,000.00 McCullough did not credit himself with any amount for his services for
supervising the completion of the warehouses, nor for liquidating or winding
up the company's affairs. We think that the amount of $4,918.75 Mexican

1020
currency, balance in McCullough's favor up to this point, represents a fair,
equitable, and just settlement.
So far we have referred to the Philippine Engineering and Construction
Company as the "company," without any attempt to define its legal status.
The plaintiff and defendants organized this company with a capital stock of
$100,000 Mexican currency, each paying in on the organization $2,000
Mexican currency. The remainder, $9,000, according to the articles of
agreement, were to be offered to the public in shares of $100 Mexican
currency, each. The names of all the organizers appear in the articles of
agreement, which articles were duly inscribed in the commercial register. The
purpose for which this organization was affected were to engage in general
engineering and construction work, and operating under the name of the
"Philippine Engineering and Construction Company." during its active
existence, it engaged in the business of attempting to rise the sunken
Spanish fleet, constructing under contract warehouses and a wharf for the
United States Government, supervising the construction of a warehouse for a
private firm, and some assay work. It was, therefore, an industrial civil
partnership, as distinguished from a commercial one; a civil partnership in
the mercantile form, an anonymous partnership legally constituted in the city
of Manila.
The articles of agreement appeared in a public document and were duly
inscribed in the commercial register. To the extent of this inscription the
corporation partook of the form of a mercantile one and as such must e
governed by articles 151 to 174 of the Code of Commerce, in so far as these
provisions are not in conflict with the Civil Code (art. 1670, Civil Code); but
the direct and principal law applicable is the Civil Code. Those provisions of
the Code of Commerce are applicable subsidiary.
This partnership or stock company (sociedad anonima) upon the execution of
the public instrument in which is articles of agreement appear, and the
contribution of funds and personal property, became a juridicial person an
artificial being, invisible, intangible and existing only in contemplation of law
with the power to hold, buy, and ell property, and to use and be sued a
corporation not a general copartnership nor a limited copartnership. (Arts.
37, 38,1656 of the Civil Code; Compania Agricola de Ultimar vs. Reyes et al.,
4 Phil. Rep., 2; and Chief Justice Marshall's definition of a corporation, 17 U.
S., 518.)
The inscribing of its articles of agreement in the commercial register was not
necessary to make it a juridicial person a corporation. Such inscription
only operated to show that it partook of the form of a commercial corporation.
(Compania Agricola de Ultimar vs. Reyes et al., supra.)
Did a majority of the stockholders, who were at the same time a majority of
the directors of this corporation, have the power under the law and its articles
of agreement, to sell or transfer to one of its members the assets of said
corporation?
In the first article of the statutes of incorporation it is stated tat by virtue of a
public document the organizers, whose names are given in full, agreed to
form a sociedad anonima. Article II provides that the organizers should be
the directors an administrators until the second general meeting, and until
their successors were duly elected and installed. The third provides that
the sociedad should run for ninety-nine years from the date of the execution
of its articles of agreement. Article IV sets forth the object or purpose of the
organization. Article V makes the capital $100,000 Mexican currency, divided
into one thousand shares at $100 Mexican currency each. Article VI provides
that each shareholder should be considered as a coowner in the assets of
the company and entitled to participate in the profits in proportion to the
amount of his stock. Article VII fixed the time of holding general meetings and
the manner of calling special meetings of the stockholders. Article VIII
provides that the board of directors shall be elected annually. Article IX
provides for the filing of vacancies in the board of directors. Article X provides
that "the board of directors shall elect the officers of the sociedad and have
under is charge the administration of the said sociedad." Article XI: "In all the
questions with reference to the administration of the affairs of the sociedad, it
shall be necessary to secure the unanimous vote of the board of directors,
and at least three of said board must be provides that all of the stock, except
that which was divided among the organizers should remain in the treasury
subject to the disposition of the board of directors. Article XIII reads: "In all
1021
the meetings of the stockholders, a majority vote of the stockholders present
shall be necessary to determine any question discussed." The fourteenth
articles authorizes the board of directors to adopt such rules and regulations
for the government of the sociedad as it should deem proper, which were not
in conflict with its statutes.
When the sale or transfer heretofore mentioned took place, there were
present four directors, all of whom gave their consent to that sale or transfer.
The plaintiff was then about and his express consent to make this transfer or
sale was not obtained. He was, before leaving, one of the directors in this
corporation, and although he had resigned as manager, he had not resigned
as a director. He accepted the position of engineer of the Canton and
Shanghai Railway Company, knowing that his duties as such engineer would
require his whole time and attention and prevent his returning to the
Philippine Islands for at least a year or more. The new position which he
accepted in China was incompatible with his position as director in the
Philippine Engineering and Construction Company, a corporation whose
sphere of operations was limited to the Philippine Islands. These facts are
sufficient to constitute an abandoning or vacating of hid position as director in
said corporation. (10 Cyc., 741.) Consequently, the transfer or sale of the
corporation's assets to one of its members was made by the unanimous
consent of all the directors in the corporation at that time.
There were only five stockholders in this corporation at any time, four of
whom were the directors who made the sale, and the other the plaintiff, who
was absent in China when the said sale took place. The sale was, therefore,
made by the unanimous consent of four-fifths of all the stockholders. Under
the articles of incorporation, the stockholders and directors had general
ordinary powers. There is nothing in said articles which expressly prohibits
the sale or transfer of the corporate property to one of the stockholders of
said corporation.
Is there anything in the law which prohibits such a sale or transfer? To
determine this question, it is necessary to examine, first, the provisions of the
Civil Code, and second, those provisions (art. 151 to 174) of the Code o ]
Commerce.
Articles 1700 to 1708 of the Civil Code deal with the manner of dissolving a
corporation. There is nothing in these articles which expressly or impliedly
prohibits the sale of corporate property to one of its members, nor a
dissolution of a corporation in this manner. Neither is there anything in
articles 151 to 174 of the Code of Commerce which prohibits the dissolution
of a corporation by such sale or transfer.
The articles of incorporation must include:
xxx xxx xxx
The submission to the vote of the majority of the meeting of
members, duly called and held, of such matters as may properly be
brought before the same. (No. 10, art. 151, Code of Commerce.)
Article XIII of the corporation's statutes expressly provides that "in all the
meetings of the stockholders, a majority vote of the stockholders present
shall be necessary to determine any question discussed."
The sale or transfer to one of its members was a matter which a majority of
the stockholders could very properly consider. But it i said that if the acts and
resolutions of a majority of the stockholders in a corporation are binding in
every case upon the minority, the minority would be completely wiped out
and their rights would be wholly at the mercy of the abuses of the majority.
Generally speaking, the voice of a majority of the stockholders is the law of
the corporation, but there are exceptions to this rule. There must necessarily
be a limit upon the power of the majority. Without such a limit the will of the
majority would be absolute and irresistible and might easily degenerate into
an arbitrary tyranny. The reason for these limitations is that in every contract
of partnership (and a corporation can be something fundamental and
unalterable which is beyond the power of the majority of the stockholders,
and which constitutes the rule controlling their actions. this rule which must
be observed is to be found in the essential compacts of such partnership,
which gave served as a basis upon which the members have united, and
without which it is not probable that they would have entered not the
1022
corporation. Notwithstanding these limitations upon the power of the majority
of the stockholders, their (the majority's) resolutions, when passed in good
faith and for a just cause, deserve careful consideration and are generally
binding upon the minority.
Eixala, in his work entitled "Instituciones del Derecho Mercantil de Espaa,"
speaking of sociedades anonimas, says:
The resolutions of the boards passed by a majority vote are valid . . .
and authority for passing such resolutions is unlimited, provided that
the original contract is not broken by them, the partnership funds not
devoted to foreign purposes, or the partnerships transformed, or
changes made which are against public policy or which infringe upon
the rights of third persons.
The supreme court of Spain, in its decision dated June 30, 1888, said:
In order to be valid and binding upon dissenting members, it s an
indispensable requisite that resolutions passed by a general meeting
of stockholders conform absolutely to the contracts and conditions of
the articles of the association, which are to be strictly construed.
That resolutions passed within certain limitations by a majority of the
stockholders of a corporation are binding upon the minority, is therefore
recognized by the Spanish authorities.
Power of private corporation to alienate property. This power of
absolute alienability of corporate property applies especially to
private corporations that are established solely for the purpose of
trade or manufacturing and in which he public has no direct interest.
While this power is spoken of as belonging to the corporation it must
be observed that the authorities point out that the trustees or
directors of a corporation do not possess the power to dispose of the
corporate property so as to virtually end the existence of the
corporation and prevent it from carrying on the business for which it
was incorporated. (Thompson on Corporation, second edition, sec.
2416, and cases cited thereunder.)
Power to dispose of all property. Where there are no creditors,
and no stockholder objects, a corporation, as against all other
persons but the state, may sell and dispose of all its property. The
state in its sovereign capacity may question the power of the
corporation to do so, but with these exceptions such as a sale is
void. A rule of general application is that a corporation of a purely
private business character, one which owes no special duty to the
public, and is not given the right of eminent domain, where
exigencies of its business require it or when the circumstances are
such that it can no longer continue the business with profit, may sell
and dispose of all its property, pay its debts, divide the remaining
assets and wind up the affairs of the corporation. (Id., sec. 2417.)
When directors or officers may dispose of all the property. It is
within the dominion of the managing officers and agents of the
corporation to dispose of all the corporate property under certain
circumstances; and this may be done without reference to the assent
or authority of the stockholders. This disposition of the property may
be temporarily by lease, or permanently by absolute conveyance.
But it can only be done in the course of the corporate business and
for the furtherance of the purposes of the incorporation. The board of
directors possess this power when the corporation becomes involved
and by reason of its embarrassed or insolvent condition is unable
either to pay its debts or to secure capital and funds for the further
prosecution of its enterprise, and especially where creditors are
1023
pressing their claims and demands and are threatening to or have
instituted actions to enforce their claims. This power of the directors
to alienate the property is conceded where it is regarded as of
imperative necessity. (If., sec. 2418, and case cited.)
When majority stockholder may dispose of all corporate property.
Another rule that permits a majority of the stockholders to dispose of
all the corporate property and wind up the business, is where the
corporation has became insolvent, and the disposition of the property
is necessary to pay the debt; or where from any cause the business
is a failure, and the best interest of the corporation and all the
stockholders require it, then the majority have clearly the power to
dispose of all the property even as against the protests of a minority.
It would be a harsh rule that could permit one stockholder, or any
minority of the stockholders, to hold the majority to their investment
where the continuation of the business would be at a loss and where
there was no prospect or hope that the enterprise could be made
profitable. The rule as stated by some courts is that the majority
stockholders may dispose of the property when just cause exists;
and this just cause is usually defined to be the unprofitableness of
the business and where its continuation would be ruinous to the
corporation and against the interest of stockholders. (Id., sec. 2424,
and cases cited.)
Nothing is better settled in the law of corporations than the doctrine
that a corporation has the same capacity and power as a natural
person to dispose of the convey its property, real or personal,
provided it does not do so for a purpose which is foreign to the
objects for which it was created, and provided, further, it violates no
charter or statutory restriction, on rule of law based upon public
policy. . . .This power need not be expressly conferred upon a
corporation by its charter. It is implied as an incident to its ownership
of property, unless there is some clear restriction in this charter or in
some statute. (Clark and Marshall's Private Corporations, sec. 152,
and cases cited.)
A purely private business corporation, like a manufacturing or trading
company, which is not given the right of eminent domain, and which
owes no special duties to the public, may certainly sell and convey
absolutely the whole of its property, when the exigencies of its
business require it to do so, or when the circumstances are such that
it can no longer profitably continue its business, provided the
transaction is not in fraud of the rights of creditors, or in violation of
charter or statutory restrictions. And, by the weight of authority, this
may be done a majority of the stockholders against the dissent of the
minority. (Id., sec. 160, and cases cited.)
The above citations are taken from the works of the most eminent writers on
corporation law. The citation of cases in support of the rules herein
announced are too numerous to insert.
From these authorities it appears to be well settled, first, that a private
corporation, which owes no special duty to the public and which has not been
given the right of eminent domain, has the absolute right and power as
against the whole world except the state, to sell and dispose of all of its
property; second, that the board of directors, has the power, without
referrence to the assent or authority of the stockholders, when the
corporation is in failing circumstances or insolvent or when it can no longer
continue the business with profit, and when it is regarded as an imperative
necessity; third, that a majority of the stockholders or directors, even against
the protest of the minority, have this power where, from any cause, the
business is a failure and the best interest of the corporation and all the
stockholders require it.
May officer or directors of the corporation purchase the corporate property?
The authorities are not uniform on this question, but on the general
proposition whether a director or an officer may deal with the corporation, we
think the weight of authority is that he may. (Merrick vs. Peru Coal Co., 61 Ill.,
472; Harts et al. vs. Brown et al., 77 Ill., 226; Twin-Lick Oil Company vs.
Marbury, 91 U.S., 587; Whitwell vs, Warner, 20 Vt., 425; Smith vs. Lansing,
22 N.Y., 520; City of St. Loius vs. Alexander, 23 Mo., 483; Beach et al vs.
Miller, 130 Ill., 162.)
1024
While a corporation remains solvent, we can see no reason why a director or
officer, by the authority of a majority of the stockholders or board of
managers, may not deal with the corporation, loan it money or buy property
from it, in like manner as a stranger. So long as a purely private corporation
remains solvent, its directors are agents or trustees for the stockholders.
They owe no duties or obligations to others. But the moment such a
corporation becomes insolvent, its directors are trustees of all the creditors,
whether they are members of the corporation or not, and must manage its
property and assets with strict regard to their interest; and if they are
themselves creditors while the insolvent corporation is under their
management, they will not be permitted to secure to themselves by
purchasing the corporate property or otherwise any personal advantage over
the other creditors. Nevertheless, a director or officer may in good faith and
for an adequate consideration purchase from a majority of the directors or
stockholders the property even of an insolvent corporation, and a sale thus
made to him is valid and binding upon the minority. (Beach et al. vs.
Miller, supra; Twin-Lick Oil Company vs. Marbury, supra; Drury vs. Cross, 7
Wall., 299; Curran vs. State of Arkansas, 15 How., 304; Richards vs. New
Hamphshire Insurance Company, 43 N. H., 263; Morawetz on Corporations
(first edition), sec. 579; Haywood vs. Lincoln Lumber Company et al., 64
Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott vs. Shaw Carriage
Company, 21 Fed. Rep., 577.)
In the case of the Twin-Lick Oil Company vs. Marbury, supra, the complaint
was a corporation organized under the laws of West Virginia, engaged in the
business of raising and selling petroleum. It became very much embarrased
and a note was given secured by a deed of trust, conveying all the property
rights, and franchise of the corporation to William Thomas to secure the
payment of said note, with the usual power of sale in default of payment. The
property was sold under the deed of trust; was bought in by defendant's
agent for his benefit, and conveyed to him the same year. The defendant was
at the time of these transactions a stockholder and director in the company.
At the time the defendant's money became due there was no apparent
possibility of the corporation's paying it at any time. The corporation was then
insolvent. The property was sold by the trustee and bough in by the
defendant at a fair and open sale and at a reasonable price. The sale and
purchase was the only mode left to the defendant to make his money. The
court said:
That a director of a joint-stock corporation occupies one of those
fiduciary relations where his dealings with the subject-matter of his
trust or agency, and with the beneficiary or party whose interest is
confided to his care, is viewed with jealousy by the courts, and may
be set aside on slight grounds, is a doctrine founded on the soundest
morality, and which has received the clearest recognition in this court
and others. (Koehler vs. Iron., 2 Black, 715; Drury vs. Cross, 7 Wall.,
299; R.R. Co. vs. Magnay, 25 Beav., 586; Cumberland Co vs.
Sherman, 30 Barb., 553; Hoffman S. Coal Co. vs. Cumberland Co.,
16 Md., 456.) The general doctrine, however, in regard to contracts
of this class, is, not that they are absolutely void, but that they are
voidable at the election of the party whose interest has been so
represented by the party claiming under it. We say, this is the general
rule; for there may be cases where such contracts would be void ab
initio; as when an agent to sell buys of himself, and by his power of
attorney conveys to himself that which he was authorized to sell. but
even here, acts which amount t a ratification by the principal may
validate the sale.
The present case is not one of that class. While it is true that the
defendant, a s a director of the corporation, was bound by all those
1025
rules of conscientious fairness which courts of equity have imposed
as the guides for dealing in such cases, it can not be maintained that
any rule forbids one director among several from loaning money to
the corporation when the money is needed, and the transaction is
open, and otherwise free from blame. No adjudged case has gone
so far as this. Such a doctrine, while it would afford little protection to
the corporation against actual fraud or oppression, would deprive it
of the air of those most interested in giving aid judiciously, and best
qualified to judge of the necessity of that aid, and of the extent to
which it may safely be given.
There are in such a transaction three distinct parties whose interest
is affected by it; namely, the lender, the corporation, and the
stockholders of the corporation.
The directors are the officers or agents of the corporation, and
represent the interests of the abstract legal entity, and of those who
own the shares of its stock. One of the objects of creating a
corporation by law is to enable it to make contracts; and these
contracts may be made with its stockholders as well as with others.
In some classes of corporations, as in mutual insurance companies,
the main object of the act of the incorporation is to enable the
company to make contracts which its stockholders, or with persons
who become stockholders by the very act of making the contract of
insurance. It is very true, that as a stockholder, in making a contract
of any kind with the corporation of which he is a member, is in some
sense dealing with a creature of which he is a part, and holds a
common interest with the other stockholders, who, with him,
constitute the whole of that artificial entity, he is properly held to a
larger measure of candor and good faith than if he were not a
stockholder. So, when the lender is a director, charged, with others,
with the control and management of the affairs of the corporation,
representing in this regard the aggregated interest of all the
stockholders, his obligation, if he becomes a party to a contract with
the company, to candor and fair dealing, is increased in the precise
degree that his representative character has given him power and
control derived from the confidence reposed in him by the
stockholders who appointed him their agent. If he should be a sole
director, or one of a smaller number vested with certain powers, this
obligation would be still stronger, and his acts subject to more severe
scrutiny, and their validity determined by more rigid principles of
morality, and freedom from motives of selfishness. All this falls far
short, however, of holding that no such contract can be made which
will be valid; . . . .
In the case of Hancock vs. Holbrook et al. (40 La. Ann., 53), the court said:
As a strictly legal question, the right of a board of directors of a
corporation to apply it property to the payment of its debts, and the
right of the majority of stockholders present at a meeting called for
the purpose to ratify such action and to dissolve the corporation, can
not be questioned.
But were such action is taken at the instance, and through the
influence of the president of the corporation, and were the debt to
which the property is applied is one for which he is himself primarily
liable, and specially where he subsequently acquires, in his personal
right, the proerty thus disposed of, such circumstances undoubtedly
subject his acts to severe scrutiny, and oblige him to establish that he
acted with the utmost candor and fair-dealing for the interest of the
corporation, and without taint of selfish motive.
The sale or transfer of the corporate property in the case at bar was made by
three directors who were at the same time a majority of stockholders. If a
majority of the stockholders have a clear and a better right to sell the
corporate property than a majority of the directors, then it can be said that a
majority of the stockholders made this sale or transfer to the defendant
McCullough.
What were the circumstances under which said sale was made? The
corporation had been going from bad to worse. The work of trying to raise the
sunken Spanish fleet had been for several months abandoned. The
corporation under the management of the plaintiff had entirely failed in this
1026
undertaking. It had broken its contract with the naval authorities and the
$10,000 Mexican currency deposited had been confiscated. It had no money.
It was considerably in debt. It was a losing concern and a financial failure. To
continue its operation meant more losses. Success was impossible. The
corporation was civilly dead and had passed into the limbo of utter
insolvency. The majority of the stockholders or directors sold the assets of
this corporation, thereby relieving themselves and the plaintiff of all
responsibility. This was only the wise and sensible thing for them to do. They
acted in perfectly good faith and for the best interests of all the stockholders.
"It would be a harsh rule that would permit one stockholder, or any minority of
stockholders to hold a majority to their investment where a continuation of
the business would be at a loss and where there was no prospect or hope
that the enterprise would be profitable."
The above sets forth the condition of this insolvent corporation when the
defendant McCullough proposed to the majority of stockholders to take over
the assets and assume all responsibility for the payment of the debts and the
completion of the warehouses which had been undertaken. The assets
consisted of office furniture of a value of less than P400, the uncompleted
contract for the construction of the Government warehouses, and the
wrecking contract. The liabilities amounted to at least $19,645.74 Mexican
currency. $9,645.74 Mexican currency of this amount represented borrowed
money, and $10,000 Mexican currency was the deposit with the naval
authorities which had been confiscated and which was due the bank.
McCullough's profits on the warehouse contract amounted to almost enough
to the pay the amounts which the corporation had borrowed from its
members. The wrecking contract which had been broken was of no value to
the corporation for the reason that the naval authorities absolutely refused to
have anything further to do with the Philippine Engineering and Construction
Company. They the naval authorities) had declined to consider the petition of
the corporation for an extension in which to raise the Spanish fleet, and had
also refused to reconsider their action in confiscating the deposit. They did
agree, however, that if the defendant McCullough would organize a new
association, that they would give the new concern an extension of time and
would reconsider the question of forfeiture of the amount deposited. Under
these circumstances and conditions, McCullough organized the Manila
Salvage Company, sold five-sixth of this wrecking contract to the new
company for $15,000 Mexican currency and retained one-sixth as his share
of the stock in the new concern. The Manila Salvage company paid to the
bank the $10,000 Mexican currency which had been borrowed to deposit
with the naval authorities, and began operations. All of the $10,000 Mexican
currency so deposited was refund to the new company except P2,000. The
new association failed and McCullough, by reason of this failure, lost over
$16,000 Mexican currency. These facts show that McCullough acted in good
faith in purchasing the old corporation's assets, and that he certainly paid for
the same a valuable consideration.
But cancel for the plaintiff say: "The board of directors possessed only
ordinary powers of administration (Article X of the Articles of incorporation),
which in no manner empowered it either to transfer or to authorize the
transfer of the assets of the company to McCullough (art. 1773, Civil Code;
decisions of the supreme court of Spain of April 2, 1862, and July 8, 1903)."
Article X of the articles of incorporation above referred to provides that the
board of directors shall elect the officers of the corporation and "have under
its charge the administration of the said corporation." Articles XI reads: "In all
the questions with reference to the administration of the affairs of the
corporation, it shall be necessary to secure the unanimous vote of the board
of directors, and at least three of said board must be present in order to
constitute a legal meeting." It will be noted that article X statute a legal
meeting." It will be noted that Article X placed the administration of the affairs
of the corporation in the hands of the board of directors. If Article XI had been
omitted, it is clear that under the rules which govern business of that
character, and in view of the fact that before the plaintiff left this country and
abandoned his office as director, there were only five directors in the
corporation, then three would have been sufficient to constitute a quorum
and could perform all the duties and exercise all the powers conferred upon
the board under this article. It would not have been necessary to obtain the
consent of all three of such members which constituted the quorum in order
that a solution affecting the administration of the corporation should be
binding, as two votes a majority of the quorum would have been
sufficient for this purpose. (Buell vs. Buckingham & Co., 16 Iowa, 284; 2
Kent. Com., 293; Cahill vs. Kalamazoo Mutual Insurance Company, 2 Doug.
1027
(Mich.), 124; Sargent vs. Webster, 13 Met., 497; In re Insurance Company,
22 Wend., 591; Ex parte Wilcox, 7 Cow., 402; id., 527, note a.)
It might appear on first examination that the organizers of this corporation
when they asserted the first part of Article XI intended that no resolution
affecting the administration of the affairs should be binding upon the
corporation unless the unanimous consent of the entire board was first
obtained; but the reading of the last part of this same article shows clearly
that the said organizers had no such intention, for they said: "At least three of
said board must be present in order to constitute a legal meeting." Now, if
three constitute a legal meeting, three were sufficient to transact business,
three constituted the quorum, and, under the above-cited authorities, two of
the three would be sufficient to pass binding resolutions relating to the
administration of the corporation.
If the clause "have under in charge and administer the affairs of the
corporation" refers to the ordinary business transactions of the corporation
and does not include the power to sell the corporate property and to dissolve
the corporation when it becomes insolvent a change we admit organic and
fundamental then the majority of the stockholders in whom the ultimate
and controlling power lies must surely have the power to do so.
Article 1713 of the Civil Code reads:
An agency stated in general terms only includes acts of
administration.
In order to compromise, alienate, mortgage, or execute any other act
of strict ownership an express commission is required.
This article appears in title 9, chapter 1 of the Civil Code, which deals with
the character, form, and kind of agency. Now, were the positions of Hilbert,
Green, Hartigan, and McCullough that the agents within the meaning of the
article above quoted when the assets of the corporation were transferred or
sold to McCullough? If so, it would appear from said article that in order to
make the sale valid, an express commission would be required. This
provision of law is based upon the broad principles of sound reason and
public policy. There is a manifest impropriety in allowing the same person to
act as the agent of the seller and to become himself the buyer. In such
cases, there arises so often a conflict between duty and interest. "The wise
policy of the law put the sting of a disability into the temptation, as a
defensive weapon against the strength of the danger which lies in the
situation."
Hilbert, Green, and Hartigan were not only all creditors at the time the sale or
transfer of the assets of the insolvent corporation was made, but they were
also directors and stockholders. In addition to being a creditor, McCullough
sustained the corporation the double relation of a stockholder and president.
The plaintiff was only a stockholder. He would have been a creditor to the
extent of his unpaid salary if the corporation had been a profitable instead of
a losing concern.
But as we have said when the sale or transfer under consideration took
place, there were three directors present, and all voted in favor of making this
sale. It was not necessary for the president, McCullough, to vote. There was
a quorum without him: a quorum of the directors, and at the same time a
majority of the stockholders.
A corporation is essential a partnership, except in form. "The directors are the
trustees or managing partners, and the stockholders are the cestui que
trust and have a joint interest in all the property and effects of the
corporation." (Per Walworth, Ch., in Robinson vs. Smith, 3 Paige, 222, 232;
5 idem, 607; Slee vs. Bloom, 19 Johns., 479; Hoyt vs. Thompson, 1 Seld.,
320.)
The Philippine Engineering and Construction Company was an artificial
person, owning its property and necessarily acting by its agents; and these
agents were the directors. McCullough was then an agent or a trustee, and
the stockholders the principal. Or say (as corporation was insolvent) that he
was an agent or trustee and the creditors were the beneficiaries. This being
the true relation, then the rules of the law (art. 1713 of the Civil Code)
applicable to sales and purchases by agents and trustees would not apply to
1028
the purchase in question for the reason that there was a quorum without
McCullough, and for the further reason that an officer or director of a
corporation, being an agent of an artificial person and having a joint interest
in the corporate property, is not such an agent as that treated of in article
1713 of the Civil Code.
Again, McCullough did not represent the corporation in this transaction. It
was represented by a quorum of the board of directors, who were at the
same time a majority of the stockholders. Ordinarily, McCullough's duties as
president were to preside at the meetings, rule on questions of order, vote in
case of a tie, etc. He could not have voted in this transaction because there
was no tie.
The acts of Hilbert, Green, Hartigan, and McCullough in this transaction, in
view of the relations which they bore to the corporation, are subject to the
most severe scrutiny. They are obliged to establish that they acted with the
utmost candor and fair dealing for the interest of the corporation, and without
taint motives. We have subjected their conduct to this test, and, under the
evidence, we believe it has safely emerged from the ordeal.
Transaction which only accomplish justice, which are done in good
faith and operate legal injury to no one, lack the characteristics of
fraud and are not to be upset because the relations of the parties
give rise to suspicions which are fully cleared away. (Hancock vs.
Holbrook, supra.)
We therefore conclude that the sale or transfer made by the quorum of the
board of directors a majority of the stockholders is valid and binding
upon the majority-the plaintiff. This conclusion is not in violation of the articles
of incorporation of the Philippine Engineering and Construction Company.
Nor do we here announce a doctrine contrary to that announced by the
supreme court of Spain in its decisions dated April 2, 1862, and July 8, 1903.
As to the third cause of action, it is insisted: First, that the court erred in
holding the defendant McCullough responsible for the personal effects of the
plaintiff; and second, that the court erred in finding that the effects left by the
plaintiff were worth P2,400.
As we have said, the plaintiff was the manager of the Philippine Engineering
Company from April 1, 1902, up to January 1, 1903. Sometimes during the
previous month of December he resigned to accept a position in China, but
did not leave Manila until about January 20. He remained in Manila about
twenty days after he severed his connection with the company. He lived in
rooms in the same building which was rented by the company and were the
company had its offices. When he started for China he left his personal
effects in those rooms, having turned the same over to one Paulsen.
Testifying on this point the plaintiff said:
Q. To whom did you turn over these personal effects on leaving
here? A. To Mr. Paulsen.
Q. Have you demanded payment of this sum [referring to the value
of his personal effects]? A. On leaving for China I gave Mr.
Haussermann power of attorney to represent me in this case and
demand payment.
Q. Please state whether or not you have an inventory of these
effects. A. I had an inventory which was in my possession but it
was lost when the company took all of the books and carried them
away from the office.
Q. Can you give a list or a partial list of your effect? A. I remember
some of the items. There was a complete bedroom set, two marble
tables, one glass bookcase, chairs, all of the household effects I
used when I was living in the Botanical Garden as city engineer, one
theodolite, which I bought after commencing work with the company.
Q. How much do you estimate to be the total reasonable value of
these effects? A. The total would not be less than $1,200 gold.
1029
Counsel for the plaintiff, on page 56 of their brief, say:
Mr. McCullough, in his testimony (pp. 39 and 40) admits full
knowledge of and participation in the removal and sale of the effects
and states that he took the proceeds and considered them part of the
assets of the company. He further admits that Mr. Haussermann
made a demand for the proceeds of Mr. Mead's personal effects (p.
44).
McCullough's testimony, referred by the counsel, is as follows:
Q. At the time Mr. Mead left for China, in the building where the office
was and in the office, there were left some of the personal effects of
Mr. Mead. What do you know about these effects, a list of which is
Exhibit B? A. Nothing appearing in this Exhibit B was never
delivered to the Philippine Engineering and Construction Company,
according to my list.
Q. Do you know what became of these effects? A. No, sir. I have
no idea. I never saw them. I never heard these effects talked about. I
only heard something said about certain effects which Mr. Mead had
in his living room.
Q. Do you know what became of the bed of Mr. Mead? A. I know
there were effects, such as a bed, washstand, chairs, table, and
other things, which are used in a living room, and that they were in
Mr. Mead's room. These effects were sent to the warehouse of the
Pacific Oriental Trading Company, together with the office furniture.
We had to vacate the building where the offices were and we had to
take out everything therein. These things were deposited in the
warehouse of the Pacific Oriental Trading Company and were finally
sold by that company and the money turned over to me.
Q. How much? A. P49.97.
Q. What did you do with this money? A. I took it and considered it
part of the assets of the company. All of the other effects of the office
were sold at the same time and brought P347.16.
Q. Did Mr. Mead leave anyone in charge of his effects when he left
Manila? A. I think he left Paulsen in charge, but Paulsen did not
take these effects, so when we vacated the office we had to move
them.
Q. Did Paulsen continue occupying the living room where these
effects were and did he use these effects? A. I do not know
because I was in the office for three months before we vacated.
Q. Don't you know that it is a fact that Mr. Haussermann, as
representative of Mr. Mead, demanded of you and the company the
payment of the salary which was due Mr. Mead and the value of his
personal effects? A. Yes, sir.
As to the value of these personal effects, Hartigan, testifying as witness for
the defendant, said:
I think the personal effects were sold for P50. His personal effects
consisted of ordinary articles, such as a person would use who had
to be going from one place to another all the time, as Mr. Mead. I
know that all those effects were sold for less than P100, if I am not
mistaken.
The foregoing is the material testimony with reference to the defendant
McCullough's responsibility and the value of the personal effects of the
plaintiff.
McCullough was a member of the company and was responsible as such for
the rents where the offices were located. The company had no further use for
the building after the plaintiff resigned. The vacating of the building was the
proper thing to do. The office furniture was removed and stored in a place
where it cost nothing for rents. When Hilbert, member of the company, went
1030
to the office to remove the company's office furniture, he found no one in
charge of the plaintiff's personal effects. He took them and stored them in the
same place and later sold them, together with the office furniture, and turned
the entire amount over to defendant McCullough.
Paulsen, in whose charge Mead left his effects, apparently took no interest in
caring for them. Was the company to leave Mead's personal effects in that
building and take the chances of having to continue to pay rents, solely on
account of the plaintiff's property remaining there? The company had reason
to believe that it would have to continue paying these rents, as they had
rented the building and authorized the plaintiff to occupy rooms therein.
The plaintiff gave an estimate of the value of the effects which he left in his
rooms and placed this value at P2,400. He did not give a complete list of the
effects so left, neither did he give the value of a single item separately. The
plaintiff's testimony is so indefinite and uncertain that i t is impossible to
determine with any degree of certainty just what these personal effects
consisted of and their values, especially when we take into consideration the
significant fact that these effects were abondoned by Paulsen. On the other
hand, w have before us the positive testimony of Hilbert as to the amount
received for the plaintiff's personal effects, the testimony of Hartigan that the
same were sold for less than P100, and the testimony of McCullough as to
the amount turned over to him by Herbert.

The plaintiff knew when he left for China that he would be away a long time. So we conclude that the great preponderance of evidence as to the value of
He had accepted a position of importance, and which he knew would require these effects is in the favor of the contention of the defendant. Their value
his personal attention. He did not gather up his personal effects, but left them therefore be fixed at P49.97.
in the room in charge of Paulsen. Paulsen took no interest in caring for them,
but apparently left these effects to take care of them selves. The plaintiff did For these reasons the judgment appealed from as to the first and second
not even carry with him an inventory of these effects, but attempted on the causes of action is hereby affirmed. Judgment appealed from as to the third
trial to give a list of them and did give a partial list of the things he left in his cause of action is reduced to P49.97, without costs.
room; but it is not shown that all this things were there when Herbert
removed the office furniture and some of the plaintiff's effects. The fact that Arellano, C.J., Torres, Mapa, Carson and Moreland, JJ., concur.
the plaintiff remained in Manila some twenty days after resigning and never
cared for his own effects but left them in the possession of an irresponsible
person, shows extreme negligence on his part. He exhibited a reckless
indifference to the consequences of leaving his effects in the lease premises.
The law imposes on every person the duty of using ordinary care against
injury or damages. What constitutes ordinary care depends upon the
circumstances of each particular case and the danger reasonably to be
apprehended.

McCullough did not have anything personally to do with these effects at any
time. He only accepted the money which Herbert turned over to him. He,
personally, did not contribute in any way whatsoever to the loss of the
property, neither did he as a member of the corporation do so.

1031
 HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO
TE, respondents.

De Jesus & Associates for petitioner.

Padlan, Sutton, Mendoza & Associates for private respondent.

CAMPOS, JR., J.:

Before Us is a Petition for Review on Certiorari filed by petitioner Prime

White Cement Corporation seeking the reversal of the decision * of the then
Intermediate Appellate Court, the dispositive portion of which reads as
follows:

WHEREFORE, in view of the foregoing, the judgment

appealed from is hereby affirmed in toto. 1

The facts, as found by the trial court and as adopted by the respondent Court
are hereby quoted, to wit:

On or about the 16th day of July, 1969, plaintiff and

defendant corporation thru its President, Mr. Zosimo Falcon
and Justo C. Trazo, as Chairman of the Board, entered into
a dealership agreement (Exhibit A) whereby said plaintiff was
obligated to act as the exclusive dealer and/or distributor of
the said defendant corporation of its cement products in the
entire Mindanao area for a term of five (5) years and proving
(sic) among others that:

G.R. No. L-68555 March 19, 1993 a. The corporation shall, commencing
September, 1970, sell to and supply the
PRIME WHITE CEMENT CORPORATION, petitioner, plaintiff, as dealer with 20,000 bags (94
vs. lbs/bag) of white cement per month;

1032
 b. The plaintiff shall pay the defendant
corporation P9.70, Philippine Currency, per
bag of white cement, FOB Davao and
Cagayan de Oro ports;
c. The plaintiff shall, every time the
defendant corporation is ready to deliver the
good, open with any bank or banking
institution a confirmed, unconditional, and
irrevocable letter of credit in favor of the
corporation and that upon certification by the
boat captain on the bill of lading that the
goods have been loaded on board the
vessel bound for Davao the said bank or
banking institution shall release the
corresponding amount as payment of the
goods so shipped.
Right after the plaintiff entered into the aforesaid dealership
agreement, he placed an advertisement in a national,
circulating newspaper the fact of his being the exclusive
dealer of the defendant corporation's white cement products
in Mindanao area, more particularly, in the Manila Chronicle
dated August 16, 1969 (Exhibits R and R-1) and was even
congratulated by his business associates, so much so, he
was asked by some of his businessmen friends and close
associates if they can be his
sub-dealer in the Mindanao area.
Relying heavily on the dealership agreement, plaintiff
sometime in the months of September, October, and
December, 1969, entered into a written agreement with
several hardware stores dealing in buying and selling white
cement in the Cities of Davao and Cagayan de Oro which
would thus enable him to sell his allocation of 20,000 bags
regular supply of the said commodity, by September, 1970
(Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2). After the
plaintiff was assured by his supposed buyer that his
allocation of 20,000 bags of white cement can be disposed
of, he informed the defendant corporation in his letter dated
August 18, 1970 that he is making the necessary preparation
for the opening of the requisite letter of credit to cover the
price of the due initial delivery for the month of September,
1970 (Exhibit B), looking forward to the defendant
corporation's duty to comply with the dealership agreement.
In reply to the aforesaid letter of the plaintiff, the defendant
corporation thru its corporate secretary, replied that the
board of directors of the said defendant decided to impose
the following conditions:
a. Delivery of white cement shall commence
at the end of November, 1970;
b. Only 8,000 bags of white cement per
month for only a period of three (3) months
will be delivered;
c. The price of white cement was priced at
P13.30 per bag;
d. The price of white cement is subject to
readjustment unilaterally on the part of the
defendant;
e. The place of delivery of white cement
shall be Austurias (sic);
f. The letter of credit may be opened only
with the Prudential Bank, Makati Branch;
g. Payment of white cement shall be made
in advance and which payment shall be
used by the defendant as guaranty in the
1033
 opening of a foreign letter of credit to cover
costs and expenses in the procurement of
materials in the manufacture of white
cement. (Exhibit C).
xxx xxx xxx
Several demands to comply with the dealership agreement
(Exhibits D, E, G, I, R, L, and N) were made by the plaintiff to
the defendant, however, defendant refused to comply with
the same, and plaintiff by force of circumstances was
constrained to cancel his agreement for the supply of white
cement with third parties, which were concluded in
anticipation of, and pursuant to the said dealership
agreement.
fact, it appears on the face of the contract itself that both
officers were duly authorized to enter into the said
agreement and signed the same for and in behalf of the
corporation. When they, therefore, entered into the said
transaction they created the impression that they were duly
clothed with the authority to do so. It cannot now be said that
the disputed agreement which possesses all the essential
requisites of a valid contract was never intended to bind the
corporation as this avoidance is barred by the principle of
estoppel. 3
In this petition for review, petitioner Prime White Cement Corporation made
the following assignment of errors. 4
I

Notwithstanding that the dealership agreement between the THE DECISION AND RESOLUTION OF THE
plaintiff and defendant was in force and subsisting, the INTERMEDIATE APPELLATE COURT ARE
defendant corporation, in violation of, and with evident UNPRECEDENTED DEPARTURES FROM THE CODIFIED
intention not to be bound by the terms and conditions PRINCIPLE THAT CORPORATE OFFICERS COULD
thereof, entered into an exclusive dealership agreement with ENTER INTO CONTRACTS IN BEHALF OF THE
a certain Napoleon Co for the marketing of white cement in CORPORATION ONLY WITH PRIOR APPROVAL OF THE
Mindanao (Exhibit T) hence, this suit. (Plaintiff's Record on BOARD OF DIRECTORS.
Appeal, pp. 86-90). 2
II
After trial, the trial court adjudged the corporation liable to Alejandro Te in the
amount of P3,302,400.00 as actual damages, P100,000.00 as moral THE DECISION AND RESOLUTION OF THE
damages, and P10,000.00 as and for attorney's fees and costs. The INTERMEDIATE APPELLATE COURT ARE CONTRARY TO
appellate court affirmed the said decision mainly on the following basis, and THE ESTABLISHED JURISPRUDENCE, PRINCIPLE AND
We quote: RULE ON FIDUCIARY DUTY OF DIRECTORS AND
OFFICERS OF THE CORPORATION.
There is no dispute that when Zosimo R. Falcon and Justo
B. Trazo signed the dealership agreement Exhibit "A", they III
were the President and Chairman of the Board, respectively,
of defendant-appellant corporation. Neither is the THE DECISION AND RESOLUTION OF THE
genuineness of the said agreement contested. As a matter of INTERMEDIATE APPELLATE COURT DISREGARDED THE

1034
 PRINCIPLE AND JURISPRUDENCE, PRINCIPLE AND
RULE ON UNENFORCEABLE CONTRACTS AS
PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL CODE.
IV
THE DECISION AND RESOLUTION OF THE
INTERMEDIATE APPELLATE COURT DISREGARDED THE
PRINCIPLE AND JURISPRUDENCE AS TO WHEN AWARD
OF ACTUAL AND MORAL DAMAGES IS PROPER.
V corporation as well. He was what is often referred to as a "self-dealing"
IN NOT AWARDING PETITIONER'S CAUSE OF ACTION
AS STATED IN ITS ANSWER WITH SPECIAL AND
AFFIRMATIVE DEFENSES WITH COUNTERCLAIM THE
INTERMEDIATE APPELLATE COURT HAS CLEARLY
DEPARTED FROM THE ACCEPTED USUAL, COURSE OF
JUDICIAL PROCEEDINGS.
There is only one legal issue to be resolved by this Court: whether or not the
"dealership agreement" referred by the President and Chairman of the Board
of petitioner corporation is a valid and enforceable contract. We do not agree
with the conclusion of the respondent Court that it is.
Under the Corporation Law, which was then in force at the time this case
arose, 5 as well as under the present Corporation Code, all corporate powers
shall be exercised by the Board of Directors, except as otherwise provided by
law. 6Although it cannot completely abdicate its power and responsibility to
act for the juridical entity, the Board may expressly delegate specific powers
to its President or any of its officers. In the absence of such express
delegation, a contract entered into by its President, on behalf of the
corporation, may still bind the corporation if the board should ratify the same
expressly or impliedly. Implied ratification may take various forms like
silence or acquiescence; by acts showing approval or adoption of the
contract; or by acceptance and retention of benefits flowing
therefrom. 7 Furthermore, even in the absence of express or implied authority
by ratification, the President as such may, as a general rule, bind the
corporation by a contract in the ordinary course of business, provided the
same is reasonable under the circumstances. 8 These rules are basic, but are
all general and thus quite flexible. They apply where the President or other
officer, purportedly acting for the corporation, is dealing with a third person, i.
e., a person outside the corporation.
The situation is quite different where a director or officer is dealing with his
own corporation. In the instant case respondent Te was not an ordinary
stockholder; he was a member of the Board of Directors and Auditor of the
director.
A director of a corporation holds a position of trust and as such, he owes a
duty of loyalty to his corporation. 9 In case his interests conflict with those of
the corporation, he cannot sacrifice the latter to his own advantage and
benefit. As corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust relationship "is not
a matter of statutory or technical law. It springs from the fact that directors
have the control and guidance of corporate affairs and property and hence of
the property interests of the stockholders." 10 In the case of Gokongwei v.
Securities and Exchange Commission, this Court quoted with favor
from Pepper v. Litton, 11 thus:
. . . He cannot by the intervention of a corporate entity violate
the ancient precept against serving two masters. . . . He
cannot utilize his inside information and his strategic position
for his own preferment. He cannot violate rules of fair play by
doing indirectly through the corporation what he could not do
directly. He cannot use his power for his personal advantage
and to the detriment of the stockholders and creditors no
matter how absolute in terms that power may be and no
matter how meticulous he is to satisfy technical
requirements. For that power is at all times subject to the
equitable limitation that it may not be exercised for the
1035
 aggrandizement, preference, or advantage of the fiduciary to
the exclusion or detriment of the cestuis. . . . .
On the other hand, a director's contract with his corporation is not in all
instances void or voidable. If the contract is fair and reasonable under the
circumstances, it may be ratified by the stockholders provided a full
disclosure of his adverse interest is made. Section 32 of the Corporation
Code provides, thus:
Sec. 32. Dealings of directors, trustees or officers with the
corporation. A contract of the corporation with one or
more of its directors or trustees or officers is voidable, at the
option of such corporation, unless all the following conditions
are present:
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in the case of an officer, the contract with the officer
has been previously authorized by the Board of Directors.
Where any of the first two conditions set forth in the
preceding paragraph is absent, in the case of a contract with
a director or trustee, such contract may be ratified by the
vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of two-thirds (2/3) of the
members in a meeting called for the purpose: Provided, That
full disclosure of the adverse interest of the directors or
trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the
circumstances.
Although the old Corporation Law which governs the instant case did not
contain a similar provision, yet the cited provision substantially incorporates
well-settled principles in corporate law. 12
Granting arguendo that the "dealership agreement" involved here would be
valid and enforceable if entered into with a person other than a director or
officer of the corporation, the fact that the other party to the contract was a
Director and Auditor of the petitioner corporation changes the whole situation.
First of all, We believe that the contract was neither fair nor reasonable. The
"dealership agreement" entered into in July, 1969, was to sell and supply to
respondent Te 20,000 bags of white cement per month, for five years starting
September, 1970, at thefixed price of P9.70 per bag. Respondent Te is a
businessman himself and must have known, or at least must be presumed to
know, that at that time, prices of commodities in general, and white cement in
particular, were not stable and were expected to rise. At the time of the
contract, petitioner corporation had not even commenced the manufacture of
white cement, the reason why delivery was not to begin until 14 months later.
He must have known that within that period of six years, there would be a
considerable rise in the price of white cement. In fact, respondent Te's own
Memorandum shows that in September, 1970, the price per bag was P14.50,
and by the middle of 1975, it was already P37.50 per bag. Despite this, no
provision was made in the "dealership agreement" to allow for an increase in
price mutually acceptable to the parties. Instead, the price was pegged at
P9.70 per bag for the whole five years of the contract. Fairness on his part as
a director of the corporation from whom he was to buy the cement, would
require such a provision. In fact, this unfairness in the contract is also a basis
which renders a contract entered into by the President, without authority from
the Board of Directors, void or voidable, although it may have been in the
ordinary course of business. We believe that the fixed price of P9.70 per bag
for a period of five years was not fair and reasonable. Respondent Te,
himself, when he subsequently entered into contracts to resell the cement to
his "new dealers" Henry Wee 13 and Gaudencio Galang 14 stipulated as
follows:
1036
 The price of white cement shall be mutually determined by Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.
us but in no case shall the same be less than P14.00 per
bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with
Gaudencio Galang, on October 13, 1967. A similar contract with Prudencio
Lim was made on December 29, 1969. 15 All of these contracts were entered
into soon after his "dealership agreement" with petitioner corporation, and in
each one of them he protected himself from any increase in the market price
of white cement. Yet, except for the contract with Henry Wee, the contracts
were for only two years from October, 1970. Why did he not protect the
corporation in the same manner when he entered into the "dealership
agreement"? For that matter, why did the President and the Chairman of the
Board not do so either? As director, specially since he was the other party in
interest, respondent Te's bounden duty was to act in such manner as not to
unduly prejudice the corporation. In the light of the circumstances of this
case, it is to Us quite clear that he was guilty of disloyalty to the corporation;
he was attempting in effect, to enrich himself at the expense of the
corporation. There is no showing that the stockholders ratified the "dealership
agreement" or that they were fully aware of its provisions. The contract was
therefore not valid and this Court cannot allow him to reap the fruits of his
disloyalty.

As a result of this action which has been proven to be without legal basis,
petitioner corporation's reputation and goodwill have been prejudiced.
However, there can be no award for moral damages under Article 2217 and
succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil Code
in favor of a corporation.

In view of the foregoing, the Decision and Resolution of the Intermediate

Appellate Court dated March 30, 1984 and August 6, 1984, respectively, are
hereby SET ASIDE. Private respondent Alejandro Te is hereby ordered to
pay petitioner corporation the sum of P20,000.00 for attorney's fees, plus the
cost of suit and expenses of litigation.
G.R. No. 142936 April 17, 2002
SO ORDERED.

1037
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT
CORPORATION, petitioners,
vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.
PANGANIBAN, J.:
Basic is the rule that a corporation has a legal personality distinct and
separate from the persons and entities owning it. The corporate veil may be
lifted only if it has been used to shield fraud, defend crime, justify a wrong,
defeat public convenience, insulate bad faith or perpetuate injustice. Thus,
the mere fact that the Philippine National Bank (PNB) acquired ownership or
management of some assets of the Pampanga Sugar Mill (PASUMIL), which
had earlier been foreclosed and purchased at the resulting public auction by
the Development Bank of the Philippines (DBP), will not make PNB liable for
the PASUMILs contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of the
Court of Appeals (CA) in CA-GR CV No. 57610. The decretal portion of the
challenged Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby AFFIRMED." 2
The Facts
The factual antecedents of the case are summarized by the Court of Appeals
as follows:
"In its complaint, the plaintiff [herein respondent] alleged that it is a
partnership duly organized, existing, and operating under the laws of
the Philippines, with office and principal place of business at Nos.
794-812 Del Monte [A]venue, Quezon City, while the defendant
[herein petitioner] Philippine National Bank (herein referred to as
PNB), is a semi-government corporation duly organized, existing and
operating under the laws of the Philippines, with office and principal
place of business at Escolta Street, Sta. Cruz, Manila; whereas, the
other defendant, the National Sugar Development Corporation
(NASUDECO in brief), is also a semi-government corporation and
the sugar arm of the PNB, with office and principal place of business
at the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the
defendant Pampanga Sugar Mills (PASUMIL in short), is a
corporation organized, existing and operating under the 1975 laws of
the Philippines, and had its business office before 1975 at Del
Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in
the business of general construction for the repairs and/or
construction of different kinds of machineries and buildings; that on
August 26, 1975, the defendant PNB acquired the assets of the
defendant PASUMIL that were earlier foreclosed by the Development
Bank of the Philippines (DBP) under LOI No. 311; that the defendant
PNB organized the defendant NASUDECO in September, 1975, to
take ownership and possession of the assets and ultimately to
nationalize and consolidate its interest in other PNB controlled sugar
mills; that prior to October 29, 1971, the defendant PASUMIL
engaged the services of plaintiff for electrical rewinding and repair,
most of which were partially paid by the defendant PASUMIL, leaving
several unpaid accounts with the plaintiff; that finally, on October 29,
1971, the plaintiff and the defendant PASUMIL entered into a
contract for the plaintiff to perform the following, to wit
(a) Construction of one (1) power house building;
(b) Construction of three (3) reinforced concrete foundation
for three (3) units 350 KW diesel engine generating set[s];
(c) Construction of three (3) reinforced concrete foundation
for the 5,000 KW and 1,250 KW turbo generator sets;
(d) Complete overhauling and reconditioning tests sum for
three (3) 350 KW diesel engine generating set[s];
1038
 (e) Installation of turbine and diesel generating sets
including transformer, switchboard, electrical wirings and
pipe provided those stated units are completely supplied with
their accessories;
(f) Relocating of 2,400 V transmission line, demolition of all
existing concrete foundation and drainage canals,
excavation, and earth fillings all for the total amount of
P543,500.00 as evidenced by a contract, [a] xerox copy of
which is hereto attached as Annex A and made an integral
part of this complaint;
that aside from the work contract mentioned-above, the defendant
PASUMIL required the plaintiff to perform extra work, and provide
electrical equipment and spare parts, such as:
(a) Supply of electrical devices;
(b) Extra mechanical works;
(c) Extra fabrication works;
(d) Supply of materials and consumable items;
(e) Electrical shop repair;
(f) Supply of parts and related works for turbine generator;
(g) Supply of electrical equipment for machinery;
(h) Supply of diesel engine parts and other related works
including fabrication of parts.
that out of the total obligation of P777,263.80, the defendant
PASUMIL had paid only P250,000.00, leaving an unpaid balance, as
of June 27, 1973, amounting to P527,263.80, as shown in the
Certification of the chief accountant of the PNB, a machine copy of
which is appended as Annex C of the complaint; that out of said
unpaid balance of P527,263.80, the defendant PASUMIL made a
partial payment to the plaintiff of P14,000.00, in broken amounts,
covering the period from January 5, 1974 up to May 23, 1974,
leaving an unpaid balance of P513,263.80; that the defendant
PASUMIL and the defendant PNB, and now the defendant
NASUDECO, failed and refused to pay the plaintiff their just, valid
and demandable obligation; that the President of the NASUDECO is
also the Vice-President of the PNB, and this official holds office at
the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought this
official to pay the outstanding obligation of the defendant PASUMIL,
inasmuch as the defendant PNB and NASUDECO now owned and
possessed the assets of the defendant PASUMIL, and these
defendants all benefited from the works, and the electrical, as well as
the engineering and repairs, performed by the plaintiff; that because
of the failure and refusal of the defendants to pay their just, valid,
and demandable obligations, plaintiff suffered actual damages in the
total amount of P513,263.80; and that in order to recover these
sums, the plaintiff was compelled to engage the professional
services of counsel, to whom the plaintiff agreed to pay a sum
equivalent to 25% of the amount of the obligation due by way of
attorneys fees. Accordingly, the plaintiff prayed that judgment be
rendered against the defendants PNB, NASUDECO, and PASUMIL,
jointly and severally to wit:
(1) Sentencing the defendants to pay the plaintiffs the sum
of P513,263.80, with annual interest of 14% from the time
the obligation falls due and demandable;
(2) Condemning the defendants to pay attorneys fees
amounting to 25% of the amount claim;
(3) Ordering the defendants to pay the costs of the suit.
1039
"The defendants PNB and NASUDECO filed a joint motion to dismiss
the complaint chiefly on the ground that the complaint failed to state
sufficient allegations to establish a cause of action against both
defendants, inasmuch as there is lack or want of privity of contract
between the plaintiff and the two defendants, the PNB and
NASUDECO, said defendants citing Article 1311 of the New Civil
Code, and the case law ruling in Salonga v. Warner Barnes & Co., 88
Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al.,
20 SCRA 1214.
"The motion to dismiss was by the court a quo denied in its Order of
November 27, 1980; in the same order, that court directed the
defendants to file their answer to the complaint within 15 days.
"In their answer, the defendant NASUDECO reiterated the grounds
of its motion to dismiss, to wit:
That the complaint does not state a sufficient cause of
action against the defendant NASUDECO because: (a)
NASUDECO is not x x x privy to the various electrical
construction jobs being sued upon by the plaintiff under the
present complaint; (b) the taking over by NASUDECO of the
assets of defendant PASUMIL was solely for the purpose of
reconditioning the sugar central of defendant PASUMIL
pursuant to martial law powers of the President under the
Constitution; (c) nothing in the LOI No. 189-A (as well as in
LOI No. 311) authorized or commanded the PNB or its
subsidiary corporation, the NASUDECO, to assume the
corporate obligations of PASUMIL as that being involved in
the present case; and, (d) all that was mentioned by the said
letter of instruction insofar as the PASUMIL liabilities [were]
concerned [was] for the PNB, or its subsidiary corporation
the NASUDECO, to make a study of, and submit [a]
recommendation on the problems concerning the same.
"By way of counterclaim, the NASUDECO averred that by reason of
the filing by the plaintiff of the present suit, which it [labeled] as
unfounded or baseless, the defendant NASUDECO was constrained
to litigate and incur litigation expenses in the amount of P50,000.00,
which plaintiff should be sentenced to pay. Accordingly, NASUDECO
prayed that the complaint be dismissed and on its counterclaim, that
the plaintiff be condemned to pay P50,000.00 in concept of
attorneys fees as well as exemplary damages.
"In its answer, the defendant PNB likewise reiterated the grounds of
its motion to dismiss, namely: (1) the complaint states no cause of
action against the defendant PNB; (2) that PNB is not a party to the
contract alleged in par. 6 of the complaint and that the alleged
services rendered by the plaintiff to the defendant PASUMIL upon
which plaintiffs suit is erected, was rendered long before PNB took
possession of the assets of the defendant PASUMIL under LOI No.
189-A; (3) that the PNB take-over of the assets of the defendant
PASUMIL under LOI 189-A was solely for the purpose of
reconditioning the sugar central so that PASUMIL may resume its
operations in time for the 1974-75 milling season, and that nothing in
the said LOI No. 189-A, as well as in LOI No. 311, authorized or
directed PNB to assume the corporate obligation/s of PASUMIL, let
alone that for which the present action is brought; (4) that PNBs
management and operation under LOI No. 311 did not refer to any
asset of PASUMIL which the PNB had to acquire and thereafter
[manage], but only to those which were foreclosed by the DBP and
were in turn redeemed by the PNB from the DBP; (5) that
conformably to LOI No. 311, on August 15, 1975, the PNB and the
Development Bank of the Philippines (DBP) entered into a
Redemption Agreement whereby DBP sold, transferred and
conveyed in favor of the PNB, by way of redemption, all its (DBP)
rights and interest in and over the foreclosed real and/or personal
properties of PASUMIL, as shown in Annex C which is made an
integral part of the answer; (6) that again, conformably with LOI No.
311, PNB pursuant to a Deed of Assignment dated October 21, 1975,
conveyed, transferred, and assigned for valuable consideration, in
favor of NASUDECO, a distinct and independent corporation, all its
1040
(PNB) rights and interest in and under the above Redemption National Bank (PNB) NATIONAL SUGAR DEVELOPMENT
Agreement. This is shown in Annex D which is also made an CORPORATION (NASUDECO) and PAMPANGA SUGAR
integral part of the answer; [7] that as a consequence of the said MILLS (PASUMIL), ordering the latter to pay jointly and
Deed of Assignment, PNB on October 21, 1975 ceased to managed severally the former the following:
and operate the above-mentioned assets of PASUMIL, which
function was now actually transferred to NASUDECO. In other 1. The sum of P513,623.80 plus interest thereon at
words, so asserted PNB, the complaint as to PNB, had become moot the rate of 14% per annum as claimed from
and academic because of the execution of the said Deed of September 25, 1980 until fully paid;
Assignment; [8] that moreover, LOI No. 311 did not authorize or
direct PNB to assume the corporate obligations of PASUMIL, 2. The sum of P102,724.76 as attorneys fees; and,
including the alleged obligation upon which this present suit was
brought; and [9] that, at most, what was granted to PNB in this
3. Costs.
respect was the authority to make a study of and submit
recommendation on the problems concerning the claims of PASUMIL
creditors, under sub-par. 5 LOI No. 311. SO ORDERED.

"In its counterclaim, the PNB averred that it was unnecessarily Manila, Philippines, September 4, 1986.
constrained to litigate and to incur expenses in this case, hence it is
entitled to claim attorneys fees in the amount of at least P50,000.00.
Accordingly, PNB prayed that the complaint be dismissed; and that
'(SGD) ERNESTO S. TENGCO
on its counterclaim, that the plaintiff be sentenced to pay defendant
Judge"3
PNB the sum of P50,000.00 as attorneys fees, aside from
exemplary damages in such amount that the court may seem just
and equitable in the premises.
Ruling of the Court of Appeals
"Summons by publication was made via the Philippines Daily
Express, a newspaper with editorial office at 371 Bonifacio Drive, Affirming the trial court, the CA held that it was offensive to the basic tenets
Port Area, Manila, against the defendant PASUMIL, which was of justice and equity for a corporation to take over and operate the business
thereafter declared in default as shown in the August 7, 1981 Order of another corporation, while disavowing or repudiating any responsibility,
issued by the Trial Court. obligation or liability arising therefrom.4

"After due proceedings, the Trial Court rendered judgment, the Hence, this Petition.5
decretal portion of which reads:
Issues
WHEREFORE, judgment is hereby rendered in favor of
plaintiff and against the defendant Corporation, Philippine

1041
In their Memorandum, petitioners raise the following errors for the Courts
consideration:
"I
The Court of Appeals gravely erred in law in holding the herein
petitioners liable for the unpaid corporate debts of PASUMIL, a
corporation whose corporate existence has not been legally
extinguished or terminated, simply because of petitioners[] take-over
of the management and operation of PASUMIL pursuant to the
mandates of LOI No. 189-A, as amended by LOI No. 311.
"II
The Court of Appeals gravely erred in law in not applying [to] the
case at bench the ruling enunciated in Edward J. Nell Co. v. Pacific
Farms, 15 SCRA 415."6
Succinctly put, the aforesaid errors boil down to the principal issue of
whether PNB is liable for the unpaid debts of PASUMIL to respondent.
This Courts Ruling
The Petition is meritorious.
Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition for review
under Rule 45 of the Rules of Court. 7 To this rule, however, there are some
exceptions enumerated in Fuentes v. Court of Appeals.8 After a careful
scrutiny of the records and the pleadings submitted by the parties, we find
that the lower courts misappreciated the evidence presented. 9 Overlooked by
the CA were certain relevant facts that would justify a conclusion different
from that reached in the assailed Decision.10
Petitioners posit that they should not be held liable for the corporate debts of
PASUMIL, because their takeover of the latters foreclosed assets did not
make them assignees. On the other hand, respondent asserts that
petitioners and PASUMIL should be treated as one entity and, as such, jointly
and severally held liable for PASUMILs unpaid obligation.1wphi1.nt
As a rule, a corporation that purchases the assets of another will not be liable
for the debts of the selling corporation, provided the former acted in good
faith and paid adequate consideration for such assets, except when any of
the following circumstances is present: (1) where the purchaser expressly or
impliedly agrees to assume the debts, (2) where the transaction amounts to a
consolidation or merger of the corporations, (3) where the purchasing
corporation is merely a continuation of the selling corporation, and (4) where
the transaction is fraudulently entered into in order to escape liability for
those debts.11
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of law. It possesses
the right of succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence. 12 It has a personality separate
and distinct from the persons composing it, as well as from any other legal
entity to which it may be related.13 This is basic.
Equally well-settled is the principle that the corporate mask may be removed
or the corporate veil pierced when the corporation is just an alter ego of a
1042
person or of another corporation.14 For reasons of public policy and in the
interest of justice, the corporate veil will justifiably be impaled 15 only when it
becomes a shield for fraud, illegality or inequity committed against third
persons.16
Hence, any application of the doctrine of piercing the corporate veil should be
done with caution.17 A court should be mindful of the milieu where it is to be
applied.18 It must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in
disregard of its rights.19 The wrongdoing must be clearly and convincingly
established; it cannot be presumed. 20 Otherwise, an injustice that was never
unintended may result from an erroneous application.21
This Court has pierced the corporate veil to ward off a judgment credit, 22 to
avoid inclusion of corporate assets as part of the estate of the decedent, 23 to
escape liability arising from a debt, 24 or to perpetuate fraud and/or confuse
legitimate issues25 either to promote or to shield unfair objectives 26 or to cover
up an otherwise blatant violation of the prohibition against forum-
shopping.27 Only in these and similar instances may the veil be pierced and
disregarded.28
The question of whether a corporation is a mere alter ego is one of
fact.29 Piercing the veil of corporate fiction may be allowed only if the
following elements concur: (1) control -- not mere stock control, but complete
domination -- not only of finances, but of policy and business practice in
respect to the transaction attacked, must have been such 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 a fraud or a wrong to perpetuate the violation of a statutory or
other positive legal duty, or a dishonest and an unjust act in contravention of
plaintiffs legal right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of. 30
We believe that the absence of the foregoing elements in the present case
precludes the piercing of the corporate veil. First, other than the fact that
petitioners acquired the assets of PASUMIL, there is no showing that their
control over it warrants the disregard of corporate personalities. 31 Second,
there is no evidence that their juridical personality was used to commit a
fraud or to do a wrong; or that the separate corporate entity was farcically
used as a mere alter ego, business conduit or instrumentality of another
entity or person.32 Third, respondent was not defrauded or injured when
petitioners acquired the assets of PASUMIL.33
Being the party that asked for the piercing of the corporate veil, respondent
had the burden of presenting clear and convincing evidence to justify the
setting aside of the separate corporate personality rule. 34 However, it utterly
failed to discharge this burden;35 it failed to establish by competent evidence
that petitioners separate corporate veil had been used to conceal fraud,
illegality or inequity.36
While we agree with respondents claim that the assets of the National Sugar
Development Corporation (NASUDECO) can be easily traced to
PASUMIL,37 we are not convinced that the transfer of the latters assets to
petitioners was fraudulently entered into in order to escape liability for its debt
to respondent.38
A careful review of the records reveals that DBP foreclosed the mortgage
executed by PASUMIL and acquired the assets as the highest bidder at the
public auction conducted.39 The bank was justified in foreclosing the
mortgage, because the PASUMIL account had incurred arrearages of more
than 20 percent of the total outstanding obligation. 40 Thus, DBP had not only
a right, but also a duty under the law to foreclose the subject properties. 41
Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB acquired
PASUMILs assets that DBP had foreclosed and purchased in the normal
course. Petitioner bank was likewise tasked to manage temporarily the
operation of such assets either by itself or through a subsidiary corporation. 44
PNB, as the second mortgagee, redeemed from DBP the foreclosed
PASUMIL assets pursuant to Section 6 of Act No. 3135. 45 These assets were
later conveyed to PNB for a consideration, the terms of which were
embodied in the Redemption Agreement. 46 PNB, as successor-in-interest,
1043
stepped into the shoes of DBP as PASUMILs creditor. 47 By way of a Deed of
Assignment,48 PNB then transferred to NASUDECO all its rights under the
Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals,49 we had the
occasion to resolve a similar issue. We ruled that PNB, DBP and their
transferees were not liable for Marinduque Minings unpaid obligations to
Remington Industrial Sales Corporation (Remington) after the two banks had
foreclosed the assets of Marinduque Mining. We likewise held that
Remington failed to discharge its burden of proving bad faith on the part of
Marinduque Mining to justify the piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial courts lifting of the
corporate mask.50 The CA did not point to any fact evidencing bad faith on
the part of PNB and its transferee. 51 The corporate fiction was not used to
defeat public convenience, justify a wrong, protect fraud or defend
crime.52 None of the foregoing exceptions was shown to exist in the present
case.53 On the contrary, the lifting of the corporate veil would result in
manifest injustice. This we cannot allow.
No Merger or Consolidation
Respondent further claims that petitioners should be held liable for the
unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which
expressly authorized PASUMIL and PNB to merge or consolidate. On the
other hand, petitioners contend that their takeover of the operations of
PASUMIL did not involve any corporate merger or consolidation, because the
latter had never lost its separate identity as a corporation.
A consolidation is the union of two or more existing entities to form a new
entity called the consolidated corporation. A merger, on the other hand, is a
union whereby one or more existing corporations are absorbed by another
corporation that survives and continues the combined business. 54
The merger, however, does not become effective upon the mere agreement
of the constituent corporations.55Since a merger or consolidation involves
fundamental changes in the corporation, as well as in the rights of
stockholders and creditors, there must be an express provision of law
authorizing them.56 For a valid merger or consolidation, the approval by the
Securities and Exchange Commission (SEC) of the articles of merger or
consolidation is required.57 These articles must likewise be duly approved by
a majority of the respective stockholders of the constituent corporations. 58
In the case at bar, we hold that there is no merger or consolidation with
respect to PASUMIL and PNB. The procedure prescribed under Title IX of the
Corporation Code59 was not followed.
In fact, PASUMILs corporate existence, as correctly found by the CA, had
not been legally extinguished or terminated. 60 Further, prior to PNBs
acquisition of the foreclosed assets, PASUMIL had previously made partial
payments to respondent for the formers obligation in the amount of
P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to
respondent and, from January 5, 1974 to May 23, 1974, another P14,000.
Neither did petitioner expressly or impliedly agree to assume the debt of
PASUMIL to respondent.61 LOI No. 11 explicitly provides that PNB shall study
and submit recommendations on the claims of PASUMILs creditors. 62Clearly,
the corporate separateness between PASUMIL and PNB remains, despite
respondents insistence to the contrary.63
WHEREFORE, the Petition is hereby GRANTED and the assailed
Decision SET ASIDE. No pronouncement as to costs.
SO ORDERED.
Vitug, Sandoval-Gutierrez, and Carpio, JJ., concur.
Melo, J., Abroad, on official leave.
1044
G.R. No. 123793 June 29, 1998

ASSOCIATED BANK, petitioner,

vs.
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.

PANGANIBAN, J.:

In a merger, does the surviving corporation have a right to enforce a contract

entered into by the absorbed company subsequent to the date of the merger
agreement, but prior to the issuance of a certificate of merger by the
Securities and Exchange Commission?

The Case

This is a petition for review under Rule 45 of the Rules of Court, seeking to
set aside the Decision 1 of the Court of Appeals 2 in CA-GR CV No. 26465
promulgated on January 30, 1996, which answered the above question in the
negative. The challenged Decision reversed and set aside the October 17,
1986 Decision 3 in Civil Case No. 85-32243, promulgated by the Regional
Trial Court of Manila, Branch 48, which disposed of the controversy in favor
of herein petitioner as follows: 4

WHEREFORE, judgment is hereby rendered in favor of the

plaintiff Associated Bank. The defendant Lorenzo Sarmiento,
Jr. is ordered to pay plaintiff:

1. The amount of P4,689,413.63 with interest thereon at 14%

per annum until fully paid;

2. The amount of P200,000.00 as and for attorney's fees;

and

1045
 3. The costs of suit.
On the other hand, the Court of Appeals resolved the case in this wise: 5 defenses that the complaint states no valid cause of action;
WHEREFORE, premises considered, the decision appealed
from, dated October 17, 1986 is REVERSED and SET
ASIDE and another judgment rendered DISMISSING
plaintiff-appellee's complaint, docketed as Civil Case No. 85-
32243. There is no pronouncement as to costs.
The Facts
The undisputed factual antecedents, as narrated by the trial court and
adopted by public respondent, are as follows: 6
. . . [O]n or about September 16, 1975 Associated Banking
Corporation and Citizens Bank and Trust Company merged
to form just one banking corporation known as Associated
Citizens Bank, the surviving bank. On or about March 10,
1981, the Associated Citizens Bank changed its corporate
name to Associated Bank by virtue of the Amended Articles
of Incorporation. On September 7, 1977, the defendant
executed in favor of Associated Bank a promissory note
whereby the former undertook to pay the latter the sum of
P2,500,000.00 payable on or before March 6, 1978. As per
said promissory note, the defendant agreed to pay interest at
14% per annum, 3% per annum in the form of liquidated
damages, compounded interests, and attorney's fees, in
case of litigation equivalent to 10% of the amount due. The
defendant, to date, still owes plaintiff bank the amount of
P2,250,000.00 exclusive of interest and other charges.
Despite repeated demands the defendant failed to pay the
amount due.
xxx xxx xxx
. . . [T]he defendant denied all the pertinent allegations in the
complaint and alleged as affirmative and[/]or special
that the plaintiff is not the proper party in interest because
the promissory note was executed in favor of Citizens Bank
and Trust Company; that the promissory note does not
accurately reflect the true intention and agreement of the
parties; that terms and conditions of the promissory note are
onerous and must be construed against the creditor-payee
bank; that several partial payments made in the promissory
note are not properly applied; that the present action is
premature; that as compulsory counterclaim the defendant
prays for attorney's fees, moral damages and expenses of
litigation.
On May 22, 1986, the defendant was declared as if in default
for failure to appear at the Pre-Trial Conference despite due
notice.
A Motion to Lift Order of Default and/or Reconsideration of
Order dated May 22, 1986 was filed by defendant's counsel
which was denied by the Court in [an] order dated
September 16, 1986 and the plaintiff was allowed to present
its evidence before the Court ex-parte on October 16, 1986.
At the hearing before the Court ex-parte, Esteban C.
Ocampo testified that . . . he is an accountant of the Loans
and Discount Department of the plaintiff bank; that as such,
he supervises the accounting section of the bank, he
counterchecks all the transactions that transpired during the
day and is responsible for all the accounts and records and
other things that may[ ]be assigned to the Loans and
Discount Department; that he knows the [D]efendant
Lorenzo Sarmiento, Jr. because he has an outstanding loan
with them as per their records; that Lorenzo Sarmiento, Jr.
executed a promissory note No. TL-2649-77 dated
September 7, 1977 in the amount of P2,500,000.00 (Exhibit
1046
 A); that Associated Banking Corporation and the Citizens
Bank and Trust Company merged to form one banking
corporation known as the Associated Citizens Bank and is
now known as Associated Bank by virtue of its Amended
Articles of Incorporation; that there were partial payments
made but not full; that the defendant has not paid his
obligation as evidenced by the latest statement of account
(Exh. B); that as per statement of account the outstanding
obligation of the defendant is P5,689,413.63 less
P1,000,000.00 or P4,689,413.63 (Exh. B, B-1); that a
demand letter dated June 6, 1985 was sent by the bank thru
its counsel (Exh. C) which was received by the defendant on
November 12, 1985 (Exh. C, C-1, C-2, C-3); that the
defendant paid only P1,000,000.00 which is reflected in the
Exhibit C.
Based on the evidence presented by petitioner, the trial court ordered
Respondent Sarmiento to pay the bank his remaining balance plus interests
and attorney's fees. In his appeal, Sarmiento assigned to the trial court
several errors, namely: 7
I The [trial court] erred in denying appellant's motion to
dismiss appellee bank's complaint on the ground of lack of
cause of action and for being barred by prescription and
laches.
II The same lower court erred in admitting plaintiff-appellee
bank's amended complaint while defendant-appellant's
motion to dismiss appelle bank's original complaint and
using/availing [itself of] the new additional allegations as
bases in denial of said appellant's motion and in the
interpretation and application of the agreement of merger
and Section 80 of BP Blg. 68, Corporation Code of the
Philippines.
III The [trial court] erred and gravely abuse[d] its discretion in
rendering the two as if in default orders dated May 22, 1986
and September 16, 1986 and in not reconsidering the same
upon technical grounds which in effect subvert the best
primordial interest of substantial justice and equity.
IV The court a quo erred in issuing the orders dated May 22,
1986 and September 16, 1986 declaring appellant as if in
default due to non-appearance of appellant's attending
counsel who had resigned from the law firm and while the
parties [were] negotiating for settlement of the case and after
a one million peso payment had in fact been paid to appellee
bank for appellant's account at the start of such negotiation
on February 18, 1986 as act of earnest desire to settle the
obligation in good faith by the interested parties.
V The lower court erred in according credence to appellee
bank's Exhibit B statement of account which had been
merely requested by its counsel during the trial and bearing
date of September 30, 1986.
VI The lower court erred in accepting and giving credence to
appellee bank's 27-year-old witness Esteban C. Ocampo as
of the date he testified on October 16, 1986, and therefore,
he was merely an eighteen-year-old minor when appellant
supposedly incurred the foisted obligation under the subject
PN No. TL-2649-77 dated September 7, 1977, Exhibit A of
appellee bank.
VII The [trial court] erred in adopting appellee bank's Exhibit
B dated September 30, 1986 in its decision given in open
court on October 17, 1986 which exacted eighteen percent
(18%) per annum on the foisted principal amount of P2.5
million when the subject PN, Exhibit A, stipulated only
fourteen percent (14%) per annum and which was actually
1047

prayed for in appellee bank's original and amended
complaints.
VIII The appealed decision of the lower court erred in not
considering at all appellant's affirmative defenses that (1) the
subject PN No. TL-2649-77 for P2.5 million dated September
7, 1977, is merely an accommodation pour autrui of any
actual consideration to appellant himself and (2) the subject
PN is a contract of adhesion, hence, [it] needs [to] be strictly
construed against appellee bank assuming for granted
that it has the right to enforce and seek collection thereof.
IX The lower court should have at least allowed appellant the
opportunity to present countervailing evidence considering
the huge amounts claimed by appellee bank (principal sum
of P2.5 million which including accrued interests, penalties
and cost of litigation totaled P4,689,413.63) and appellant's
affirmative defenses pursuant to substantial justice and
equity.
The appellate court, however, found no need to tackle all the assigned errors
and limited itself to the question of "whether [herein petitioner had]
established or proven a cause of action against [herein private respondent]."
Accordingly, Respondent Court held that the Associated Bank had no cause
of action against Lorenzo Sarmiento Jr., since said bank was not privy to the
promissory note executed by Sarmiento in favor of Citizens Bank and Trust
Company (CBTC). The court ruled that the earlier merger between the two
banks could not have vested Associated Bank with any interest arising from
the promissory note executed in favor of CBTC after such merger.
Thus, as earlier stated, Respondent Court set aside the decision of the trial
court and dismissed the complaint. Petitioner now comes to us for a reversal
of this ruling. 8
Issues
9
In its petition, petitioner cites the following "reasons":
I The Court of Appeals erred in reversing the decision of the
trial court and in declaring that petitioner has no cause of
action against respondent over the promissory note.
II The Court of Appeals also erred in declaring that, since the
promissory note was executed in favor of Citizens Bank and
Trust Company two years after the merger between
Associated Banking Corporation and Citizens Bank and
Trust Company, respondent is not liable to petitioner
because there is no privity of contract between respondent
and Associated Bank.
III The Court of Appeals erred when it ruled that petitioner,
despite the merger between petitioner and Citizens Bank
and Trust Company, is not a real party in interest insofar as
the promissory note executed in favor of the merger.
In a nutshell, the main issue is whether Associated Bank, the surviving
corporation, may enforce the promissory note made by private respondent in
favor of CBTC, the absorbed company, after the merger agreement had been
signed.
The Court's Ruling
The petition is impressed with merit.
The Main Issue:
Associated Bank Assumed
All Rights of CBTC
Ordinarily, in the merger of two or more existing corporations, one of the
combining corporations survives and continues the combined business, while
the rest are dissolved and all their rights, properties and liabilities are
acquired by the surviving corporation. 10 Although there is a dissolution of the
1048
absorbed corporations, there is no winding up of their affairs or liquidation of
their assets, because the surviving corporation automatically acquires all
their rights, privileges and powers, as well as their liabilities. 11
The merger, however, does not become effective upon the mere agreement
of the constituent corporations. The procedure to be followed is prescribed
under the Corporation Code. 12 Section 79 of said Code requires the approval
by the Securities and Exchange Commission (SEC) of the articles of merger
which, in turn, must have been duly approved by a majority of the respective
stockholders of the constituent corporations. The same provision further
states that the merger shall be effective only upon the issuance by the SEC
of a certificate of merger. The effectivity date of the merger is crucial for
determining when the merged or absorbed corporation ceases to exist; and
when its rights, privileges, properties as well as liabilities pass on to the
surviving corporation.
Consistent with the aforementioned Section 79, the September 16, 1975
Agreement of Merger, 13 which Associated Banking Corporation (ABC) and
Citizens Bank and Trust Company (CBTC) entered into, provided that its
effectivity "shall, for all intents and purposes, be the date when the necessary
papers to carry out this [m]erger shall have been approved by the Securities
and Exchange Commission." 14 As to the transfer of the properties of CBTC
to ABC, the agreement provides:
10. Upon effective date of the Merger, all rights, privileges,
powers, immunities, franchises, assets and property of
[CBTC], whether real, personal or mixed, and including
[CBTC's] goodwill and tradename, and all debts due to
[CBTC] on whatever act, and all other things in action
belonging to [CBTC] as of the effective date of the [m]erger
shall be vested in [ABC], the SURVIVING BANK, without
need of further act or deed, unless by express requirements
of law or of a government agency, any separate or specific
deed of conveyance to legally effect the transfer or
assignment of any kind of property [or] asset is required, in
which case such document or deed shall be executed
accordingly; and all property, rights, privileges, powers,
immunities, franchises and all appointments, designations
and nominations, and all other rights and interests of [CBTC]
as trustee, executor, administrator, registrar of stocks and
bonds, guardian of estates, assignee, receiver, trustee of
estates of persons mentally ill and in every other fiduciary
capacity, and all and every other interest of [CBTC] shall
thereafter be effectually the property of [ABC] as they were
of [CBTC], and title to any real estate, whether by deed or
otherwise, vested in [CBTC] shall not revert or be in any way
impaired by reason thereof; provided, however, that all rights
of creditors and all liens upon any property of [CBTC] shall
be preserved and unimpaired and all debts, liabilities,
obligations, duties and undertakings of [CBTC], whether
contractual or otherwise, expressed or implied, actual or
contingent, shall henceforth attach to [ABC] which shall be
responsible therefor and may be enforced against [ABC] to
the same extent as if the same debts liabilities, obligations,
duties and undertakings have been originally incurred or
contracted by [ABC], subject, however, to all rights,
privileges, defenses, set-offs and counterclaims which
[CBTC] has or might have and which shall pertain to
[ABC]. 15
The records do not show when the SEC approved the merger. Private
respondent's theory is that it took effect on the date of the execution of the
agreement itself, which was September 16, 1975. Private respondent
contends that, since he issued the promissory note to CBTC on September
7, 1977 two years after the merger agreement had been executed
CBTC could not have conveyed or transferred to petitioner its interest in the
said note, which was not yet in existence at the time of the merger.
Therefore, petitioner, the surviving bank, has no right to enforce the
promissory note on private respondent; such right properly pertains only to
CBTC.
1049
Assuming that the effectivity date of the merger was the date of its execution,
we still cannot agree that petitioner no longer has any interest in the
promissory note. A closer perusal of the merger agreement leads to a
different conclusion. The provision quoted earlier has this other clause:
Upon the effective date of the [m]erger, all references to
[CBTC] in any deed, documents, or other papers of
whatever kind or nature and wherever found shall be
deemed for all intents and purposes, references to [ABC],
the SURVIVING BANK, as if such references were direct
references to [ABC]. . . . 6 (Emphasis supplied)
Thus, the fact that the promissory note was executed after the effectivity date
of the merger does not militate against petitioner. The agreement itself clearly
provides that all contracts irrespective of the date of execution entered
into in the name of CBTC shall be understood as pertaining to the surviving
bank, herein petitioner. Since, in contrast to the earlier aforequoted provision,
the latter clause no longer specifically refers only to contracts existing at the
time of the merger, no distinction should be made. The clause must have
been deliberately included in the agreement in order to protect the interests
of the combining banks; specifically, to avoid giving the merger agreement a
farcical interpretation aimed at evading fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the payee, the
reference to CBTC in the note shall be construed, under the very provisions
of the merger agreement, as a reference to petitioner bank, "as if such
reference [was a] direct reference to" the latter "for all intents and purposes."
No other construction can be given to the unequivocal stipulation. Being
clear, plain and free of ambiguity, the provision must be given its literal
meaning 17 and applied without a convoluted interpretation. Verba lelegis non
est recedendum. 18
In light of the foregoing, the Court holds that petitioner has a valid cause of
action against private respondent. Clearly, the failure of private respondent to
honor his obligation under the promissory note constitutes a violation of
petitioner's right to collect the proceeds of the loan it extended to the former.
Secondary Issues:
Prescription, Laches, Contract
Pour Autrui, Lack of Consideration
No Prescription
or Laches
Private respondent's claim that the action has prescribed, pursuant to Article
1149 of the Civil Code, is legally untenable. Petitioner's suit for collection of a
sum of money was based on a written contract and prescribes after ten years
from the time its right of action arose. 19 Sarmiento's obligation under the
promissory note became due and demandable on March 6, 1978. Petitioner's
complaint was instituted on August 22, 1985, before the lapse of the ten-year
prescriptive period. Definitely, petitioner still had every right to commence suit
against the payor/obligor, the private respondent herein.
Neither is petitioner's action barred by laches. The principle of laches is a
creation of equity, which is applied not to penalize neglect or failure to assert
a right within a reasonable time, but rather to avoid recognizing a right when
to do so would result in a clearly inequitable situation 20 or in an
injustice. 21 To require private respondent to pay the remaining balance of his
loan is certainly not inequitable or unjust. What would be manifestly unjust
and inequitable is his contention that CBTC is the proper party to proceed
against him despite the fact, which he himself asserts, that CBTC's corporate
personality has been dissolved by virtue of its merger with petitioner. To hold
that no payee/obligee exists and to let private respondent enjoy the fruits of
his loan without liability is surely most unfair and unconscionable, amounting
to unjust enrichment at the expense of petitioner. Besides, this Court has
held that the doctrine of laches is inapplicable where the claim was filed
within the prescriptive period set forth under the law. 22
1050
 No Contract
Pour Autrui
Private respondent, while not denying that he executed the promissory note
in the amount of P2,500,000 in favor of CBTC, offers the alternative defense
that said note was a contract pour autrui.
A stipulation pour autrui is one in favor of a third person who may demand its
fulfillment, provided he communicated his acceptance to the obligor before its
revocation. An incidental benefit or interest, which another person gains, is
not sufficient. The contracting parties must have clearly and deliberately
conferred a favor upon a third person. 23
Florentino vs. Encarnacion Sr. 24 enumerates the requisites for such contract:
(1) the stipulation in favor of a third person must be a part of the contract,
and not the contract itself; (2) the favorable stipulation should not be
conditioned or compensated by any kind of obligation; and (3) neither of the
contracting parties bears the legal representation or authorization of the third
party. The "fairest test" in determining whether the third person's interest in a
contract is a stipulation pour autrui or merely an incidental interest is to
examine the intention of the parties as disclosed by their contract. 25
We carefully and thoroughly perused the promissory note, but found no
stipulation at all that would even resemble a provision in consideration of a
third person. The instrument itself does not disclose the purpose of the loan
contract. It merely lays down the terms of payment and the penalties incurred
for failure to pay upon maturity. It is patently devoid of any indication that a
benefit or interest was thereby created in favor of a person other than the
contracting parties. In fact, in no part of the instrument is there any mention
of a third party at all. Except for his barefaced statement, no evidence was
proffered by private respondent to support his argument. Accordingly, his
contention cannot be sustained. At any rate, if indeed the loan actually
benefited a third person who undertook to repay the bank, private respondent
could have availed himself of the legal remedy of a third-party
complaint. 26That he made no effort to implead such third person proves the
hollowness of his arguments.
Consideration
Private respondent also claims that he received no consideration for the
promissory note and, in support thereof, cites petitioner's failure to submit
any proof of his loan application and of his actual receipt of the amount
loaned. These arguments deserve no merit. Res ipsa loquitur. The
instrument, bearing the signature of private respondent, speaks for itself.
Respondent Sarmiento has not questioned the genuineness and due
execution thereof. No further proof is necessary to show that he undertook to
pay P2,500,000, plus interest, to petitioner bank on or before March 6, 1978.
This he failed to do, as testified to by petitioner's accountant. The latter
presented before the trial court private respondent's statement of
account 27 as of September 30, 1986, showing an outstanding balance of
P4,689,413.63 after deducting P1,000,000.00 paid seven months earlier.
Furthermore, such partial payment is equivalent to an express
acknowledgment of his obligation. Private respondent can no longer
backtrack and deny his liability to petitioner bank. "A person cannot accept
and reject the same instrument." 28
WHEREFORE, the petition is GRANTED. The assailed Decision is SET
ASIDE and the Decision of RTC-Manila, Branch 48, in Civil Case No. 26465
is hereby REINSTATED.
SO ORDERED.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.
1051

G.R. No. 97237 August 16, 1991
FILIPINAS PORT SERVICES, INC., petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, PATERNO LIBOON,
SEGUNDO AQUINO, JOVITO BULAY, DOMINGO NAVOA, DELFIN
BERMEJO, CELEDONIO MANCUBAT, ALBERTO MAHINAY, SR.,
TEODULO SILAYA, SANTOS ARGUIDO, JUANITO LABANON,
FLORENCIO MIRANTES, LUCIO BARRERA, VICENTE GILDORE, LEON
FUENTES, CASIMIRO MAGSAYO, FERNANDO MORIENTE, MATIAS
ORBITA, SR., FRANCISCO PARDILLO, ILDEFONSO JUMILLA AND JOSE
CANTONJOS, respondents.
Yap, Ocampo & Associates for petitioner.
Porfirio S. Daclan for private respondents.
PARAS, J.:p
This is a petition for clarification with prayer for preliminary injunction filed by
Filipinas Port Services, Inc. (hereinafter referred to as Filport) seeking to
clarify two conflicting decisions rendered by this Court in cases involving
identical or similar parties, facts and issues.
The antecedent facts of the case are as follows:
In view of the government policy which ordained that cargo handling
operations should be limited to only one cargo handling operator-contractor
for every port (under Customs Memorandum Order 28075, later on
superseded by General Ports Regulations of the Philippine Ports Authority)
the different stevedoring and arrastre corporations operating in the Port of
Davao were integrated into a single dockhandlers corporation, known as the
Davao Dockhandlers, Inc., which was registered with the Securities and
Exchange Commission on July 13, 1976.
Due to the late receipt of its permit to operate at the Port of Davao from the
Bureau of Customs, Davao Dockhandlers, Inc., which was subsequently
renamed Filport, actually started its operation on February 16, 1977.
As a result of the merger, Section 118, Article X of the General Guidelines on
The Integration of Stevedoring/Arrastre Services (PPA Administrative Order
No. 13-77) mandated Filport to draw its personnel complements from the
merging operators, as follows:
Sec. 118. Absorption of labor.Subject to the provisions of
the immediate preceding section, and consistent with the
actual operational requirements of the new management, all
labor force together with its necessary personnel
complement, of the merging operators shall be absorbed by
the merged or integrated organization to constitute its labor
force. (Emphasis supplied)
Thus, Filport's labor force was mostly taken from the integrating corporations,
among them the private respondents.
On February 4,1987, private respondent Paterno Liboon and 18 others filed a
complaint with the Department of Labor and Employment Regional Office in
Davao City, alleging that they were employees of Filport since 1955 through
1958 up to December 31, 1986 when they retired; that they were paid
retirement benefits computed from February 16,1977 up to December 31,
1986 only; and that taking into consideration their continuous length of
service, they are entitled to be paid retirement benefits differentials from the
1052
time they started working with the predecessors of Filport up to the time they
were absorbed by the latter in 1977 (p. 15, Rollo).
Finding Filport a mere alter ego of the different integrating corporations, the
Labor Arbiter held Filport liable for retirement benefits due private
respondents for services rendered prior to February 16, 1977. Said decision
was affirmed by the NLRC on appeal.
Filport filed a petition for certiorari with the Supreme Court docketed as G.R.
No. 85704, claiming that it is an entirely new corporation with a separate
juridical personality from the integrating corporations; and that Filport is not a
successor-employer, liable for the obligations of private respondents'
previous employers, as shown clearly in the memorandum dated November
21,1978 of PPA Assistant General Manager Maximo S. Dumlao, Jr., to wit:
21 November 1978 S. DUMLAO, JR.
MEMORANDUM
TO: The Officer-in-Charge
PMU Davao
FROM: The AGM for Operations
SUBJECT: Clarification of Sec. 116 of PPA Administrative
Order No. 13-77 of New Organization's Liability.
In reply to your telegram dated November 16, 1978, Sec.
116 of PPA Administrative Order #13-77 is hereby quoted for
clarification:
New Organization's LiabilityThe integrated cargo-handling
organization shall be absolutely free from any liability or
obligation of the merging operators who shall continue to be
individually liable for their respective liabilities or obligations,
if any. (emphasis supplied) ...
xxx xxx xxx
The new organization's liability shall be the payment of
salaries, benefits and all other money due the employee as a
result of his employment, starting on the date of his service
in the newly integrated organization.
In answer to your query, therefore, the absorption of an
employee into a newly integrated organization does not
include the carry over of his length of service.
s/t MAXIMO
Asst. General Manager
While G.R. No. 85704 was still pending decision by this Court, Josefino Silva,
another employee of Filport, instituted a suit against Filport and Damasticor
(one of the defunct stevedoring firms) claiming for retirement benefits for
services rendered prior to February 19, 1977. The labor arbiter found for
Josefino Silva and said decision was affirmed by the NLRC.
Filport filed a petition for certiorari with the Supreme Court docketed as G.R.
No. 86026. On August 31, 1989, this Court, through the First Division,
rendered a decision, holding that:
Petitioner (Filport) cannot be held liable for the payment of the retirement pay
of private respondent (Josefino Silva) while in the employ of
DAMASTICOR ... who is held responsible for the same as the labor contract
is in personam and cannot be passed on to the petitioner." (Rollo, p. 7)
In so ruling, the First Division relied heavily on the case of Fernando v. Angat
Labor Union (5 SCRA 248) where it was held that unless expressly assumed,
1053
labor contracts are not enforceable against a transferee of an enterprise
labor contracts being in personam.
Per entry of judgment, the aforesaid decision became final and executory on
November 24, 1989 (p. 87, Rollo).
On September 3, 1990, however, this Court, through the Second Division,
dismissed the petition in G.R. No. 85704 "for failure to sufficiently show that
the questioned judgment is tainted with grave abuse of discretion."
Per entry of judgment, said resolution became final and executory on
December 4, 1 990 (p. 108, Rollo).
Hence, the instant petition for clarification with prayer for preliminary
injunction to enjoin the respondents from enforcing the decision in G.R. No.
85704 until further orders of this Court.
We see no reason to disturb the findings of fact of the public respondent,
supported as they are by substantial evidence in the light of the well
established principle that findings of administrative agencies which have
acquired expertise because their jurisdiction is confined to specific matters
are generally accorded not only respect but at times even finality, and that
judicial review by this Court on labor cases does not go so far as to evaluate
the sufficiency of the evidence upon which the Labor Arbiter and the NLRC
based their determinations but are limited to issues of jurisdiction or grave
abuse of discretion. (National Federation of Labor Union v. Ople, 143 SCRA
129).
In the case filed by private respondent Paterno Liboon et al against Filport,
the findings of the NLRC in its November 27, 1987 decision are categorical:
In resolving the issues, the Labor Arbiter concludes as follows:
The eventual incorporation of the arrastre/stevedoring firms
and their subsequent registration with the Securities and
Exchange Commission on July 13, 1975 brought to the fore
the interlocking ownership of the new corporation.
xxx xxx xxx
Subsequent amendment of its Articles of Incorporation
highlighted by the renaming of the Davao Dockhandlers, Inc.
to Filipinas Port Services, Inc. did not diminish the fact that
the ownership and constituency of the new corporation are
basically Identical with the previous owners.
It is, therefore, the considered view of this Office that
respondent Filport being a mere alter ego of the different
merging companies has at the very least, the obligation not
only to absorb into its employ workers of the dissolved
companies, but also to absorb the length of service earned
by the absorbed employees from their former employers.
xxx xxx xxx
We are in full accord with, and hereby sustain, the findings
and conclusions of the Labor Arbiter. Under the
circumstances, respondent-appellant is a successor-
employer. As a successor entity, it is answerable to the lawful
obligations of the predecessor employers, herein integrees.
This Commission has so held under the principle of
'substitution' that the successor firm is liable to (sic) the
obligations of the predecessor employer, notwithstanding the
change in management or even personality, of the new
contracting employer." (Lakas Ng Manggagawang Filipino
(LAKAS] v. Tarlac Electrical Cooperative, Inc. et al., NLRC
Case No. RB III-1 57-75, January 28,1978, En Banc). ... The
Supreme Court earlier upheld the "Substitutionary" doctrine
in the case of Benguet Consolidated, Inc. vs. BOI
1054
 Employees & Workers Union, (G.R. L-24711, April 30, 1968,
23 SCRA 465). (pp. 35 & 37, Rollo)
Said findings were reiterated in the case filed by Josefino Silva against
Filport where the NLRC, in its decision dated January 19, 1988, further ruled
that:
... As We have ruled in the similar case involving herein
appellant, the latter is deemed a survivor entity because it
continued in an essentially unchanged manner the business
operators of the predecessor arrastre and port service
operators, hiring substantially the same workers, including
herein appellee, of the integree predecessors, using
substantially the same facilities, with similar working
conditions and line of business, and employing the same
corporate control, although under a new management and
corporate personality. (G.R. No. 86026, p. 35, Rollo)
Thus, granting that Filport had no contract whatsoever with the private
respondents regarding the services rendered by them prior to February 16,
1977, by the fact of the merger, a succession of employment rights and
obligations had occurred between Filport and the private respondents. The
law enforced at the time of the merger was Section 3 of Act No. 2772 which
took effect on March 6, 1918. Said law provides:
Sec. 3. Upon the perfecting, as aforesaid, of a consolidation
made in the manner herein provided, the several
corporations parties thereto shall be deemed and taken as
one corporation, upon the terms and conditions set forth in
said agreement; or, upon the perfecting of a merger, the
corporation merged shall be deemed and taken as absorbed
by the other corporation and incorporated in it; and all and
singular rights, privileges, and franchises of each of said
corporations, and all property, real and personal, and all
debts due on whatever account, belonging to each of such
corporations, shall be taken and deemed as transferred to
and vested in the new corporation formed by the
consolidation, or in the surviving corporation in case of
merger, without further act or deed; and the title to real
estate, either by deed or otherwise, under the laws of the
Philippine Islands vested in either corporation, shall not be
deemed in any way impaired by reason of this Act: Provided,
however, That the rights of creditors and all liens upon the
property of either of said corporations shall be preserved
unimpaired; and all debts liabilities, and duties of said
corporations shall thenceforth attach to the new corporation
in case of a consolidation, or to the surviving corporation in
case of a merger, and be enforced against said new
corporation or surviving corporation as if said debts,
liabilities, and duties had been incurred or contracted by it.
As earlier stated, it was mandated that Filport shall absorb all labor force and
necessary personnel complement of the merging operators, thus, clearly
indicating the intention to continue the employer-employee relationships of
the individual companies with its employees through Filport.
The alleged memorandum of the PPA Assistant General Manager
exonerating Filport from any liability arising from and as a result of the
merger is contrary to public policy and is violative of the workers' right to
security of tenure. Said memorandum was issued in response to a query of
the PMU Officer-in-Charge and was not even published nor made known to
the workers who came to know of its existence only at the hearing before the
NLRC. (G.R. No. 86026, pp. 93-94, Rollo)
The principle involved in the case cited by the First Division (Fernando v.
Angat Labor Union [supra]) applies only when the transferee is an entirely
new corporation with a distinct personality from the integrating firms and NOT
where the transferee was found to be merely an alter ego of the different
merging firms, as in this case. Thus, Filport has the obligation not only to
absorb the workers of the dissolved companies but also to include the length
of service earned by the absorbed employees with their former employees as
well. To rule otherwise would be manifestly less than fair, certainly, less than
just and equitable.
1055
Finally, to deny the private respondents the fruits of their labor corresponding
to the time they worked with their previous employers would render at naught
the constitutional provisions on labor protection. In interpreting the protection
to labor and social justice provisions of the Constitution and the labor laws,
and rules and regulations implementing the constitutional mandate, the
Supreme Court has always adopted the liberal approach which favors the
exercise of labor rights. (EuroLinea Phils., Inc. v. NLRC, 156 SCRA 83).
WHEREFORE, the Resolution of the Second Division of this Court in G.R.
No. 85704 dated September 3, 1990 is hereby REITERATED. SO
ORDERED.
G.R. No. 105364* June 28, 2001
PHILIPPINE VETERANS BANK EMPLOYEES UNION-N.U.B.E. and
PERFECTO V. FERNANDEZ, petitioners,
vs.
HONORABLE BENJAMIN VEGA, Presiding Judge of Branch 39 of the
REGIONAL TRIAL COURT of Manila, the CENTRAL BANK OF THE
PHILIPPINES and THE LIQUIDATOR OF THE PHILIPPINE VETERANS
BANK,respondents
KAPUNAN, J.:
May a liquidation court continue with liquidation proceedings of the Philippine
Veterans Bank (PVB) when Congress had mandated its rehabilitation and
reopening?
This is the sole issue raised in the instant Petition for Prohibition with Petition
for Preliminary Injunction and application for Ex Parte Temporary Restraining
Order.
The antecedent facts of the case are as follows:
Sometime in 1985, the Central Bank of the Philippines (Central Bank, for
brevity) filed with Branch 39 of the Regional Trial Court of Manila a Petition
for Assistance in the Liquidation of the Philippine Veterans Bank, the same
docketed as Case No. SP-32311. Thereafter, the Philipppine Veterans Bank
Employees Union-N.U.B.E., herein petitioner, represented by petitioner
Perfecto V. Fernandez, filed claims for accrued and unpaid employee wages
and benefits with said court in SP-32311.1
After lengthy proceedings, partial payment of the sums due to the employees
were made. However, due to the piecemeal hearings on the benefits, many
remain unpaid.2
On March 8, 1991, petitioners moved to disqualify the respondent judge from
hearing the above case on grounds of bias and hostility towards petitioners. 3
On January 2, 1992, the Congress enacted Republic Act No. 7169 providing
for the rehabilitation of the Philippine Veterans Bank. 4
Thereafter, petitioners filed with the labor tribunals their residual claims for
benefits and for reinstatement upon reopening of the bank. 5
Sometime in May 1992, the Central Bank issued a certificate of authority
allowing the PVB to reopen.6
Despite the legislative mandate for rehabilitation and reopening of PVB,
respondent judge continued with the liquidation proceedings of the bank.
Moreover, petitioners learned that respondents were set to order the
payment and release of employee benefits upon motion of another lawyer,
while petitioners claims have been frozen to their prejudice.
Hence, the instant petition.
Petitioners argue that with the passage of R.A. 7169, the liquidation court
became functus officio, and no longer had the authority to continue with
liquidation proceedings.
1056
In a Resolution, dated June 8, 1992, the Supreme Court resolved to issue a
Temporary Restraining Order enjoining the trial court from further proceeding
with the case.
On June 22, 1992, VOP Security & Detective Agency (VOPSDA) and its 162
security guards filed a Motion for Intervention with prayer that they be
excluded from the operation of the Temporary Restraining Order issued by
the Court. They alleged that they had filed a motion before Branch 39 of the
RTC of Manila, in SP-No. 32311, praying that said court order PVB to pay
their backwages and salary differentials by authority of R.A. No 6727, Wage
Orders No. NCR-01 and NCR-01-Ad and Wage Orders No. NCR-02 and
NCR-02-A; and, that said court, in an Order dated June 5, 1992, approved
therein movants case and directed the bank liquidator or PVB itself to pay
the backwages and differentials in accordance with the computation
incorporated in the order. Said intervenors likewise manifested that there was
an error in the computation of the monetary benefits due them.
On August 18, 1992, petitioners, pursuant to the Resolution of this Court,
dated July 6, 1992, filed their Comment opposing the Motion for Leave to File
Intervention and for exclusion from the operation of the T.R.O. on the
grounds that the movants have no legal interest in the subject matter of the
pending action; that allowing intervention would only cause delay in the
proceedings; and that the motion to exclude the movants from the T.R.O. is
without legal basis and would render moot the relief sought in the petition.
On September 3, 1992, the PVB filed a Petition-In-Intervention praying for
the issuance of the writs of certiorari and prohibition under Rule 65 of the
Rules of Court in connection with the issuance by respondent judge of
several orders involving acts of liquidation of PVB even after the effectivity of
R.A. No. 7169. PVB further alleges that respondent judge clearly acted in
excess of or without jurisdiction when he issued the questioned orders.
We find for the petitioners.
Republic Act No. 7169 entitled "An Act To Rehabilitate The Philippine
Veterans Bank Created Under Republic Act No. 3518, Providing The
Mechanisms Therefor, And For Other Purposes", which was signed into law
by President Corazon C. Aquino on January 2, 1992 and which was
published in the Official Gazette on February 24, 1992, provides in part for
the reopening of the Philippine Veterans Bank together with all its branches
within the period of three (3) years from the date of the reopening of the head
office.7 The law likewise provides for the creation of a rehabilitation
committee in order to facilitate the implementation of the provisions of the
same.8
Pursuant to said R.A. No. 7169, the Rehabilitation Committee submitted the
proposed Rehabilitation Plan of the PVB to the Monetary Board for its
approval. Meanwhile, PVB filed a Motion to Terminate Liquidation of
Philippine Veterans Bank dated March 13, 1992 with the respondent judge
praying that the liquidation proceedings be immediately terminated in view of
the passage of R.A. No. 7169.
On April 10, 1992, the Monetary Board issued Monetary Board Resolution
No. 348 which approved the Rehabilitation Plan submitted by the
Rehabilitaion Committee.
Thereafter, the Monetary Board issued a Certificate of Authority allowing PVB
to reopen.
On June 3, 1992, the liquidator filed A Motion for the Termination of the
Liquidation Proceedings of the Philippine Veterans Bank with the respondent
judge.
As stated above, the Court, in a Resolution dated June 8, 1992, issued a
temporary restraining order in the instant case restraining respondent judge
from further proceeding with the liquidation of PVB.
On August 3, 1992, the Philippine Veterans Bank opened its doors to the
public and started regular banking operations.
Clearly, the enactment of Republic Act No. 7169, as well as the subsequent
developments has rendered the liquidation court functus officio.
1057
Consequently, respondent judge has been stripped of the authority to issue
orders involving acts of liquidation.
Liquidation, in corporation law, connotes a winding up or settling with
creditors and debtors.9 It is the winding up of a corporation so that assets are
distributed to those entitled to receive them. It is the process of reducing
assets to cash, discharging liabilities and dividing surplus or loss.
On the opposite end of the spectrum is rehabilitation which connotes a
reopening or reorganization. Rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and solvency.10
It is crystal clear that the concept of liquidation is diametrically opposed or
contrary to the concept of rehabilitation, such that both cannot be undertaken
at the same time. To allow the liquidation proceedings to continue would
seriously hinder the rehabilitation of the subject bank.
Hence, it is clear that the legislature intended to make the law
effective immediately upon its approval. It is undisputed that R.A. No. 7169
was signed into law by President Corazon C. Aquino on January 2, 1992.
Therefore, said law became effective on said date.
Assuming for the sake of argument that publication is necessary for the
effectivity of R.A. No. 7169, then it became legally effective on February 24,
1992, the date when the same was published in the Official Gazette, and not
on March 10, 1992, as erroneously claimed by respondents Central Bank
and Liquidator.
WHEREFORE, in view of the foregoing, the instant petition is hereby GIVEN
DUE COURSE and GRANTED. Respondent Judge is hereby
PERMANENTLY ENJOINED from further proceeding with Civil Case No. SP-
32311.
SO ORDERED.

Anent the claim of respondents Central Bank and Liquidator of PVB that R.A. Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago,
No. 7169 became effective only on March 10, 1992 or fifteen (15) days after JJ., concur.
its publication in the Official Gazette; and, the contention of intervenors VOP
Security, et. al. that the effectivity of said law is conditioned on the approval
of a rehabilitation plan by the Monetary Board, among others, the Court is of
the view that both contentions are bereft of merit.
* This case was transferred to the ponente pursuant to the resolution in AM
While as a rule, laws take effect after fifteen (15) days following the No. 00-9-03-SC. Re: Creation of Special Committee on Case Backlog dated
completion of their publication in the Official Gazette or in a newspaper of February 27, 2001.
general circulation in the Philippines, the legislature has the authority to
provide for exceptions, as indicated in the clause "unless otherwise
provided."

In the case at bar, Section 10 of R.A. No. 7169 provides:

Sec. 10. Effectivity. - This Act shall take effect upon its approval.

1058

[G.R. No. 146698. September 24, 2002]
PHILIPPINE AIRLINES, petitioner, vs. SPOUSES SADIC AND AISHA
KURANGKING and SPOUSES ABDUL SAMAD T. DIANALAN
AND MORSHIDA L. DIANALAN, respondents.
DECISION
VITUG, J.:
In April 1997, respondents, all Muslim Filipinos, returned to Manila from
their pilgrimage to the Holy City of Mecca, Saudi Arabia, on board a
Philippines Airlines (PAL) flight. Respondents claimed that they were unable
to retrieve their checked-in luggages. On 05 January 1998, respondents filed
a complaint with the Regional Trial Court (RTC) of Marawi City against PAL
for breach of contract resulting in damages due to negligence in the custody
of the missing luggages.
On 02 March 1998, PAL filed its answer invoking, among its defenses,
the limitations under the Warsaw Convention. On 19 June 1998, before the
case could be heard on pre-trial, PAL, claiming to have suffered serious
business losses due to the Asian economic crisis, followed by a massive
strike by its employees, filed a petition for the approval of a rehabilitation plan
and the appointment of a rehabilitation receiver before the Securities and
Exchange Commission (SEC). On 23 June 1998, the SEC issued an order
granting the prayer for an appointment of a rehabilitation receiver, and it
constituted a three-man panel to oversee PALs rehabilitation. On 25
September 1998, the SEC created a management committee conformably
with Section 6(d) of Presidential Decree (P.D.) 902, as amended, declaring
the suspension of all actions for money claims against PAL pending before
any court, tribunal, board or body. Thereupon, PAL moved for the suspension
of the proceedings before the Marawi City RTC. On 11 January 1999, the trial
court issued an order denying the motion for suspension of the proceedings
on the ground that the claim of respondents was only yet to be established.
PALs motion for reconsideration was denied by the trial court.
PAL went to the Court of Appeals via a petition for certiorari. On 16 April
1999, the appellate court dismissed the petition for the failure of PAL to serve
a copy of the petition on respondents. PAL moved for a reconsideration. In its
resolution, dated 08 October 1999, the appellate court denied the motion but
added that a second motion for reconsideration before the trial court could
still be feasible inasmuch as the assailed orders of the trial court were merely
interlocutory in nature. Consonantly, PAL filed before the trial court a motion
for leave to file a second motion for reconsideration. The trial court, however,
denied leave of court to admit the second motion for reconsideration. Again,
PAL filed a motion for reconsideration which sought reconsideration of the
1059
denial of the prayed leave to file a second motion for reconsideration. In an
order, dated 28 December 2000, the trial court denied the motion.
On the thesis that there was no other plain, speedy and adequate
remedy available to it, PAL went to this Court via a petition for review
on certiorari under Rule 45 of the Rules of Court, raising the question of -
"Whether or not the proceedings before the trial court should have been
suspended after the court was informed that a rehabilitation receiver was
appointed over the petitioner by the Securities and Exchange Commission
under Section 6(c) of Presidential Decree No. 902-A.[1]
In their comment to the petition, private respondents posited (a) that the
instant petition under Rule 45 would not lie, the assailed orders of the court
a quo being merely interlocutory; (b) that PAL was already operational and
thus claims and actions against it should no longer be suspended; (c) that
the SEC, not the RTC, should have the prerogative to determine the
necessity of suspending the proceedings; and (d) that the only claims or
actions that could be suspended under P.D. 902-A were those pending with
the SEC.
While a petition for review on certiorari under Rule 45 would ordinarily
be inappropriate to assail an interlocutory order, in the interest, however, of
arresting the perpetuation of an apparent error committed below that could
only serve to unnecessarily burden the parties, the Court has resolved to
ignore the technical flaw and, also, to treat the petition, there being no other
plain, speedy and adequate remedy, as a special civil action for certiorari.
Not much, after all, can be gained if the Court were to refrain from now
making a pronouncement on an issue so basic as that submitted by the
parties.
On 15 December 2000, the Supreme Court, in A.M. No. 00-8-10-SC,
adopted the Interim Rules of Procedure on Corporate Rehabilitation and
directed to be transferred from the SEC to Regional Trial Courts, [2] all
petitions for rehabilitation filed by corporations, partnerships, and
associations under P.D. 902-A in accordance with the amendatory provisions
of Republic Act No. 8799. The rules require trial courts to issue, among other
things, a stay order in the enforcement of all claims, whether for money or
otherwise, and whether such enforcement is by court action or otherwise,
against the corporation under rehabilitation, its guarantors and sureties not
solidarily liable with it. Specifically, Section 6, Rule 4, of the Interim Rules of
Procedure On Corporate Rehabilitation, provides:
SEC. 6. Stay Order. - If the court finds the petition to be sufficient in form and
substance, it shall, not later than five (5) days from the filing of the petition,
issue an Order (a) appointing a Rehabilitation Receiver and fixing his bond;
(b) staying enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against the debtor,
its guarantors and sureties not solidarily liable with the debtor; (c) prohibiting
the debtor from selling, encumbering, transferring, or disposing in any
manner any of its properties except in the ordinary course of business; (d)
prohibiting the debtor from making any payment of its liabilities outstanding
as at the date of filing of the petition; (e) prohibiting the debtors suppliers of
goods or services from withholding supply of goods and services in the
ordinary course of business for as long as the debtor makes payments for
the services and goods supplied after the issuance of the stay order; (f)
directing the payment in full of all administrative expenses incurred after the
issuance of the stay order; (g) fixing the initial hearing on the petition not
earlier than forty-five (45) days but not later than sixty (60) days from the
filing thereof; (h) directing the petitioner to publish the Order in a newspaper
of general circulation in the Philippines once a week for two (2) consecutive
weeks; (I) directing all creditors and all interested parties (including the
Securities and Exchange Commission) to file and serve on the debtor a
verified comment on or opposition to the petition, with supporting affidavits
and documents, not later than ten (10) days before the date of the initial
hearing and putting them on notice that their failure to do so will bar them
from participating in the proceedings; and (j) directing the creditors and
interested parties to secure from the court copies of the petition and its
annexes within such time as to enable themselves to file their comment on or
opposition to the petition and to prepare for the initial hearing of the petition.
The stay order is effective from the date of its issuance until the dismissal of
the petition or the termination of the rehabilitation proceedings. [3]
1060
 The interim rules must likewise be read and applied along with Section
6(c) of P.D. 902-A, as so amended, directing that upon the appointment of a
management committee, rehabilitation receiver, board or body pursuant to
the decree, all actions for claims against the distressed corporation pending
before any court, tribunal, board or body shall be suspended accordingly.
Paragraph (c) of Section 6 of the law reads:
Section 6. In order to effectively exercise such jurisdiction, the Commission
shall possess the following powers:
xxx xxx xxx.
c) To appoint one or more receivers of the property, real or personal, which is
the subject of the action pending before the Commission in accordance with
the pertinent provisions of the Rules of Court in such other cases whenever
necessary in order to preserve the rights of the parties-litigants and/or protect
the interest of the investing public and creditors: x x x Provided, finally, That
upon appointment of a management committee, the rehabilitation receiver,
board or body, pursuant to this Decree, all actions for claims against
corporations, partnerships, or associations under management or
receivership pending before any court, tribunal, board or body shall be
suspended accordingly.
x x x (T)he reason for suspending actions for claims against the corporation
should not be difficult to discover. it is not really to enable the management
committee or the rehabilitation receiver to substitute the defendant in any
pending action against it before any court, tribunal, board or body. Obviously,
the real justification is to enable the management committee or rehabilitation
receiver to effectively exercise its/his powers free from any judicial or extra-
judicial interference that might unduly hinder or prevent the rescue of the
debtor company. To allow such other action to continue would only add to the
burden of the management committee or rehabilitation receiver, whose time,
effort and resources would be wasted in defending claims against the
corporation instead of being directed toward its restructuring and
rehabilitation.[8]
WHEREFORE, the petition is GRANTED. The assailed orders of the
Regional Trial Court, Branch 9, of Marawi City, are SET ASIDE. No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, and Carpio, JJ., concur.

A claim is said to be a right to payment, whether or not It is reduced to

judgment, liquidated or unliquidated, fixed or contingent, matured or
unmatured, disputed or undisputed, legal or equitable, and secured or
unsecured.[4] In Finasia Investments and Finance Corporation [5] this Court
has defined the word claim, contemplated in Section 6(c) of P.D. 902-A, as
referring to debts or demands of a pecuniary nature and the assertion of a
right to have money paid as well.

Verily, the claim of private respondents against petitioner PAL is a

money claim for the missing luggages, a financial demand, that the law
requires to be suspended pending the rehabilitation proceedings. [6] In B.F.
Homes, Inc. vs. Court of Appeals,[7] the Court has ratiocinated:

1061
G.R. No. 74851 December 9, 1999

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,

vs.
INTERMEDIATE APPELLATE COURT AND BF HOMES,
INC., respondents.

RESOLUTION

MELO, J.:

On September 14, 1992, the Court passed upon the case at bar and
rendered its decision, dismissing the petition of Rizal Commercial Banking
Corporation (RCBC), thereby affirming the decision of the Court of Appeals
which canceled the transfer certificate of title issued in favor of RCBC, and
reinstating that of respondent BF Homes.

This will now resolve petitioner's motion for reconsideration which, although
filed in 1992 was not deemed submitted for resolution until in late 1998. The
delay was occasioned by exchange of pleadings, the submission of
supplemental papers, withdrawal and change of lawyers, not to speak of the
case having been passed from one departing to another retiring justice. It
was not until May 3, 1999, when the case was re-raffled to herein ponente,
but the record was given to him only sometime in the late October 1999.

By way of review, the pertinent facts as stated in our decision are reproduced
herein, to wit:

1062
On September 28, 1984, BF Homes filed a "Petition for
Rehabilitation and for Declaration of Suspension of
Payments" (SEC Case No. 002693) with the Securities and
Exchange Commission (SEC).
One of the creditors listed in its inventory of creditors and
liabilities was RCBC.
On October 26, 1984, RCBC requested the Provincial Sheriff
of Rizal to extra-judicially foreclose its real estate mortgage
on some properties of BF Homes. A notice of extra-judicial
foreclosure sale was issued by the Sheriff on October 29,
1984, scheduled on November 29, 1984, copies furnished
both BF Homes (mortgagor) and RCBC (mortgagee).
On motion of BF Homes, the SEC issued on November 28,
1984 in SEC Case No. 002693 a temporary restraining order
(TRO), effective for 20 days, enjoining RCBC and the sheriff
from proceeding with the public auction sale. The sale was
rescheduled to January 29, 1985.
On January 25, 1985, the SEC ordered the issuance of a
writ of preliminary injunction upon petitioner's filing of a bond.
However, petitioner did not file a bond until January 29,
1985, the very day of the auction sale, so no writ of
preliminary injunction was issued by the SEC. Presumably,
unaware of the filing of the bond, the sheriffs proceeded with
the public auction sale on January 29, 1985, in which RCBC
was the highest bidder for the properties auctioned.
On February 5, 1985, BF Homes filed in the SEC a
consolidated motion to annul the auction sale and to cite
RCBC and the sheriff for contempt. RCBC opposed the
motion
Because of the proceedings in the SEC, the sheriff withheld
the delivery to RCBC of a certificate of sale covering the
auctioned properties.
On February 13, 1985, the SEC in Case No. 002693
belatedly issued a writ of preliminary injunction stopping the
auction sale which had been conducted by the sheriff two
weeks earlier.
On March 13, 1985, despite SEC Case No. 002693, RCBC
filed with the Regional Trial Court, Br. 140, Rizal (CC 10042)
an action for mandamus against the provincial sheriff of Rizal
and his deputy to compel them to execute in its favor a
certificate of sale of the auctioned properties.
In answer, the sheriffs alleged that they proceeded with the
auction sale on January 29, 1985 because no writ of
preliminary injunction had been issued by SEC as of that
date, but they informed the SEC that they would suspend the
issuance of a certificate of sale to RCBC.
On March 18, 1985, the SEC appointed a Management
Committee for BF Homes.
On RCBC's motion in the mandamus case, the trial court
issued on May 8, 1985 a judgment on the pleadings, the
dispositive portion of which states:
WHEREFORE, petitioner's Motion for
Judgment on the pleadings is granted and
judgment is hereby rendered ordering
respondents to execute and deliver to
petitioner the Certificate of the Auction Sale
of January 29, 1985, involving the properties
sold therein, more particularly those
1063
 described in Annex "C" of their Answer." (p.
87, Rollo.)
On June 4, 1985, B.F. Homes filed an original complaint with
the IAC pursuant to Section 9 of B.P. 129 praying for the
annulment of the judgment, premised on the following:
. . .: (1) even before RCBC asked the sheriff
to extra-judicially foreclose its mortgage on
petitioner's properties, the SEC had already
assumed exclusive jurisdiction over those
assets, and (2) that there was extrinsic fraud
in procuring the judgment because the
petitioner was not impleaded as a party in
the mandamus case, respondent court did
not acquire jurisdiction over it, and it was
deprived of its right to be heard. (CA
Decision, p. 88, Rollo).
On April 8, 1986, the IAC rendered a decision, setting aside
the decision of the trial court, dismissing
the mandamus case and suspending issuance to RCBC of
new land titles, "until the resolution of case by SEC in Case
No. 002693," disposing as follows:
WHEREFORE, the judgment dated May 8,
1985 in Civil Case No. 10042 is hereby
annulled and set aside and the case is
hereby dismissed. In view of the admission
of respondent Rizal Commercial Banking
Corporation that the sheriff's certificate of
sale has been registered on BF Homes'
TCT's . . . (here the TCTs were enumerated)
the Register of Deeds for Pasay City is
hereby ordered to suspend the issuance to
the mortgagee-purchaser, Rizal Commercial
Banking Corporation, of the owner's copies
of the new land titles replacing them until the
matter shall have been resolved by the
Securities and Exchange Commission in
SEC Case No. 002693.
(p. 257-26
also pp.
213 SCR
[1992]; Emp
the original.
On June 18, 1986, RCBC appealed the decision of the then Intermediate
Appellate Court (now, back to its old revered name, the Court of Appeals) to
this Court, arguing that:
1. Petitioner did not commit extrinsic fraud in
excluding private respondent as party
defendant in Special Civil Case No. 10042
as private respondent was not indispensable
party thereto, its participation not being
necessary for the full resolution of the issues
raised in said case.
2. SEC Case No. 2693 cannot be invoked to
suspend Special Civil Case No. 10042, and
for that matter, the extra-judicial foreclosure
of the real estate mortgage in petitioner's
favor, as these do not constitute actions
against private respondent contemplated
under Section 6(c) of Presidential Decree
No. 902-A.
3. Even assuming arguendo that the extra-
judicial sale constitute an action that may be
suspended under Section 6(c) of
1064
 Presidential Decree No. 902-A, the basis for
the suspension thereof did not exist so as to
adversely affect the validity and regularity
thereof.
4. The Regional Trial court had jurisdiction to
take cognizable of Special Civil Case No.
10042.
5. The Regional Trial court had jurisdiction
over Special Civil Case No. 10042.
(p. 5,
On November 12, 1986, the Court gave due course to the petition. During the
pendency of the case, RCBC brought to the attention of the Court an order
issued by the SEC on October 16, 1986 in Case No. 002693, denying the
consolidated Motion to Annul the Auction Sale and to cite RCBC and the
Sheriff for Contempt, and ruling as follows:
WHEREFORE, the petitioner's
"Consolidated Motion to Cite Sheriff and
Rizal Commercial Banking Corporation for
Contempt and to Annul Proceedings and
Sale," dated February 5, 1985, should be as
is, hereby DENIED.
While we cannot direct the Register of
Deeds to allow the consolidation of the titles
subject of the Omnibus Motion dated
September 18, 1986 filed by the Rizal
Commercial Banking Corporation, and
therefore, denies said Motion, neither can
this Commission restrain the said bank and
the Register of Deeds from effecting the said
consolidation.
SO ORDERED.
(p. 143, Rol
By virtue of the aforesaid order, the Register of Deeds of Pasay City effected
the transfer of title over subject pieces of property to petitioner RCBC, and
the issuance of new titles in its name. Thereafter, RCBC presented a motion
for the dismissal of the petition, theorizing that the issuance of said new
transfer certificates of title in its name rendered the petition moot and
academic.
In the decision sought to be reconsidered, a greatly divided Court (Justices
Gutierrez, Nocon, and Melo concurred with the ponente, Justice Medialdea;
Chief Justice Narvasa, Justices Bidin, Regalado, and Bellosillo concurred
only in the result; while Justice Feliciano dissented and was joined by Justice
Padilla, then Justice, now Chief Justice Davide, and Justice Romero;
Justices Grio-Aquino and Campos took no part) denied petitioner's motion
to dismiss, finding basis for nullifying and setting aside the TCTs in the name
of RCBC. Ruling on the merits, the Court upheld the decision of the
Intermediate Appellate Court which dismissed the mandamus case filed by
RCBC and suspended the issuance of new titles to RCBC. Setting aside
RCBC's acquisition of title and nullifying the TCTs issued to it, the Court held
that:
. . . whenever a distressed corporation asks
the SEC for rehabilitation and suspension of
payments, preferred creditors may no longer
assert such preference, but . . . stand on
equal footing with other creditors.
Foreclosure shall be disallowed so as not to
prejudice other creditors, or cause
discrimination among them. If foreclosure is
undertaken despite the fact that a petition,
for rehabilitation has been filed, the
certificate of sale shall not be delivered
pending rehabilitation. Likewise, if this has
1065
 also been done, no transfer of title shall be
effected also, within the period of
rehabilitation. The rationale behind PD 902-
A, as amended to effect a feasible and
viable rehabilitation. This cannot be
achieved if one creditor is preferred over the
others.
In this connection, the prohibition against
foreclosure attaches as soon as a petition
for rehabilitation is filed. Were it otherwise,
what is to prevent the petitioner from
delaying the creation of a Management
Committee and in the meantime dissipate all
its assets. The sooner the SEC takes over
and imposes a freeze on all the assets, the
better for all concerned.
(pp. 265-266,
also p. still
SCRA 830
Then Justice Feliciano (joined by three other Justices), dissented and voted
to grant the petition. He opined that the SEC acted prematurely and without
jurisdiction or legal authority in enjoining RCBC and the sheriff from
proceeding with the public auction sale. The dissent maintain that Section 6
(c) of Presidential Decree 902-A is clear and unequivocal that, claims against
the corporations, partnerships, or associations shall be suspended only upon
the appointment of a management committee, rehabilitation receiver, board
or body. Thus, in the case under consideration, only upon the appointment of
the Management Committee for BF Homes on March 18, 1985, should the
suspension of actions for claims against BF Homes have taken effect and not
earlier.
In support of its motion for reconsideration, RCBC contends:
The restraining order and the writ of preliminary injunction
issued by the Securities and Exchange Commission
enjoining the foreclosure sale of the properties of respondent
BF Homes were issued without or in excess of its jurisdiction
because it was violative of the clear provision of Presidential
Decree No. 902-A, and are therefore null and void; and
Petitioner, being a mortgage creditor, is entitled to rely solely
on its security and to refrain from joining the unsecured
creditors in SEC Case No. 002693, the petition for
rehabilitation filed by private respondent.
We find the motion for reconsideration meritorious.
The issue of whether or not preferred creditors of distressed corporations
stand on equal footing with all other creditors gains relevance and materiality
only upon the appointment of a management committee, rehabilitation
receiver, board, or body. Insofar as petitioner RCBC is concerned, the
provisions of Presidential Decree No. 902-A are not yet applicable and it may
838, 213
be allowed to assert its preferred status because it foreclosed on the
[1992].)prior to the appointment of the management committee on March
mortgage
18, 1985. The Court, therefore, grants the motion for reconsideration on this
score.
The law on the matter, Paragraph (c), Section 6 of Presidential Decree 902-
A, provides:
Sec. 6. In order to effectively exercise such jurisdiction, the
Commission shall posses the following powers:
c) To appoint one or more receivers of the property, real and
personal, which is the subject of the action pending before
the Commission in accordance with the pertinent provisions
of the Rules of Court in such other cases whenever
necessary to preserve the rights of the parties litigants to
and/or protect the interest of the investing public and
1066
 creditors; Provided, however, that the Commission may, in
appropriate cases, appoint a rehabilitation receiver of
corporations, partnerships or other associations not
supervised or regulated by other government agencies who
shall have, in addition to the powers of a regular receiver
under the provisions of the Rules of Court, such functions
and powers as are provided for in the succeeding paragraph
(d) hereof: Provided, finally, That upon appointment of a
management committee rehabilitation receiver, board or
body, pursuant to this Decree, all actions for claims against
corporations, partnerships or associations under
management or receivership, pending before any court,
tribunal, board or body shall be suspended accordingly. (As
amended by PDs No. 1673, 1758 and by PD No. 1799.
Emphasis supplied.)
It is thus adequately clear that suspension of claims against a corporation
under rehabilitation is counted or figured up only upon the appointment of a
management committee or a rehabilitation receiver. The holding that
suspension of actions for claims against a corporation under rehabilitation
takes effect as soon as the application or a petition for rehabilitation is filed
with the SEC may, to some, be more logical and wise but unfortunately,
such is incongruent with the clear language of the law. To insist on such
ruling, no matter how practical and noble, would be to encroach upon
legislative prerogative to define the wisdom of the law plainly judicial
legislation.
It bears stressing that the first and fundamental duty of the Court is to apply
the law. When the law is clear and free from any doubt or ambiguity, there is
no room for construction or interpretation. As has been our consistent ruling,
where the law speaks in clear and categorical language, there is no occasion
for interpretation; there is only room for application (Cebu Portland Cement
Co. vs. Municipality of Naga, 24 SCRA-708 [1968]).
Where the law is clear and unambiguous, it must be taken to
mean exactly what it says and the court has no choice but to
see to it that its mandate is obeyed (Chartered Bank
Employees Association vs. Ople, 138 SCRA 273 [1985];
Luzon Surety Co., Inc. vs. De Garcia, 30 SCRA 111 [1969];
Quijano vs. Development Bank of the Philippines, 35 SCRA
270 [1970]).
Only when the law is ambiguous or of doubtful meaning may the court
interpret or construe its true intent. Ambiguity is a condition of admitting two
or more meanings, of being understood in more than one way, or of referring
to two or more things at the same time. A statute is ambiguous if it is
admissible of two or more possible meanings, in which case, the Court is
called upon to exercise one of its judicial functions, which is to interpret the
law according to its true intent.
Furthermore, as relevantly pointed out in the dissenting opinion, a petition for
rehabilitation does nor always result in the appointment of a receiver or the
creation of a management committee. The SEC has to initially determine
whether such appointment is appropriate and necessary under the
circumstances. Under Paragraph (d), Section 6 of Presidential Decree No.
902-A, certain situations must be shown to exist before a management
committee may be created or appointed, such as;
1. when there is imminent danger of
dissipation, loss, wastage or destruction of
assets or other properties; or
2. when there is paralization of business
operations of such corporations or entities
which may be prejudicial to the interest of
minority stockholders, parties-litigants or to
the general public.
On the other hand, receivers may be appointed whenever:
1. necessary in order to preserve the rights
of the parties-litigants; and/or
1067
 2. protect the interest of the investing public
and creditors. (Section 6 (c), P.D. 902-A.)
These situations are rather serious in nature, requiring the appointment of a
management committee or a receiver to preserve the existing assets and
property of the corporation in order to protect the interests of its investors and
creditors. Thus, in such situations, suspension of actions for claims against a
corporation as provided in Paragraph (c) of Section 6, of Presidential Decree
No. 902-A is necessary, and here we borrow the words of the late Justice
Medialdea, "so as not to render the SEC management Committee irrelevant
and inutile and to give it unhampered "rescue efforts" over the distressed
firm" (Rollo, p. 265).
Otherwise, when such circumstances are not obtaining or when the SEC
finds no such imminent danger of losing the corporate assets, a management
committee or rehabilitation receiver need not be appointed and suspension of
actions for claims may not be ordered by the SEC. When the SEC does not
deem it necessary to appoint a receiver or to create a management
committee, it may be assumed, that there are sufficient assets to sustain the
rehabilitation plan and, that the creditors and investors are amply protected.
Petitioner additionally argues in its motion for reconsideration that, being a
mortgage creditor, it is entitled to rely on its security and that it need not join
the unsecured creditors in filing their claims before the SEC appointed
receiver. To support its position, petitioner cites the Court's ruling in the case
of Philippine Commercial International Bank vs. Court of Appeals, (172
SCRA 436 [1989]) that an order of suspension of payments as well as
actions for claims applies only to claims of unsecured creditors and cannot
extend to creditors holding a mortgage, pledge, or any lien on the property.
Ordinarily, the Court would refrain from discussing additional matters such as
that presented in RCBC's second ground, and would rather limit itself only to
the relevant issues by which the controversy may be settled with finality.
In view, however, of the significance of such issue, and the conflicting
decisions of this Court on the matter, coupled with the fact that our decision
of September 14, 1992, if not clarified, might mislead the Bench and the Bar,
the Court resolved to discuss further.
It may be recalled that in the herein en banc majority opinion (pp. 256-
275, Rollo, also published as RCBC vs. IAC, 213 SCRA 830 [1992]), we held
that:
. . . whenever a distressed corporation asks the SEC for
rehabilitation and suspension of payments, preferred
creditors may no longer assert such preference,
but . . . stand on equal footing with other creditors.
Foreclosure shall be disallowed so as not to prejudice other
creditors, or cause discrimination among them. If foreclosure
is undertaken despite the fact that a petition for rehabilitation
has been filed, the certificate of sale shall not be delivered
pending rehabilitation. Likewise, if this has also, been done,
no transfer of title shall be effected also, within the period of
rehabilitation. The rationale behind PD 902-A, as amended,
is to effect a feasible and viable rehabilitation. This cannot
be achieved if one creditor is preferred over the others.
In this connection, the prohibition against foreclosure
attaches as soon as a petition for rehabilitation is filed. Were
it otherwise, what is to prevent the petitioner from delaying
the creation of a Management Committee and in the
meantime dissipate all its assets. The sooner the SEC takes
over and imposes a freeze on all the assets, the better for all
concerned.
p. 265-266
838, 213 S
Emphasis s
The foregoing majority opinion relied upon BF Homes, Inc. vs. Court of
Appeals (190 SCRA 262 [1990] per Cruz, J.: First Division) where it held
that "when a corporation threatened by bankruptcy is taken over by a
1068
receiver, all the creditors should stand on an equal footing. Not anyone of
them should be given preference by paying one or some of them ahead of
the others. This is precisely the reason for the suspension of all pending
claims against the corporation under receivership. Instead of creditors vexing
the courts with suits against the distressed firm, they are directed to file their
claims with the receiver who is a duly appointed officer of the SEC (pp. 269-
270; emphasis in the original). This ruling is a reiteration of Alemar's Sibal &
Sons, Inc. vs. Hon. Jesus M. Elbinias (pp. 99-100; 186 SCRA 94 [1991]
per Fernan, C.J.: Third Division).
Taking the lead from Alemar's Sibal & Sons, the Court also applied this same
ruling in Araneta vs. Court of Appeals (211 SCRA 390 [1992] per Nocon,
J.: Second Division).
All the foregoing cases departed from the ruling of the Court in the much
earlier case of PCIB vs. Court of Appeals(172 SCRA 436 [1989] per
Medialdea, J.: First Division) where the Court categorically ruled that:
SEC's order for suspension of payments of Philfinance as
well as for all actions of claims against Philfinance could only
be applied to claims of unsecured creditors. Such order can
not extend to creditors holding a mortgage, pledge or any
lien on the property unless they give up the property, security
or lien in favor of all the creditors of Philfinance . . .
(p. 440.
Emphasis
supplied)
Thus, in BPI vs. Court of Appeals (229 SCRA 223 [1994] per Bellosilio, J.:
First Division) the Court explicitly stared that ". . . the doctrine in the PCIB
Case has since been abrogated. In Alemar's Sibal & Sons v. Elbinias, BF
Homes, Inc. v. Court of Appeals, Araneta v. Court of Appeals and RCBC v.
Court of Appeals, we already ruled that whenever a distressed corporation
asks SEC for rehabilitation and suspension of payments, preferred
creditors may no longer assert such preference, but shall stand on equal
footing with other creditors . . ." (pp. 227-228).
It may be stressed, however, that of all the cases cited by Justice Bellosillo in
BPI, which abandoned the Court's ruling in PCIB, only the present case
satisfies the constitutional requirement that "no doctrine or principle of law
laid down by the court in a decision rendered en banc or in division may be
modified or reversed except by the court sitting en banc" (Sec 4, Article VIII,
1987 Constitution). The rest were division decisions.
It behooves the Court, therefore, to settle the issue in this present resolution
once and for all, and for the guidance of the Bench and the Bar, the following
rules of thumb shall are laid down:
1. All claims against corporations, partnerships, or associations that are
pending before any court, tribunal, or board, without distinction as to whether
or not a creditor is secured or unsecured, shall be suspended effective upon
the appointment of a management committee, rehabilitation receiver, board,
or body in accordance which the provisions of Presidential Decree No. 902-
A.
2. Secured creditors retain their preference over unsecured creditors, but
enforcement of such preference is equally suspended upon the appointment
of a management committee, rehabilitation receiver, board, or body. In the
event that the assets of the corporation, partnership, or association are finally
liquidated, however, secured and preferred credits under the applicable
provisions of the Civil Code will definitely have preference over unsecured
ones.
In other words, once a management committee, rehabilitation receiver, board
or body is appointed pursuant to P.D. 902-A, all actions for claims against a
distressed corporation pending before any court, tribunal, board or body shall
be suspended accordingly.
This suspension shall not prejudice or render ineffective the status of a
secured creditor as compared totally unsecured creditor P.D. 902-A does not
1069
state anything to this effect. What it merely provides is that all actions for SO ORDERED.
claims against the corporation, partnership or association shall be
suspended. This should give the receiver a chance to rehabilitate the Davide, Jr., C.J., Bellosillo, Puno, Vitug, Kapunan, Mendoza, Quisumbing,
corporation if there should still be a possibility of doing so. (This will be in Purisima, Pardo, Buena, Gonzaga-Reyes, Ynares-Santiago and De Leon,
consonance with Alemar's BF Homes, Araneta, and RCBC insofar as Jr., JJ., concur.
enforcing liens by preferred creditors are concerned.)
Panganiban, J., please see separate (concuring) opinion.
However, in the event that rehabilitation is no longer feasible and claims
against the distressed corporation would eventually have to be settled, the
secured creditors shall enjoy preference over the unsecured creditors (still
maintaining PCIB ruling), subject only to the provisions of the Civil Code on
Concurrence and Preferences of Credit (our ruling in State Investment
House, Inc. vs. Court of Appeals, 277 SCRA 209 [1997]).

The Majority ruling in our 1992 decision that preferred creditors of distressed
corporations shall, in a way, stand an equal footing with all other creditors,
must be read and understood in the light of the foregoing rulings. All claims of
both a secured or unsecured creditors, without distinction on this score, are
suspended once a management committee is appointed. Secured creditors,
in the meantime, shall not be allowed to assert such preference before the
Securities and Exchange Commission. It may be stressed, however, that this
shall only take effect upon the appointment of a management committee,
rehabilitation receiver, board, or body, as opined in the dissent.

In fine, the Court grants the motion for reconsideration for the cogent reason
that suspension of actions for claims commences only from the time a
management committee or receiver is appointed by the SEC. Petitioner
RCBC, therefore, could have rightfully, as it did, move for the extrajudicial
foreclosure of its mortgage on October 26, 1984 because a management
committee was not appointed by the SEC until March 18, 1985.

WHEREFORE, petitioner's motion for reconsideration is hereby GRANTED.

The decision, dated September 14, 1992 is vacated, the decision of
Intermediate Appellate Court in AC-G.R. No. SP-06313 REVERSED and
SET ASIDE, and the judgment of the Regional Trial Court National Capital
Judicial Region, Branch 140, in Civil Case No. 10042 REINSTATED.

1070

G.R. No. L-31490 January 6, 1978
REPUBLIC OF THE PHILIPPINES, petitioner-appellee,
vs.
BISAYA LAND TRANSPORTATION CO., INC., MIGUEL CUENCO,
MANUEL CUENCO, LOURDES CUENCO, JOSE P. VELEZ, JESUS P.
VELEZ and FEDERICO A. REYES (Original Respondents); and ANTONIO
V. CUENCO, CARMEN CUENCO, DIOSCORO B. LAZARO and MANUEL
V. CUENCO, JR. (New Directors of respondent corporation), respondent-
appellees. MIGUEL CUENCO, respondent-crossclaimant-appellant.
Vicente J. Francisco for respondent-crossclaimant-appellant.
Norberto J. Quisumbing & Humberto V. Quisumbing for respondents-
appellees.
Solicitor General Felix Q. Antonio, Acting Assistant Solicitor General
Dominador L. Quiroz and Solicitor Rosario A. de Leon for petitioner-
appellees.
CASTRO, C. J.:
This is an appeal from the "Resolution" of the Court of First Instance of
Manila. dated April 3, 1968, Hon. Francisco Geronimo presiding, granting the
petition of the Republic of the Philippines to (1) the for quo warranto it filed
against the respondent Bisaya Land Transportation Company, Inc., and its
Board of consisting of Miguel Cuenco, Manuel Cuenco, Jose P. Velez, Jesus
P. Velez and Federico A. Reyes, and later including the now member thereof,
Antonio V. Cuenco, Carmen Cuenco, Dioscoro B. Lazaro and Manuel V.
Cuenco, Jr., and (2) the cross-claim filed by respondent Miguel Cuenco
against his co-respondent.
The Bisaya Land Transportation Company is a corporation organized on or
about June 10, 1935 under Act No. 1459, otherwise known as the
Corporation Law, for the principal purpose of engaging in the business of
land and water transportation, having its domicile and principal place of
business in Cebu City.
The instant case came into being on March 21, 1959, when the Republic of
the Philippines, through the then Solicitor General Edilberto Barot, filed a
petition for quo warranto in the Court of First Instance of Manila, docketed as
Special Civil Case No. 39766, for the dissolution of the Bisaya Land
Transportation Company.
The petition alleges that respondent corporation, through its co-respondents
named therein, acting in their offended as officers and controlling stockholder
of the corporation, by conspiring and confabulating together and with the aid
offended their associates, agents and confederates, had violated and
continues to violate, offended and continues to offend the proceeding of the
Corporation Law and other statutes of the Philippines by having committed
and continuing to commit acts amounting to a forfeiture of the present
corporation's franchise, rights and private and, through venous means,
misused and continues to and continues to abuse, the terms of its franchise,
palpably in contravention of the law and public policy.
The acts allegedly committed by the corporation, through as corespondent,
are embodied in nine causes of action which, in substance, are as follows:
1071
FIRST CAUSE OF ACTION
To conceal its illegal transaction, respondent corporation falsely reconstituted
its articles of incorporation in July 1948 by adding new cattle ranch,
agriculture, and general merchandise;
SECOND CAUSE OF ACTION
On May 25, 1948, respondent corporation through its Board of Directors,
adopted a resolution authorizing it to acquire 1,024 hectares of public land in
Zamboanga and 10,000 hectares of timber concession in Mindanao in
violation of Section 6, Act No. 143);
THIRD CAUSE OF ACTION
In May, 1949, respondent office constituting themselves as Board of
Directors of respondent corporation, passed a resolution authorizing the
corporation to lease a pasture land of 2,000 hectares of cattle ranch on a
public land in Bayawan, Negros Occidental;
FOURTH CAUSE OF ACTION
From August 1946 to the end of 1952, respondent corporation operated a
general merchandise store, a business which is neither for, nor incidental to,
the accomplishment of its principal business for which it was organized, i.e.,
the operation of land and water transportation;
FIFTH CAUSE OF ACTION
Respondent corporation snowed Mariano Cuenco and Manuel Cuenco to act
as president in 1945 to 1948 and 1953 to 1954, respectively, when at that
time, neither of them owned a single stock;
SIXTH CAUSE OF ACTION
In violation of its charter and articles of incorporation, as well as applicable
statutes concerning its operation, it engaged in mining by organizing the Jose
P. Velez Coal Mines, and allowing said corporation to use the facilities and
assets of respondent corporation;
SEVENTH CAUSE OF ACTION
It imported and sold at black market prices to third persons truck spare Parts,
the of which were appropriated by respondent directors;
EIGHTH CAUSE OF ACTION
It paid its laborers and employees wages below the minimum wage law to
the great prejudice of its labor force, and in violation of the laws of the state,
manipulating its books and records so as to make it appear that its laborers
and employees were and have been paid their salaries and wages in
accordance with the minimum wage law;
NINTH CAUSE OF ACTION
It deliberately failed to maintain accurate and faithful stock and transfer
books since 1945 up to the filing of the petition, enabling it to defraud the
state, mislead the general public, its creditors, investors and its stockholders
by not accurately and faithfully making
a. an adequate, accurate and complete record of dividend distribution, and
b. an adequate, accurate and complete record of transfers of its stocks.
The petition for quo warranto prayed that during the pendency of the action,
a receiver be appointed by the court for the purpose of preserving the assets
of the respondent corporation pursuant to section I (a) of Rule 61 of the
Rules of Court.
1072
Under date of April 17, 1959, respondents (except Miguel Cuenco) filed a
motion to dismiss the petition for quo warranto on the grounds of lack of
cause of action, prescription, and the failure of the Solicitor General to the
court's permission as required in section 4 of Rule 66 of the Rules of Court.
The motion to dismiss was denied on June 27, 1959.
On April 25, 1959, respondent Miguel Cuenco filed his answer admitting
certain allegations and denying others, especially participation in the acts
imputed to respondent corporation which were made the basis of the quo
warranto proceedings. He alleged several other causes, namely: (1) that
stock dividends were issued to respondents Manuel Cuenco and Jose P.
Velez, without giving the same benefit to other stockholders; (2) that, thru
respondent directors, Bisaya had destroyed company payrolls, books of
accounts and other records; (3) that Bisaya Land had allowed Manuel
Cuenco to use corporate funds, facilities and stocks for his personal benefit;
and (4) that, to cover up these irregularities, said directors had manipulated
the corporate books and accounts. Moreover, he set up a cross-claim against
respondents-directors to recover from them, for the benefit of Bisaya, under
several causes of action, the aggregate sum of P4,336,701.19. Respondent
Miguel Cuenco also prayed for the appointment of a receiver without bond for
the purpose of preserving the assets of respondent corporation.
On May 6, 1959, respondents (except Miguel Cuenco) filed a motion to
dismiss Miguel Page Cuenco's cross-claim on the ground, among others,
that the claims subject of the cross-claim could not be pleaded by respondent
Miguel Cuenco since they did not arise out of the transactions or occurrences
that were the subject-matter of the original petition for quo warranto which did
not assert any claim against respondent directors or any one of them, which
would thus entitle respondent Miguel Cuenco to claim indemnity from the
others.
On September 19, 1959, the lower court deferred resolution on the cross-
claim after trial on the merits.
Under date of September 25, 1959, respondents (except Miguel Cuenco)
filed their answer, denying as well as admitting certain facts and setting up
special and affirmative defenses, and praying that judgment be rendered
dismissing the petition. Also, on October 19, 1959, respondents (except
Miguel Cuenco) filed their answer to the cross-claim.
On January 29, 1960, respondents (except Miguel Cuenco) filed a petition for
certiorari with the Supreme Court (G.R. No. L-16593, Bisaya Land
Transportation Company vs. Judge Bonifacio Isip), questioning the, orders of
the lower court dated June 27, 1959 (denying respondents' [except Miguel
Cuenco] motion to dismiss quo warranto and September 19, 1959 (deferring
resolution on the motion to dismiss Miguel Cuenco's cross-claim). However,
on February 11, 1960, the Supreme Court dismiss the petition on the ground
that the orders complained of were interlocutory.
On February 23, 1960, the lower court appointed the clerk of court as
commissioner to receive the evidence of the parties.
Thereafter, on February 28, 1962, respondent corporation filed a motion for
judgment on consent, manifesting its consent to and moving for judgment to
be rendered ordering the dissolution of respondent Bisaya Land
transportation Company, inc. and, in furtherance of that dissolution, ordering
its board of directors to proceed to the liquidation of its assets in accordance
with the provisions of the corporation law. In said motion for judgment on
consent, respondent corporation did not admit having committed any act
requiring its forcible dissolution, but alleged, as reason for the filing of said
motion, that the pendency of the petition of quo warranto had prejudiced the
corporation its business. as well as its innocent stockholders, and that its
business interests that late relief be given to the corporation and to its
thousands of stockholders; and that the majority of the board of directors and
stockholders representing more than two-thirds of its capital stock had
indicated their election to voluntarily dissolve the corporation as the most
feasible remedy to the corporation's problems brought about by the
respondent Miguel Cuenco.
The petitioner, Republic of the Philippines, filed a manifestation stating that
the motion for judgment on consent being in accordance with the petition
for quo warranto, the matter of the implementation of the dissolution of
1073
respondent corporation be submitted to the discretion of the lower court.
Respondent Miguel Cuenco, on the other hand, filed his answer agreeing to
such judgment, but urging that a receiver be appointed, and that judgment be
rendered on his cross-claim.
On May 27, 1963, respondents (except Miguel Cuenco) filed their motion to
withdraw motion for judgment on consent on the grand that the conditions to
which the motion was subject had not been accepted. Miguel Cuenco
opposed said withdrawal and pressed for the appointment of a receiver,
which was, in turn objected to by respondent corporation. The denial of the
motion to withdraw was questioned by respondent corporation in a petition
for prohibition filed with the Supreme Court, docketed as G.R. No. L-22097,
which was, however, dismiss by this Court.
Several incidents followed thereafter which, for purposes of the disposition of
the present case, need not be set forth herein.
The motion to withdraw judgment on consent was, on December 3, 1963,
denied by the lower court which, however, granted receivership. From this
order, respondent corporation filed a petition for certiorari with the Court of
Appeals (CA-G.R. No. 33266-R), which issued an ex-parte writ of preliminary
injunction enjoining the lower court from enforcing its order of December 3,
1963. On January 29, 1968, the Supreme Court in G.R. No. L-23012
annulment all the proceedings in the Court of Appeals in CA-G.R. No. 33266-
R, on the ground that the latter court had no jurisdiction over said case.
On October 20, 1966, the then Solicitor General Barredo (now Supreme
Court Justice) filed a motion for dismissal of the quo warranto proceedings,
to which motion respondent Miguel Cuenco riled his opposition on December
3, 1966. On April 3, 1968, the court a quo issued a resolution granting
petitioner's motion for the dismissal of the action for quo warranto, and
dismissing respondent Miguel Cuenco's cross-claim. Respondent and cross-
claimant Miguel Cuenco has appealed to this Court to question this
resolution.
Six errors are imputed by appellant Miguel Cuenco to the lower court in
issuing its resolution of April 3, 1968, namely:
I
THE LOWER COURT ERRED IN NOT ORDERING ENTRY OF JUDGMENT
DISSOLVING RESPONDENT-APPELLEE CORPORATION ON THE
STRENGTH OF IT'S OWN MOTION CONSENTING TO AND PRAYING FOR
SUCH JUDGMENT, DESPITE APPELLANT MIGUEL CUENCO'S
INSISTENT PLEA FOR ACTION ON THE SAID MOTION.
II
THE LOWER COURT ERRED IN FAILING TO CONSIDER THAT
RESPONDENT-APPELLEE CORPORATION'S MOTION FOR JUDGMENT
OF DISSOLUTION WAS A CONFESSION OF JUDGMENT OR, AT ANY
RATE, THAT THE ENTRY OF SUCH JUDGMENT HAD BEEN FORMALLY
AGREED TO BY THE SOLICITOR GENERAL AS WELL AS APPELLANT
MIGUEL CUENCO.
III
THE LOWER COURT ERRED IN HOLDING THAT THE EVIDENCE SO FAR
ADDUCED BY PETITIONER WAS INSUFFICIENT TO DISSOLVE THE
CORPORATION, AND IN NOT HOLDING INSTEAD THAT THE SAID
EVIDENCE HAS MORE THAN SUFFICIENTLY ESTABLISHED FACTS
CONSTITUTING PRACTICALLY ALL THE GROUNDS FOR QUO
WARRANT AGAINST A CORPORATION AND SHOWING THAT
RESPONDENT-APPELLEE CORPORATION WAS AND IS BEING
OPERATED VIRTUALLY AS A CRIME SYNDICATE AND, HENCE, MUST
BE ORDERED DISSOLVED.
IV
THE LOWER COURT ERRED IN HOLDING THAT THE SOLICITOR
GENERAL WAS VESTED WITH ABSOLUTE AND UNLIMITED POWER TO
1074
DISCONTINUE THE STATE'S LITIGATION AND ACCORDINGLY TO HAVE
THE QUO WARRANT PETITION DISMISSED, IF AND WHEN IN HIS
OPINION THIS SHOULD BE DONE, AND IN NOT HOLDING INSTEAD
THAT THE SOLICITOR GENERALS MOTION FOR DISMISSAL OF THE
PETITION IS DEVOID OF ANY MERIT, AND INDEED MUST BE DENIED.
V corporation conditioned its motion in that its liquidation shall be effected by its
THE LOWER COURT ERRED IN HOLDING THAT THE CROSS-CLAIM
FILED BY APPELLANT MIGUEL CUENCO AGAINST HIS CO-
RESPONDENTS DOES NOT PRECLUDE THE DISMISSAL OF THE
PETITION WITHOUT HIS CONSENT AND IN NOT HOLDING INSTEAD
THAT BY REASON OF THE SAID CROSS-CLAIM, THE SOLICITOR
GENERAL COULD NOT MOVE FOR THE DISMISSAL OF THE PETITION
OVER APPELLANT MIGUEL CUENCO'S OBJECTION.
VI
THE LOWER COURT ERRED IN DISMISSING THE CROSS-CLAIM.
Appellant argues, on his first and second assignments of error, that the lower
court should have rendered judgment dissolving appellee corporation on the
strength of its own motion consenting to and praying for its dissolution, as
such Motion amounted to a confession of judgment, besides the fact that it
had been formally agreed to by the Solicitor General as well as by appellant
Miguel Cuenco. The claim is without merit. As pointed out in the brief for
Petitioner-appellee Republic of the Philippines, a motion for judgment on
consent is not to be equated with a judgment by confession. The former is
one the provisions and terms of which are settled and a agreed upon by the
parties to the action, and which is entered in the record by the consent and
sanction of the court, Hence, there must be an unqualified agreement among
the parties to be bound by the judgment on consent before said judgment
may be entered. The court does not have the Power to supply terms,
provisions, or essential details not previously agreed to by the parties (49
C.J.S. 308). On the other hand, a judgment by confession is not a Plea but
an affirmative and voluntary act of the defendant himself, Here, the court
exercises a certain amount of supervision over the entry of judgment, as well
as equitable jurisdiction over their subsequent status (Ibid., pp. 268-269).
The records would show that there was no meeting of the minds among the
parties hereto with respect to the motion for judgment on consent filed by
appellee corporation and agreed to by petitioner appellee. Whereas, appellee
Board of Directors, appellant Miguel Cuenco would agree to such liquidation
only if his cross-claim was first summarily adjudged and a receiver appointed
by the court to effect said liquidation. On the other hand, the petitioner-
appellee would have the matter regarding the implementation of the
dissolution of appellee corporation submitted to the discretion of the lower
court. And, before the parties could come to an unqualified agreement as to
the judgment requested to be entered by appellee corporation, the latter
decided to withdraw its motion for judgment on consent. Clearly therefore, in
view of the non-agreement of the parties as to the terms, and considering the
nature of a judgment by consent as explained above, it can not be said that
the lower court erred in not rendering judgment dissolving respondent
corporation on the basis of the motion for judgment by consent filed by
appellee corporation.
On the third assignment of error, appellant Miguel Cuenco would attribute
error to the court a quo in not holding that the evidence which petitioner had
presented in the hearings established facts constituting practically all the
grounds for quo warranto against a corporation.
It will be recalled that at the before the Clerk of Court who was appointed
commissioner to remove the evidence of the petitioner, the latter had
presented three wit , namely, Juan P. Mata, Clemente Vasquez and Silverio
Mata, and several exhibits which were Identified by said witnesses. After a
very careful and deliberate consideration of the evidence adduced by
petitioner, the lower court came to the conclusion that the same did not really
warrant a quo warranto by the State that could truly justify to decapitate
corporate life, and that the corporate acts or missions complained of had not
resulted in substantial injury to the public, nor were they wilful and clearly
obdurate. The court found that the several acts of misuse and misapplication
of the funds and/or assets of the Bisaya Land Transportation Co., Inc. were
1075
committed new particularly by the respondent Dr. Manuel Cuenco with the
cooperation of Jose P. Velez, for the commission of which they may be
personally held liable. There appears to be no reason for us to disregard the
findings of the trial court, which, applying well settled doctrines, ought to be
given due weight and credit (De la Rama vs. Ma-ao Sugar Central, L-17504
& L-17506, Feb. 28, 1969). Besides, the court a quo found that the
controversy between the parties was more personal than anything else and
did not at all affect public interest. Thus, the Court held:
A careful perusal of the above-quoted letters patently reveals
that rather than public interest the personal interests of both
Dr. Manuel Cuenco and Mr. Miguel Cuenco are principally
involved in this controversy. The allegations, therefore, of
Solicitor Barredo in his motion for dismissal of action filed on
October 20, 1966
xxx xxx xxx
6. That in a large sense, this case involves
personal controversies among the Cuenco's,
and their relatives, by consanguinity and
affinity, involving their respective interests as
stockholders in the Bisaya Land
Transportation Company, Inc., more than
anything else;
7. That, such private controversies can be
ventilated in appropriate stockholders' suits
which do not have to occupy the time and
attention of government officials which can
be better devoted to matters of more direct
public interest.
are well founded.
After a very careful and conscientious study of the records of
this case, this court is not prepared to say that sufficient
competent evidence has been adduced to impeach the
motive of Solicitor General Barredo in filing his motion for
dismissal, since honesty rather than dishonesty, good faith
rather than bad faith should always be presumed in the
absence of clear contrary evidence. The Solicitor General
explained that after having been briefed on the evidence by
Solicitor Rosete before the negotiation of an amicable
settlement between the parties involved in this case started,
he had already in mind asking for the dismissal of the quo
warranto proceeding for he believed in all sincerity that the
evidence so far presented did not justify the dissolution of
the corporation through a quo warranto proceeding. He
admitted that even after he had filed the motion for dismissal
he continued the negotiation for the settlement of the case,
but he explained that it was because of the request of the
respondent and cross-claimant Miguel Cuenco and his wife
that he continue to use his good offices to effect an amicable
settlement between the parties.
The Solicitor General himself asserts that the only purpose of his ration for
the of this quo warranto is to take the State out of an unnecessary court
litigation, so that the dismissal of the case would result in the disposition
solely of the quo warranto by and between petitioner Republic of the
Philippines and the respondents named therein. Other interested parties who
might feel aggrieved, therefore, would not be without their remedies since
they can still maintain whatever claims they may have against each other. It
has been held that relief by dissolution will be awarded only where no other
adequate remedy is available, and is not available where the rights of the
stockholders can be, or are, protected in some other way (16 Fletcher Cyc.
Corporations, 1942 Ed., pp. 812-813, citing "Thwing vs. McDonald", 134
Minn. 148,156 N.W. 780,158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E
420; Mitchell vs. Bank of St. Paul, 7 Minn. 252, cited in De la Rama vs. Ma-
ao Sugar Central, supra). The third assignment of error, therefore, should be
disregarded.
1076
The pivotal question in this case is case in the fourth assignment of error, i.e.,
whether or not the lower court erred in holding that the Solicitor General was
vested with full power to manage and control the State's litigation, which
includes the power to continue such litigation, if and when in his opinion this
should be done.
Appellant would maintain the negative of the above proposition, giving three
main reasons therefor, namely:
1. The evidence so far adduced was in fact sufficient to dissolve the
respondent corporation;
2. There was a pending motion of respondents for judgment on consent, by
virtue of which instead of dismissal of the petition, the corporation should be
considered dissolved;
3. A cross-claim has been interposed by Miguel Cuenco which precluded the
dismissal of the petition for quo warranto.
It will be noted that the first two reasons, given in support of the fourth
assigned error, have already been discussed in connection with appellant's
first three assignments of error, and shown to be unworthy of serious
consideration. We shall dwell on the third reason in our discussion of the fifth
assignment of error.
Meeting squarely the issue of whether or not the Solicitor General is vested
with absolute and unlimited power to discontinue the State's litigation and,
accordingly, to have the quo warranto petition dismissed, if and when in his
opinion this should be done, the general rule seems to be that the plaintiff
may do so with the approval of the court, subject to be defined exceptions
(such as, for example, where the answer sets up a counterclaim which
cannot stand independently of the main action).
The right of the plaintiff to dismiss an action with the consent
of the court is universally recognized with certain well-
defined exceptions. If the plaintiff discovers that the action
which he commenced was brought for purposes of enforcing
a right or a benefit, the advisability or necessity of which he
later discovers no longer exists, or that the result of the
action would be different from what he had intended, then he
should be permitted to withdraw his action, subject to the
approval of the court. The plaintiff should not be required to
continue the action, subject to some well-defined exceptions,
when it is not to his advantage so to do. Litigation should be
discouraged and not encouraged. Courts should not with
require parties to litigate when they no longer desire so to
do. Courts, in granting permission to dismiss an action, of
course, should always take into consideration the effect
which said dismissal would have upon the rights of the
defendant.
... in the case of a municipality, where the agents of the
public are spending public money, we are of the opinion that
such agent should not be required to continue an action
when (a) it clearly appears that there is no longer a necessity
therefor, or (b) when it clearly appears that to continue the
action, the result would be prejudicial to the interests of the
public. We think that this conclusion is more in harmony with
the rational conduct of public affairs than the opposite rule.
(City of Manila vs. Ruymann, 37 Phil. 421, 424-425, 427,
cited in Metropolitan Water District vs. De los Angeles, 55
Phil. 776, 790.)
American authorities likewise uphold the power and authority of the state
attorney to control and manage all litigation in behalf of the State, which
power involves the power to discontinue the same if and when, in his opinion,
this should be done. (7 Am. Jur. 2d 18- 19).
Thus, in State vs. Finch, 280 Pac. Rep. 910, 912, 915, the Attorney General
moved to dismiss a liquor prosecution brought against one of the defendants
by the county attorney, which motion was overruled. On appeal, the Kansas
Supreme Court held:
1077
And, as a rule, the attorney-general has power, both under
the common law and by statute, to make any disposition of
the state's litigation that the deems for its best interest; for
instance, he may abandon, discontinue, dismiss, or
compromise it. But he cannot enter into any agreement with
respect to the conduct of litigation which will bind his
successor in office, nor can he empower any other person to
do so. ... The attorney-general may dismiss any suit or
proceeding, prosecuted solely in the public interest,
regardless of the relator's wishes. ... Where the attorney-
general is empowered, either generally or specifically, to
conduct a criminal prosecution, he may do any act which the
prosecuting attorney might do in the premises; that is, he
can do each and every thing essential to prosecute in
accordance e with the law of the land, and this includes
appearing in proceedings before the grand jury. So an
attorney-general, even at common law. had the right to enter
a nolle prosequi; although he could not do so during the trial
without leave of court.
xxx xxx xxx
... At common law the duties of the attorney-general, as chief
law officer of the realm, were very numerous and varied. He
was the chief legal adviser of the crown, and was instructed
with the management of all legal affairs and the prosecution
of all suits, civil and criminal, in which the crown was
interested. He alone could discontinue a criminal prosecution
by entering a nolle prosequi; therein. ... It is generally
acknowledged that the attorney-general is the proper party
to determine the necessity and advisability of undertaking or
prosecuting actions on the part of the state. Thus it has
been' held that the discretion of the attorney-general in
determining what the public interests require as to bringing
an action against a domestic business corporation or its
officers is absolute, and cannot be made the subject of
inquiry by the courts.
xxx xxx xxx
... The power effectively to control a prosecution involves the
power to discontinue if, and when, in the opinion of the
prosecutor in charge, this should be done. We are of the
opinion the trial court should have sustained the Attorney-
General's motion to dismiss in the instant case.
In a much later case, State vs. City of Kansas, 350 P2d 37, the authority of
the Attorney-General to dismiss any time before submission, a quo
warranto proceeding commenced by the State on the relation of the county
attorney questioning certain ordinances of the city of Kansas making part of
the city a portion of the Fairfax industrial district, was declared by the Kansas
Supreme court to be absolute, and a duty that could not be questioned,
notwithstanding 18 months had passed subsequent to the commencement of
the action and after the commissioner had fixed the date the hearing was to
begin. Said the court:
Applying the above reasoning to our present case we
conclude the attorney general by his motion to intervene and
supersede the county attorney exercised his powers and
duties under the constitution and appropriate statutes; this
was as far as he could go as an executive officer and as an
attorney and officer of this court. Since he is an officer of the
judicial branch, under the separation of powers of the three
branches of government, he was limited and restricted in his
conduct before this court by the code of professional ethics
to the same extent any other lawyer would be. If, therefore,
the attorney-general considered the action unmeritorious, he
not only had the authority but he also had a duty to move for
dismissal. ...
xxx xxx xxx
Any plaintiff has an absolute right to dismiss his action any
time before submission. (G.S. 1949, 603105; Bavuso vs.
1078
 Angwin, 166 Kan. 469, 201 P. 2d 1057) and in Kinsch vs.
Missouri Kansas-Texas Railroad Co., 183 Kan. 224, 326 P.
2d 327, when plaintiff moved to dismiss before final
submission, this court held the trial court committed
reversible error in overruling such motion.
xxx xxx xxx
... As previously stated, the attorney-general, plaintiff herein,
had an absolute right to dismiss this action and the
allegations in Quindaro's pleadings must fall because they
clearly show that Quindaro, one municipality, is questioning
the organization, or reorganization, of the city, another
municipality, and this can be done only by the estate through
its proper officers.
Well might the State vs. city of Kansas case, supra, be applied to the present
case, since in our jurisdiction it is the Solicitor General Who must commence
the action involved herein (Rule 66, Sec. 3) and he, therefore, also has,
before submission, the right to terminate of the same where he deems it best
for the interest of the State. (See also: Lyle vs. Luna, 338 P2d 1060, 1065)
In his fifth assignment of error, appellant Miguel Cuenco claims that the lower
court erred in holding that the cross-claim filed by him did not proceeding the
dismissal of the petition without his consent, and in not holding that by
reason of the said cross-claim, the Solicitor General could not move for the
dismissal of the petition over appellant Miguel Cuenco's objection. Citing the
proceeding of 2 and 4 of Rule 17 of the Rules of Court, appellant opines that
since his cross-claim cannot remain pending for independent adjudication, it
being allegedly interwoven with the petition for quo warranto, the lower court
should not have dismissed said petition.
The position taken by appellant Miguel Cuenco is legally untenable. The
Provision of Section 2 of Rule 17, invoked by him in support of his stand, is
inapplicable. It governs dismissal of an action by order of the court,
prohibiting such dismissal against defendants objection where
a counterclaim which cannot remain pending for respondent adjudication by
the court has been pleaded by a defendant prior to the service upon him of
plaintiffs motion to dismiss. It advisedly omits reference to a cross-claim as a
factor to be considered by the court in determining whether, considering the
circumstances set forth therein, an action should be dismissed. The reason
could be that the framers of the rules realized that the policy against
dismissal of an action behind the provision involved, while applicable to a
counterclaim, is not so with respect to a cross-claim, expense in preparing for
his defense, only to see the case dismissed without prejudice at the instance
of plaintiff, thereby putting the defendant "to expense literally for nothing."
(Francisco, Revised Rules of Court, Vol. I, p. 980, citing McCann vs. Bently
Stores Corp., 34 F. Supp. 234, 3 Fed. Rules of service 41a., Case 3 [W.D.
Mo. 1940]). On the other hand, the dismissal of the main action would only
benefit the cross-claim and not result in any prejudice or disadvantage to
him.
Neither do the provisions of Section 4 of Rule 17 help the position taken by
appellant Miguel Cuenco. For although this section makes the provisions of
Rule 17 also applicable to the dismissal of a claim, what it actually
contemplates is the allowance or allowance of a motion to dismiss a cross-
claim as an "independent" action against which a counterclaim has been
interposed. It does not intend to prohibit the dismissal of an action just
because a cross-claim which cannot be the subject to independent
adjudication, has been pleaded. Section 4, Rule 17, should taken in
correlation with Section 2 of the same Rule which would have included also
"cross-claim," instead of merely mentioning "counterclaim, as a bar to the
dismissal of an action where the same cannot remain pending for
independent adjudication, if it had really been its intention to do so.
A cross-claim is allowed to be interposed by a party against a co-party to
enable the former to recover from the latter whatever he might be made
liable to pay to the plaintiff. Considering then the nature of a cross-claim, we
fail to grasp the logic in appellant Miguel Cuenco's objection to the dismissal
of the main action the quo warrantoproceedings. The withdrawal or
dismissal of said action would effectively prevent him from suffering any
prejudice exonerate him from any liability, to evade or mitigate rules grant
him the right to file a cross-claim dismissal of the main action would not wipe
1079
out hi cross-claim, since, if minded to do he may subsequently bring the
corresponding action based thereon (Watts vs. Watts, 15 S.W. 2d 998;
Severance vs. Heyl and Patterson, 174 A. 789).

In view of our conclusion that the court a quo committed no error in

dismissing the quo warranto proceedings, it also stands to reason that it
acted correctly in dismissing appellant Miguel Cuenco's cross- claim. A
cross-claim is proper only where the cross-claimant stands to be prejudiced
by the filing of an action against him. Hence, where such action has been
dismissed, his cross-claim would have no leg to stand on (Sm. 7, Rule 6, 4
Moore's Federal Practice Under the New Rules p. 693). This disposes of
the sixth assignment of error.

ACCORDINGLY, without prejudice to the rights of the private parties herein to

take proper steps to enforce whatever causes of action they may have
against each other, the order of the lower court embodied in its "Resolution"
dated April 3, 1968, granting the Solicitor General's motion to dismiss
the quo warranto proceedings and dismissing appellant Miguel Cuenco's
cross-claim, is hereby upheld; the receivership on the respondent
corporation's property and assets is hereby ordered terminated, effective
upon the lapse of thirty (30) days from the date of promulgation of this
decision; and the receiver is directed to render, within three (3) months from
the finality of this decision, a full and complete accounting to the Board of
Directors of the respondent corporation. No costs.

Muoz Palma, Martin, Fernandez and Guerrero, JJ., concur.

Makasiar, J., took no part.

G.R. No. L-11789 April 2, 1918

1080
THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellant,
vs.
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO.
(LTD.) defendant-appellant.
Acting Attorney-General Paredes for plaintiff.
Gilbert, Cohn & Fisher and L. M. Southworth for defendant.
JOHNSON, J.:
This is an action in the nature of quo warranto. It was brought by the
Attorney-General for and on the behalf of the Government of the Philippine
Islands for the purpose of having the charter of the defendant corporation
declared forfeited. The complaint alleged that the defendant was a
corporation duly organized under the laws of the Philippine Islands; that for a
period of eighteen months previous to the filing of the complaint (Nov. 21,
1914), it had continuously offended against the laws of the Philippine Islands
and had misused its corporate authority, franchises, and privileges and had
assumed privileges and franchises not granted; that it had engaged in the
business of buying and selling real estate; that on the 31st of May, 1913, it
entered into a contract with the Tayabas Land Company for the purpose of
engaging in the business of purchasing lands along the right of way of the
Manila Railroad Company through the Province of Tayabas with a view to
reselling the same to the Manila Railroad Company at a profit. A copy of the
contract was made part of the complaint. The plaintiff alleged, that by the
acts and omissions of the defendant, it had forfeited its corporate rights,
privileges, powers, and franchises, dissolving it as a corporation, and to grant
such other and further relief as might seem just and equitable to the court,
and for costs.
The defendant appeared on January 18, 1915, and demurred to the
complaint upon the ground that it failed to state a cause of action. On April
28, 1915, the court overruled said demurrer and the defendant duly
excepted. On May 5, 1915, the defendant answered the complaint. The
defendant admitted the first paragraph of the complaint and denied generally
the allegations of the second and third paragraphs with the exception that it
admitted having entered into the contract set out in paragraph III and alleged
that The Tayabas Land Company was an ordinary partnership and not a
corporation as alleged in paragraph III. The allegations of paragraph IV were
denied generally. The defendant prayed that the complaint be dismissed with
costs.
On August 24, 1915, the parties filed a stipulation of facts which appears at
page 16 of bill of exceptions. By said stipulation it was agreed that the
defendant was a corporation duly organized; that The Tayabas Land
Company was a partnership; that a contract was entered into between the
defendant and The Tayabas Land Company by virtue of which the defendant
delivered to the said The Tayabas Land Company P304,459.42 which the
plaintiff contended amounted to a contribution by the defendant to the capital
of The Tayabas Land Company but which the defendant contended
amounted to a loan to said concern; that the money thus received was
devoted to the purchase of the real estate in the Province of Tayabas along
the proposed right of way of the Manila Railroad Company in that province;
that the purpose of these purchases was for resale to the Manila Railroad
Company or any other person offering an acceptable price. Attached to this
stipulation are three exhibits which are (a) copies of the charter of the
defendant; (b) the partnership agreement of The Tayabas Land Company;
and (c) the contract entered into between the defendant and The Tayabas
Land Company. On October 14, 1915, it was further stipulated and agreed
that all of the deeds of land executed to The Tayabas Land Company, which
had been in the possession of the defendant, had been delivered to the
Board of Public Utility Commissioners in obedience to a subpoena
duces tecum.
On February 21, 1916, the court rendered judgment ordering the defendant
to abstain in the future from engaging in the business of buying and selling
lands and to pay the costs of the action. Both parties excepted to this
judgment and moved for a new trial which was denied by the court. They
appealed and filed one bill of exceptions.
The lower court reduced the issue in this case to two queries: (1) Did the
defendant engage in the business of buying and selling land or was this
transaction merely a loan to a partnership, which was engaged in the
1081
business of buying and selling land? (2) Assuming that the defendant was
engaged in the business of buying and selling land, does the law require that
it be dissolved or is the prohibition of future acts of this nature sufficient?
The decision upon the demurrer was to the effect that the contract entered
into between the defendant and The Tayabas Land Company constituted an
agreement to enter into a partnership. After studying the proof and the
evidence the court decided that the contract was not one of partnership but
was a contract of cuentas en participacion. The court found that the
defendant had interested itself in The Tayabas Land Company to such an
extent that it was in effect carrying on the business of buying and selling
land. The court found that the law did not require that the charter of the
defendant be forfeited and it further found that the Government could not be
benefited by such forfeiture. The court ordered the defendant to abstain from
the further prosecution of this class of business.
Certain facts are important in order to make clear the argument of the
appellants.
First. The defendant corporation by its charter was authorized, among other
things:
( j) To buy shares of the Compaia de Navegacion, Ferrocarriles,
Diques, y Almacenes de Depositos, and, in this manner or otherwise,
to engage in any mercantile or industrial enterprise.
(k) With no other restrictions than those provided by law, place funds
of the corporation in hypothecary or pignorative loans, in public
securities of the United States, in stocks or shares issued by firms,
corporations, or companies that are legally organized and operated,
and in rural and urban property. It may also contract and guarantee
all kinds of obligations, in conformity with existing laws. (Bill of
Exceptions, p.21)
Second. These powers are necessarily limited by section 75 of the Act of
Congress of July 1, 1902, and by the section 13 Act of 1459, the latter being
a reproduction of the former, which is as follows:
That no corporation shall be authorized to conduct the business of
buying and selling real estate or be permitted to hold or own real
estate except such as may be reasonably necessary to enable it to
carry out the purposes for which it is created, . . . . Corporations,
however, may loan funds upon real estate, security, and purchase
real estate when necessary for the collection of loans, but they shall
dispose of real estate so obtained within five years after receiving the
title . . . .
Third. The provisions of the contract between the defendant and The
Tayabas Land Company which are pertinent to this case are as follows:
First. That the Philippine Sugar Estates Development Co., (Ltd.)
which hereinafter shall be denominated "The Philippine Sugar," shall
take part in the business which The Tayabas Land Company has
established, and, for this purpose, brings in the sum of four hundred
thousand pesos (P400,000), Philippine currency, which it places at
the disposal of the latter concern, through the opening of a credit for
said amount, of which credit The Tayabas Land Company may
dispose in accordance with the requirements of the business it at
present conducts or in the future may conduct.
Second. That The Tayabas Land Company agrees that the Philippine
Sugar take part in the business of the former, in the amount and
manner stated in the preceding clause.
Third. That the allotments by The Philippine Sugar, up to the amount
of the four thousand pesos above specified, shall be the following 1.
(P100,000 already received. 2. (P30,000 already received). 3. Two
hundred and seventy thousand pesos (P270,000) which The
Philippine Sugar shall deliver from time to time in accordance with
the needs of the business of The Tayabas Land Company.
1082
Fourth. . . .
Fifth. The Philippine Sugar shall have a share of twenty-five per cent
(25% per cent) of the net profits derived from any and all the
business of The Tayabas Land Company . The Tayabas Land
Company shall keep its accounts in proper manner, and shall exhibit
to the Philippine Sugar all books, balances, and accounts such as
the latter company may require to be shown in order to have
complete proof of the correctness of any and all the proper
settlements.
Sixth. The general, actual, and necessary expenses which The
Tayabas Land Company may have to defray in the transaction of its
business, shall be paid by it and by The Philippine Sugar in the same
proportion as they each share in the profits in accordance with the
preceding clause. Exception is made of the loss referred to in the
fourth clause of this contract, which as therein set forth, shall be
borne solely by The Tayabas Land Company.
Seventh. All lands bought or which may be bought with the credit,
which The Philippine Sugar brings to The Tayabas Land Company
and which lie within and without the railway line from Pagbilao to
Lopez, shall be held as security for such credit, at their respective
cost price, until their alienation, except the part thereof which
pertains to D. Mariano Lim in The Tayabas Land Company.
Eighth. When The Tayabas Land Company is to sell lands and
improvements at a price lower than P0.50 per meter, it shall first
obtain the consent of The Philippine Sugar Estates Development Co.
(Ltd.) Such consent, however, shall not be necessary when the price
is more than that fixed above.
Ninth. The Philippine Sugar shall be the treasurer and depository of
the aforementioned credit, shall make all disbursements against it as
required from time to time, and shall receive all sums derived from
the sale of the lands. The deeds of purchase of the said lands shall
be filed in its office.
Tenth. The proceeds from the first sales of lands and improvements
of the line from Pagbilao to Lopez shall be integrity set aside for the
total amortization of the capital.
Eleventh. The Tayabas Land Company binds itself to make use the
credit in its entirety. (Bill of Exceptions, p. 41.)
Fourth. The foregoing contract was made in pursuance of a meeting
of the board of directors of the defendant corporation held on May
30, 1913. The minutes, after stating the history of the relations
between the defendant and The Tayabas Land Company, set out the
following authorization:
In view of the foregoing facts and considerations, unanimously
recognized, and for the stability of the business, the board resolved
by a majority vote: 1. To grant to The Tayabas Land Company the
credit applied for, amounting to four hundred thousand (P400,000)
pesos, the one hundred thousand (P100,000) pesos of the original
loan being included in this sum; 2. To change the form of the
mortgage, in view of the impossibility of the borrowers to find
sufficient and substantial securities wherewith to cover said new
credit under the new form of contract, the bases and conditions
thereof being follows:
CREDIT WITH SECURITY AND IN CO-PARTNERSHIP.
Credit which The Philippine Sugar . . . opens in favor of The Tayabas
Land Co. up to P400,000. . . .
1083
 With security because all the lands bought with funds from said
credit are held as security. . . .
And in co-partnership because the loan applied for shares in the
gross profits to the extent of 25 per cent, instead of interest, as being
enormously more advantageous. . . .
CONDITIONS.
1. Share of 25 per cent in the profits.
2. Reimbursement of all loses which The Philippine Sugar may suffer
in the realization of its securities.
3. Charge against The Tayabas Land Company for all the general
expenses, enumerated under letter "i", and other especial expenses
of whatever kind which it may incur. This condition is inserted in view
of the disproportional share of the capital employed in the business,
and as a compensation . . .
4. To revert this 25 per cent share to the present liabilities of The
Tayabas Land Company. . . .
5. Settlement of the interest, at 12 per cent of the first loan. . . .
6. All the lands bought or which may be bought with funds from that
credit, within and without line from Pagbilao to Lopez, shall be held
as security, except the share which Mr. Lim has in The Tayabas Land
Company.
7. The Philippine Sugar shall give its approval; ... to the sale of lands
to the Railroad Company, whether there settlement or litigation,
whether such sale be made by compromise, or whether suit must be
brought. . . .
8. The Philippine Sugar shall be the depositary-treasurer of said
credit, and shall deliver the sums needed from time to time and, in
exchange for the deposit in its office, of the deeds of purchase of the
lands.
9. The proceeds from the first and successive sales shall be devoted
to the total amortization of the capital . . .
10. The Tayabas Land Company, binds itself to make use of this loan
in its entirety, or, in a contrary case, it shall be obliged to reimburse
the totality of the loss corresponding to the three hundred thousand
(P300,000) pesos which The Philippine Sugar bind itself to place in
the market, . . .
The purchase price agreed upon with the manager of The Tayabas
Land Company is at the rate of 95 percent . . . . (Record pp. 105-
108.)
Said sum of money was turned over to The Tayabas Land Company and land
was purchased by it. It must be presumed that the relation between the
defendant corporation and The Tayabas Land Company was governed by the
contract which has been quoted above.
There are a number of features of this contract which should be noted. (1)
there was no period fixed in the contract for the repayment of the money,
except that the first returns from the sale of the land was to be devoted to the
payment of the capital. There was no date fixed for this payment. (2) The
entire amount of the "credit" was not to be turned over at once but was to be
used by The Tayabas Land Company as it was needed. (3) The return on the
capital was not by a fixed rate of interest but 25 per cent of the profits earned
by The Tayabas Land Company in "todos los negocios" was to be paid to the
defendant. (4) The defendant corporation agreed to pay 25 per cent of "los
gastos generales, reales y necesarios que The Tayabas Land Company
tenga que efectuar para el desenvolvimiento de los asuntos" (all general
expenditures true and necessary that The Tayabas Land Company must
make for the development of its business.) (Articulo sexto of the contract.) (5)
1084
The consent of the defendant was necessary when The Tayabas Land
Company desired to sell the land at a price under P0.50 per square meter
but was not required if the selling price was over that amount. (6) The
defendant acted as the treasurer of the enterprise. It paid out the money as it
was needed for the purchase of land and received the proceeds of the sale
of land as well as acting as the depositary of the deeds, covering the land.
The lower court found that the contract entered into was that of "cuentas en
participacion" and that the proper judgment was an order prohibiting a
continuance of this relationship.
The defendant-appellant contends that the contract was within its powers;
that the contract was in reality merely a loan. It is argued that the board of
directors did not authorize Suarez to enter into a partnership agreement or a
"cuentas en participacion" but only to negotiate a loan and 25 per cent of the
profits to be paid in lieu of interest. Any contract which is not authorized by
the board of directors (meeting of May 30, 1913) would, it is argued, be ultra
vires on the part of the officer executing it and would not bind the corporation.
A comparison of the contract actually entered into with the minutes of the
board of directors will show that they are practically identical.
Clause decima of the "condiciones" in the minutes of the board of directors is
explained as follows: The Philippine Sugar Estates Development Co., in
order to raise part of the capital which they loaned to The Tayabas Land
Company sold P300,000 worth of Japanese bonds. The loss occasioned by
this sale was to be paid by The Tayabas Land Company as provided in the
4th section of the contract. (See pp. 14-15, Bill of Exceptions.)
It is difficult to understand how this contract can be considered a loan. There
was no date fixed for the return of the money and there was no fixed return to
be made for the use of the money. The return was dependent solely upon the
profits of the business. It is possible for the defendant to receive a return
from the business even after all of the "capital" has been returned. The
"capital" was to be returned as soon as the land was sold and apparently,
from clause "decima," there were to be no profits until this "capital" was
returned. The defendant was not to receive anything for the use of said sum
until after the capital had been fully repaid, which is not consistent with the
idea of a loan. It is not impossible to provide that the capital be repaid first
but the usual method is to pay the interest first. In the present instance after
sufficient land had been sold to repay the capital the remaining land unsold
represented the profit between the defendant and The Tayabas Land
Company in the proportion of 25 to 75. The remaining land, under the
agreement, must be sold at a profit and the result must be therefore a profit
upon the profit. The remaining land was not necessary to guarantee the
repayment of the original loan because the original loan had already been
paid. Under the contract, even though the 25 per cent of the profit were
turned over to the defendant, if The Tayabas Land Company reinvested its
share of the profits and continued the business, the defendant would still be
entitled to a profit on that investment. The contract provides that the
defendant shall be entitled to 25 percent upon "todos los negocios" of The
Tayabas Land Company.
After the capital is returned the land remaining, if any, is profit. It can be
nothing else and belongs to both parties in the proportion of 25 to 75. The
defendant at least has an equitable interest in the land itself; it has in fact
an equitable title to 25 percent of all the remaining land. If these lands were
to be registered, the defendant could demand that its interest be noted to be
register. This being so, can it be denied that the defendant is, at least
indirectly, conducting the business of buying and selling real estate? When
an individual or a corporation becomes the owner of land by purchase he or it
must be a purchaser. The defendant-appellant argues that it never secured
and title to any of the real estate purchased and therefore it could not sell it.
Does not an equitable title in the real estate come at least within the spirit of
the prohibition?
The lower court found that the relation between the defendant and The
Tayabas Land Company was that of "cuentas en participacion." Whether the
relation between the defendant and The Tayabas Land Company was that of
a co-partnership or one of "cuentas en participacion" is of little importance if
under such relation the defendant, as a party to such relation actually
engaged in the business of "holding and owing" real estate which was
"unnecessary to carry out the purposes for which it was created."
The plaintiff has appealed upon the ground that the lower court erred in not
declaring that the defendant has forfeited its charter. Section 198 of Act No.
1085
190 provides that an action may be maintained by the Government against
the corporation: (a) when it has offended against the provision of an act for
its creation or renewal or any act altering or amending such act; (b) when it
has forfeited its privileges and franchise by nonuser; (c) when it has
committed or omitted an act which amounts to a surrender of its corporate
rights, privileges, or franchises; (d) when it misused a franchise, privilege, or
right conferred upon it by law, or when it has exercised a franchise, privilege,
or right in contravention of law.
Section 212 of Act No. 190 provides a judgment which may be rendered in
said case:
When in any such action, it is found and adjudged that the
corporation has, by any act done or omitted surrendered, or forfeited
its corporate rights, privileges, and franchise, or has not used the
same during the term of five years, judgment shall be entered that it
be ousted and excluded therefrom and that it be dissolved; but when
it is found and adjudged that a corporation has offended in any
matter or manner which does not by law work as a surrender or
forfeiture, or has misused a franchise or exercised a power not
conferred by law, but not of such a character as to work a surrender
or forfeiture of its franchise, judgment shall be rendered that it be
ousted from the continuance of such offense or the exercise of such
power.
It will be seen that said section (212) gives the court a wide discretion in its
judgment in depriving corporations of their franchise. High, in his work on
Extraordinary Legal Remedies, says at page 606:
It is to be observed in the outset that the courts proceed with
extreme caution in the proceeding which have for their object the
forfeiture of corporate franchises, and a forfeiture will not be allowed,
except under express limitation, or for a plain abuse of power by
which the corporation fails to fulfill the design and purpose of its
organization.
In the case of State of Minnesota vs. Minnesota Thresher Manufacturing Co.
(3 L.R.A. 510) the court said (p. 518):
The scope of the remedy furnished by its (quo warranto) is to forfeit
the franchises of a corporation for misuser or nonuser. It is therefore
necessary in order to secure a judicial forfeiture of respondent's
charter to show a misuser of its franchises justifying such a forfeiture.
And as already remarked the object being to protect the public, and
not to redress private grievances, the misuser must be such as to
work or threaten a substantial injury to the public, or such as to
amount to a violation of the fundamental condition of the contract by
which the franchise was granted and thus defeat the purpose of the
grant; and ordinarily the wrong or evil must be one remediable in no
other form of judicial proceeding.
Courts always proceed with great caution in declaring a forfeiture of
franchises, and require the prosecutor seeking the forfeiture to bring
the case clearly within the rules of law entitling him to exact so
severe a penalty. (People vs. North River Sugar Refining Co., 9
L.R.A., 33, 39; State vs. Portland Natural Gas Co., 153, Ind., 483.)
While it is true that the courts are given a wide discretion in ordering the
dissolution of corporations for violations of its franchises, etc., yet
nevertheless, when such abuses and violations constitute or threaten a
substantial injury to the public or such as to amount to a violation of the
fundamental conditions of the contract (charter) by which the franchises were
granted and thus defeat the purpose of the grant, then the power of the
courts should be exercised for the protection of the people. Under the law the
people of the Philippine Islands have guaranteed the payment of the interest
upon cost of the construction of the railroad which occupied or occupies at
least some of the lands purchased by the defendant. Every additional dollar
of increase in the price of the land purchased by the railroad company added
that much to the costs of construction and thereby increased the burden
imposed upon the people. The very and sole purpose of the intervention of
the defendants in the purchase of the land from the original owners was for
the purpose of selling the same to the Railroad Company at profit at an
increased price, thereby directly increasing the burden of the people by way
1086
of additional taxation. The purpose of the intervention of the defendant in the
transactions in question, was to enrich itself at the expense of the taxpayers
of the Philippine Islands, who had, by a franchise granted, permitted the
defendant to exist and do business as a corporation. The defendant was not
willing to allow the Railroad Company to purchase the land of the original
owners. Its intervention with The Tayabas Land Company was to obtain an
increase in the price of the land in a resale of the same to the railroad
company. The conduct of the defendant in the premises merits the severest
condemnation of the law.
The judgment of the lower court should be modified. It is hereby ordered and
decreed that the franchise heretofore granted to the defendant by which it
was permitted to exist and do business as a corporation in the Philippine
Islands, be withdrawn and annulled and that it be disallowed to do and to
continue doing business in the Philippine Islands, unless it shall within a
period of six months after final decision, liquidate, dissolve and separate
absolutely in every respect and in all of its relations, complained of in the
petition, with The Tayabas Land Company, without any findings to costs. And
it is hereby further ordered and decreed that the record be returned to the
lower court with direction that a judgment be entered in accordance herewith.
And be it further ordered and decreed, upon the presentation of positive
proof that the defendant corporation has complied in full with the foregoing
order and decree that then and in that case the complaint shall be dismissed,
otherwise this decree shall remain in full force and effect. So ordered.
Torres, Araullo and Street, JJ., concur.
Carson, J., concurs in result.
Separate Opinions MALCOLM, J., concurring:
I concur in the result. The defendant corporation has violated the plain
provision of the statute law and organic law the law of its creation. It has
performed acts hostile to the policy of the state and detrimental to the public.
Consequently, the charter of the Philippine Sugar Estates Development Co.
(Ltd.), should be declared forfeited for willful misuser and the corporation
should be immediately dissolved. (Philippine Bill, secs. 75; Corporation Law,
sec. 15 [5]; Code of the Civil Procedure, secs. 198, 212; New Orleans Water
Works vs. Lousiana [1902], 185 U.S., 336; State vs. New Orleans Gas Light
& Banking Co. [1842], 2 Rob. [La.], 529, Commonwealth vs. Commercial
Bank of Pennsylvania [1857], 28 Pa., St., 383., etc.)
G.R. No. L-20583 January 23, 1967
REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T.
RESUELLO, PABLO TANJUTCO, ARTURO SORIANO, RUBEN BELTRAN,
BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D. BALATBAT,
JOSE SEBASTIAN and VITO TANJUTCO JR., respondents.
Office of the Solicitor General Arturo A. Alafriz and Solicitor E. M. Salva for
petitioner.
Sycip, Salazar, Luna, Manalo & Feliciano for respondents.
Natalio M. Balboa and F. E. Evangelista for the receiver.
CONCEPCION, C.J.:
This is an original quo warranto proceeding, initiated by the Solicitor General,
to dissolve the Security and Acceptance Corporation for allegedly engaging
in banking operations without the authority required therefor by the General
Banking Act (Republic Act No. 337). Named as respondents in the petition
are, in addition to said corporation, the following, as alleged members of its
Board of Directors and/or Executive Officers, namely:
NAME POSITION
1087
 The record shows that the Articles of Incorporation of defendant
corporation1 were registered with the Securities and Exchange Commission
Rosendo T. Resuello President & Chairman of the Board
on March 27, 1961; that the next day, the Board of Directors of the
corporation adopted a set of by-laws,2 which were filed with said Commission
on April 5, 1961; that on September 19, 1961, the Superintendent of Banks of
the Central Bank of the Philippines asked its legal counsel an opinion on
Pablo Tanjutco Director
whether or not said corporation is a banking institution, within the purview of
Republic Act No. 337; that, acting upon this request, on October 11, 1961,
said legal counsel rendered an opinion resolving the query in the affirmative;
Arturo Soriano Director that in a letter, dated January 15, 1962, addressed to said Superintendent of
Banks, the corporation through its president, Rosendo T. Resuello, one of
defendants herein, sought a reconsideration of the aforementioned opinion,
which reconsideration was denied on March 16, 1962; that, prior thereto, or
Ruben Beltran Director on March 9, 1961, the corporation had applied with the Securities and
Exchange Commission for the registration and licensing of its securities
under the Securities Act; that, before acting on this application, the
Commission referred it to the Central Bank, which, in turn, gave the former a
Bienvenido V. Zapa Director & Vice-President copy of the above-mentioned opinion, in line with which, the Commission
advised the corporation on December 5, 1961, to comply with the
requirements of the General Banking Act; that, upon application of members
of the Manila Police Department and an agent of the Central Bank, on May
Pilar G. Resuello Director & Secretary-Treasurer 18, 1962, the Municipal Court of Manila issued Search Warrant No. A-1019;
that, pursuant thereto, members of the intelligence division of the Central
Bank and of the Manila Police Department searched the premises of the
corporation and seized documents and records thereof relative to its
Ricardo D. Balatbat Director & Auditor business operations; that, upon the return of said warrant, the seized
documents and records were, with the authority of the court, placed under
the custody of the Central Bank of the Philippines; that, upon examination
and evaluation of said documents and records, the intelligence division of the
Jose R. Sebastian Director & Legal Counsel Central Bank submitted, to the Acting Deputy Governor thereof, a
memorandum dated September 10, 1962, finding that the corporation is:

1. Performing banking functions, without requisite certificate of

Vito Tanjutco Jr. Director & Personnel Manager authority from the Monetary Board of the Central Bank, in violation of
Secs. 2 and 6 of Republic Act 337, in that it is soliciting and
accepting deposit from the public and lending out the funds so
received;

1088
2. Soliciting and accepting savings deposits from the general
public when the company's articles of incorporation authorize it only
to engage primarily in financing agricultural, commercial and
industrial projects, and secondarily, in buying and selling stocks and
bonds of any corporation, thereby exceeding the scope of its powers
and authority as granted under its charter; consequently such acts
are ultra-vires:
3. Soliciting subscriptions to the corporate shares of stock and
accepting deposits on account thereof, without prior registration
and/or licensing of such shares or securing exemption therefor, in
violation of the Securities Act; and
4. That being a private credit and financial institution, it should come
under the supervision of the Monetary Board of the Central Bank, by
virtue of the transfer of the authority, power, duties and functions of
the Secretary of Finance, Bank Commissioner and the defunct
Bureau of Banking, to the said Board, pursuant to Secs. 139 and 140
of Republic Act 265 and Secs. 88 and 89 of Republic Act 337."
(Emphasis Supplied.) that upon examination and evaluation of the
same records of the corporation, as well as of other documents and
pertinent pipers obtained elsewhere, the Superintendent of Banks,
submitted to the Monetary Board of the Central Bank a
memorandum dated August 28, 1962, stating inter alia.
11. Pursuant to the request for assistance by the Chief, Intelligence
Division, contained in his Memorandum to the Governor dated May
23, 1962 and in accordance with the written instructions of Governor
Castillo dated May 31, 1962, an examination of the books and
records of the Security Credit and Loans Organizations, Inc. seized
by the combined MPD-CB team was conducted by this Department.
The examination disclosed the following findings:
a. Considering the extent of its operations, the Security
Credit and Acceptance Corporation, Inc., receives deposits
from the public regularly. Such deposits are treated in the
Corporation's financial statements as conditional
subscription to capital stock. Accumulated deposits of
P5,000 of an individual depositor may be converted into
stock subscription to the capital stock of the Security Credit
and Acceptance Corporation at the option of the depositor.
Sale of its shares of stock or subscriptions to its capital stock
are offered to the public as part of its regular operations.
b. That out of the funds obtained from the public through the
receipt of deposits and/or the sale of securities, loans are
made regularly to any person by the Security Credit and
Acceptance Corporation.
A copy of the Memorandum Report dated July 30, 1962 of the
examination made by Examiners of this Department of the seized
books and records of the Corporation is attached hereto.
12. Section 2 of Republic Act No. 337, otherwise known as the
General Banking Act, defines the term, "banking institution" as
follows:
Sec. 2. Only duly authorized persons and entities may
engage in the lending of funds obtained from the public
through the receipts of deposits or the sale of bonds,
securities, or obligations of any kind and all entities regularly
conducting operations shall be considered as banking
institutions and shall be subject to the provisions of this Act,
of the Central Bank Act, and of other pertinent laws. ...
13. Premises considered, the examination disclosed that the Security
Credit and Acceptance Corporation is regularly lending funds
obtained from the receipt of deposits and/or the sale of securities.
The Corporation therefore is performing 'banking functions' as
contemplated in Republic Act No. 337, without having first complied
with the provisions of said Act.
1089
Recommendations:
In view of all the foregoing, it is recommended that the Monetary
Board decide and declare:
1. That the Security Credit and Acceptance Corporation is performing
banking functions without having first complied with the provisions of
Republic Act No. 337, otherwise known as the General Banking Act,
in violation of Sections 2 and 6 thereof; and
2. That this case be referred to the Special Assistant to the Governor
(Legal Counsel) for whatever legal actions are warranted, including,
if warranted criminal action against the Persons criminally liable
and/or quo warranto proceedings with preliminary injunction against
the Corporation for its dissolution. (Emphasis supplied.)
that, acting upon said memorandum of the Superintendent of Banks,
on September 14, 1962, the Monetary Board promulgated its
Resolution No. 1095, declaring that the corporation is performing
banking operations, without having first complied with the provisions
of Sections 2 and 6 of Republic Act No. 337; 3that on September 25,
1962, the corporation was advised of the aforementioned resolution,
but, this notwithstanding, the corporation, as well as the members of
its Board of Directors and the officers of the corporation, have been
and still are performing the functions and activities which had been
declared to constitute illegal banking operations; that during the
period from March 27, 1961 to May 18, 1962, the corporation had
established 74 branches in principal cities and towns throughout the
Philippines; that through a systematic and vigorous campaign
undertaken by the corporation, the same had managed to induce the
public to open 59,463 savings deposit accounts with an aggregate
deposit of P1,689,136.74; that, in consequence of the foregoing
deposits with the corporation, its original capital stock of P500,000,
divided into 20,000 founders' shares of stock and 80,000 preferred
shares of stock, both of which had a par value of P5.00 each, was
increased, in less than one (1) year, to P3,000,000 divided into
130,000 founders' shares and 470,000 preferred shares, both with a
par value of P5.00 each; and that, according to its statement of
assets and liabilities, as of December 31, 1961, the corporation had
a capital stock aggregating P1,273,265.98 and suffered, during the
year 1961, a loss of P96,685.29. Accordingly, on December 6, 1962,
the Solicitor General commenced this quo warranto proceedings for
the dissolution of the corporation, with a prayer that, meanwhile, a
writ of preliminary injunction be issued ex parte, enjoining the
corporation and its branches, as well as its officers and agents, from
performing the banking operations complained of, and that a receiver
be appointed pendente lite.
Upon joint motion of both parties, on August 20, 1963, the Superintendent of
Banks of the Central Bank of the Philippines was appointed by this Court
receiver pendente lite of defendant corporation, and upon the filing of the
requisite bond, said officer assumed his functions as such receiver on
September 16, 1963.
In their answer, defendants admitted practically all of the allegations of fact
made in the petition. They, however, denied that defendants Tanjutco (Pablo
and Vito, Jr.), Soriano, Beltran, Zapa, Balatbat and Sebastian, are directors
of the corporation, as well as the validity of the opinion, ruling, evaluation and
conclusions, rendered, made and/or reached by the legal counsel and the
intelligence division of the Central Bank, the Securities and Exchange
Commission, and the Superintendent of Banks of the Philippines, or in
Resolution No. 1095 of the Monetary Board, or of Search Warrant No. A-
1019 of the Municipal Court of Manila, and of the search and seizure made
thereunder. By way of affirmative allegations, defendants averred that, as of
July 7, 1961, the Board of Directors of the corporation was composed of
defendants Rosendo T. Resuello, Aquilino L. Illera and Pilar G. Resuello; that
on July 11, 1962, the corporation had filed with the Superintendent of Banks
an application for conversion into a Security Savings and Mortgage Bank,
with defendants Zapa, Balatbat, Tanjutco (Pablo and Vito, Jr.), Soriano,
Beltran and Sebastian as proposed directors, in addition to the defendants
first named above, with defendants Rosendo T. Resullo, Zapa, Pilar G.
Resuello, Balatbat and Sebastian as proposed president, vice-president,
secretary-treasurer, auditor and legal counsel, respectively; that said
1090
additional officers had never assumed their respective offices because of the
pendency of the approval of said application for conversion; that defendants
Soriano, Beltran, Sebastian, Vito Tanjutco Jr. and Pablo Tanjutco had
subsequently withdrawn from the proposed mortgage and savings bank; that
on November 29, 1962 or before the commencement of the present
proceedings the corporation and defendants Rosendo T. Resuello and
Pilar G. Resuello had instituted Civil Case No. 52342 of the Court of First
Instance of Manila against Purificacion Santos and other members of the
savings plan of the corporation and the City Fiscal for a declaratory relief and
an injunction; that on December 3, 1962, Judge Gaudencio Cloribel of said
court issued a writ directing the defendants in said case No. 52342 and their
representatives or agents to refrain from prosecuting the plaintiff spouses
and other officers of the corporation by reason of or in connection with the
acceptance by the same of deposits under its savings plan; that acting upon
a petition filed by plaintiffs in said case No. 52342, on December 6, 1962, the
Court of First Instance of Manila had appointed Jose Ma. Ramirez as
receiver of the corporation; that, on December 12, 1962, said Ramirez
qualified as such receiver, after filing the requisite bond; that, except as to
one of the defendants in said case No. 52342, the issues therein have
already been joined; that the failure of the corporation to honor the demands
for withdrawal of its depositors or members of its savings plan and its former
employees was due, not to mismanagement or misappropriation of corporate
funds, but to an abnormal situation created by the mass demand for
withdrawal of deposits, by the attachment of property of the corporation by its
creditors, by the suspension by debtors of the corporation of the payment of
their debts thereto and by an order of the Securities and Exchange
Commission dated September 26, 1962, to the corporation to stop soliciting
and receiving deposits; and that the withdrawal of deposits of members of
the savings plan of the corporation was understood to be subject, as to time
and amounts, to the financial condition of the corporation as an investment
firm.
In its reply, plaintiff alleged that a photostat copy, attached to said pleading,
of the anniversary publication of defendant corporation showed that
defendants Pablo Tanjutco, Arturo Soriano, Ruben Beltran, Bienvenido V.
Zapa, Ricardo D. Balatbat, Jose R. Sebastian and Vito Tanjutco Jr. are
officers and/or directors thereof; that this is confirmed by the minutes of a
meeting of stockholders of the corporation, held on September 27, 1962,
showing that said defendants had been elected officers thereof; that the
views of the legal counsel of the Central Bank, of the Securities and
Exchange Commission, the Intelligence Division, the Superintendent of
Banks and the Monetary Board above referred to have been expressed in
the lawful performance of their respective duties and have not been assailed
or impugned in accordance with law; that neither has the validity of Search
Warrant No. A-1019 been contested as provided by law; that the only assets
of the corporation now consist of accounts receivable amounting
approximately to P500,000, and its office equipment and appliances, despite
its increased capitalization of P3,000,000 and its deposits amounting to not
less than P1,689,136.74; and that the aforementioned petition of the
corporation, in Civil Case No. 52342 of the Court of First Instance of Manila,
for a declaratory relief is now highly improper, the defendants having already
committed infractions and violations of the law justifying the dissolution of the
corporation.
Although, admittedly, defendant corporation has not secured the requisite
authority to engage in banking, defendants deny that its transactions partake
of the nature of banking operations. It is conceded, however, that, in
consequence of a propaganda campaign therefor, a total of 59,463 savings
account deposits have been made by the public with the corporation and its
74 branches, with an aggregate deposit of P1,689,136.74, which has been
lent out to such persons as the corporation deemed suitable therefor. It is
clear that these transactions partake of the nature of banking, as the term is
used in Section 2 of the General Banking Act. Indeed, a bank has been
defined as:
... a moneyed institute [Talmage vs. Pell 7 N.Y. (3 Seld. ) 328, 347,
348] founded to facilitate the borrowing, lending and safe-keeping of
money (Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243, 255
U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills of exchange,
and credits (State vs. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa
338). (Banks & Banking, by Zellmann Vol. 1, p. 46).
Moreover, it has been held that:
1091
 An investment company which loans out the money of its customers,
collects the interest and charges a commission to both lender and
borrower, is a bank. (Western Investment Banking Co. vs. Murray, 56
P. 728, 730, 731; 6 Ariz 215.)
... any person engaged in the business carried on by banks of
deposit, of discount, or of circulation is doing a banking business,
although but one of these functions is exercised. (MacLaren vs.
State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas.
826; 9 C.J.S. 30.)
Accordingly, defendant corporation has violated the law by engaging
in banking without securing the administrative authority required in
Republic Act No. 337.
That the illegal transactions thus undertaken by defendant corporation
warrant its dissolution is apparent from the fact that the foregoing misuser of
the corporate funds and franchise affects the essence of its business, that it
is willful and has been repeated 59,463 times, and that its continuance inflicts
injury upon the public, owing to the number of persons affected thereby.
It is urged, however, that this case should be remanded to the Court of First
Instance of Manila upon the authority of Veraguth vs. Isabela Sugar Co. (57
Phil. 266). In this connection, it should be noted that this Court is vested with
original jurisdiction, concurrently with courts of first instance, to hear and
decide quo warranto cases and, that, consequently, it is discretionary for us
to entertain the present case or to require that the issues therein be taken up
in said Civil Case No. 52342. The Veraguth case cited by herein defendants,
in support of the second alternative, is not in point, because in said case
there were issues of fact which required the presentation of evidence, and
courts of first instance are, in general, better equipped than appellate courts
for the taking of testimony and the determination of questions of fact. In the
case at bar, there is, however, no dispute as to the principal facts or acts
performed by the corporation in the conduct of its business. The main issue
here is one of law, namely, the legal nature of said facts or of the
aforementioned acts of the corporation. For this reason, and because public
interest demands an early disposition of the case, we have deemed it best to
determine the merits thereof.
Wherefore, the writ prayed for should be, as it is hereby granted and
defendant corporation is, accordingly, ordered dissolved. The appointment of
receiver herein issued pendente lite is hereby made permanent, and the
receiver is, accordingly, directed to administer the properties, deposits, and
other assets of defendant corporation and wind up the affairs thereof
conformably to Rules 59 and 66 of the Rules of Court. It is so ordered.
Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez
and Castro, JJ., concur.
1092
 JAIME T. BUENAFLOR, petitioner,
vs.
CAMARINES SUR INDUSTRY CORPORATION, respondent.

Manuel O. Chan and Vicente Ampil for petitioner.

Evaristo R. Sandoval and Claro T. Almeda for respondent.

BENGZON, J.:

Jaime T. Buenaflor has appealed the decision of the Public Service

Commission which rejected his application to install and operate a 5-ton ice
plant in Sabang (Calabanga, Camarines Sur) even as it permitted Camarines
Sur Industry Corporation to build in that barrio, a factory with the same
output.

On June 25, 1957, Buenaflor filed his said application (P. S. Case 107548)
together with another application to establish a cold storage and refrigeration
service of about 6,000 cubic feet capacity (P. S. Case 107549). The
Commission, by order of September 12, 1957, set the applications for
hearing on October 9, 1957, requiring applicant to publish them in two
newspapers, and to serve copy thereof to Iigo Daza and Camarines Sur
Industry Corporation (hereinafter called Camarines Corporation). These
owned ice plants in neighboring municipalities and had been apparently
selling ice to Sabang's inhabitants.

After receiving copy of Buenaflor's applications, the Camarines Corporation

submitted to the Commission on October 1, 1957, its own two applications:
one for authority to construct and manage a 5-ton ice plant, and another for a
cold storage and refrigeration system, both in Sabang too (P. S. Cases
109874 and 109875). It likewise registered opposition to Buenaflor's
proposed ice business, on the ground that it was the pioneer distributor of the
commodity in that particular locality.

When the petitions of Buenaflor were called for hearing on October 9, 1957,
G.R. Nos. L-14991-94 May 30, 1960 the attorney for Camarines Corporation voicing its application, invited

1093
attention to his client's applications moved for postponement, and agreed to
a joint hearing of the four applications of both parties on October 25, 1957.
On the last mentioned date, Buenaflor's attorneys presented a motion to
dismiss the Camarines Corporation's applications, challenging its personality,
inasmuch as its corporate life had expired in November 1953, in accordance
with its own articles of incorporation. Surprised by the move, counsel of
Camarines Corporation asked, and was granted, time to answer. Immediately
thereafter, the corporators of Camarines Corporation got busy and executed
on October 30, 1957, and registered October 31, 1957, new articles of
incorporation of Camarines Sur Industry Corporation, and at the same time,
notarized a deed of conveyance assigning to the new corporation, all the
assets of the expired (old) corporation, together with its existing certificates of
public convenience to operate ice factories in Naga and Magarao.
Without loss of time, the corporators of the defunct (old) corporation and the
newly organized corporation petitioned the Public Service Commission for
the approval of the conveyance, and on November 7, 1957, the Commission
provisionally approved the transfer of assets, plus the certificates of public
convenience.
On November 8, 1957, the Camarines Corporation (new) answered the
motion to dismiss, by alleging to the amazement of Buenaflor its recent
incorporation, plus its acquisition of the assets and certificates of the old
Camarines Corporation with the Commission's approval as above described.
Reiterating his application, while resisting the Camarines Corporation,
Buenaflor argued: (a) he was first to apply; (b) although the old Camarines
Corporation had been operating an ice plant in Magarao town, only six
kilometers away, it neglected to take trouble of applying until Buenaflor had
made his application; (c) the preference which the new Camarines
Corporation claims by virtue of the old corporation's having distributed ice in
Sabang for the years previous to Buenaflor's application, should not be
granted, because since 1953 such old corporation had ceased to be juridical
entity, and could not lawfully continue in business nor invoke any protection
or preference.
Evidence was presented in support of the applications and oppositions.
The Commission, in its decision of December 12, 1958, after settling forth the
gist of the proofs submitted to it, made the following considerations and
conclusions.
There is a clear need for an ice plant and a cold storage service in
the barrio of Sabang and question to decide is who of the applicant
should be granted the necessary authority inasmuch as we do not
believe from the evidence that we should authorize two ice plants of
5 tons each and two cold storage chambers with a total capacity of
14,000 cubic feet. As to the ice plant service, we find that Buenaflor
filed his application ahead of the Camarines Corporation but the
evidence and our records show that the Camarines Corporation is
really the pioneer ice plant in Magarao since 1945 which now has a
capacity of 10 tons, and another ice plant established that the
Camarines Corporation has been rendering ice service thru delivery
in Sabang but we doubt whether its service has been adequate
because there is satisfactory proof that ice also comes from other
places. The fact, however, is that the Camarines Corporation cannot
be said to have neglected its duty to serve Sabang and we believe
that the shortage in its service has been due to the fact that the
produce of its Naga and Magarao plants are needed for its other
territories with not much to spare for Sabang. We think that as the
pioneer ice plant operator in Naga and Magarao with authority to
serve Sabang the Camarines Corporation, which has not abandoned
its service in Sabang, is entitled to the protection of its investments
and to put up an ice plant in Sabang, and that the Camarines
Corporation has been rendering service therein although in a limited
manner. We believe, therefore, that applicant Camarines Corporation
has a better right than Buenaflor to the certificate for a 5-ton ice plant
in Sabang. As to the cold storage service, we think that Buenaflor
has a better right to the certificate.... By virtue of Buenaflor's right of
priority in the filing of his application and the fact that he is as
financially capable as the Camarines Corporation to install the
service, we believe that the certificate for the cold storage service in
Sabang should be granted to Buenaflor, but insamuch as we take
1094
 notice of the fact that a cold storage operator also needs ice for the
preservation of fish and other perishable foodstuffs when these
cannot be immediately deposited in the refrigerating chambers and
also to provide its customers with ice they need after the goods are
removed from the chambers, we believe that applicant Buenaflor
may also be granted a certificate for a one (1) ton ice plant in
Sabang together with a certificate of 5,000 cubic feet cold storage
service.
The Camarines Corporation did not appeal. Buenaflor appealed in so far as
he was denied authority to erect a 5-ton ice plant.
Therefore, the question of cold storage service is not here in issue, since
Buenaflor got it, and Camarines Corporation did not appeal.
As to the ice plant, Buenaflor insists he should be given authority to establish
a 5-ton ice plant not the new Camarines Corporation. His line of argument
centers around the expiration of the old Corporation's charter in 1953; and
we think he touches the vital spot.
It is admitted and the Commission found--that the needs of Sabang Barrio
will be conveniently served with the establishment of a 5-ton ice plant. But it
elected to deny Buenaflor's application, even as it awarded the privilege to
the new Camarines Corporation on the ground that it (the old
corporation) had been serving ice in Sabang up to the time of Buenaflor's
application, and was, consequently, the pioneer operator there.
The fact, however, is that since 1953, the old Corporation had been illegally
plying its business of selling ice in Sabang because, under the Corporation
Law, Sec. 77, after November 1953, it could not lawfully continue the
business for which it had been established (operate ice plant, sell ice, etc).
After November 1953, it could only continue to exist for three years for the
purpose of prosecuting and defending suits by or against it, and of enabling it
gradually to settle and close its affairs, to dispose and convey its property
and to divide its capital stock. It could not, without violating the law, continue
to sell ice. And yet, the Commission awarded the certificate on the basis of
such serve and distribution of ice applying the "prior operator" rule. 1 In
other words, the new Camarines Corporation is rewarded, precisely because
the old corporation, its predecessor, had violated the lawduring that period
(1953-1957). We can not, and should not countenance such anomalous
result.
On the other hand, when the old Camarines Corporation docketed its
application October 1, 1957, it had no juridical personality, it had ceased to
exist as a corporation and could not sue 2 nor apply for certificate, for it was
incapable of receiving a grant3 . It was not even a corporation de facto4 . And
then, there is no application subscribed by the new Camarines Corporation.
Far from being mere technicality, these point support a conclusion which
appears to be just and equitable, not only for the reasons already indicated,
but also to compensate Buenaflor's diligence and courage in exposing the
irregular practice5 of a "ghost" corporation foisting its services upon the
unsuspecting public of Sabang and neighboring territory enjoying a
franchise without paying, perhaps, the corporate income tax 6 and other
burdens attached to corporate existence.
Remembering the Camarines Corporation's automatic cessation in
November 1956 (three years after November 1953) we must decline to
regard the new Camarines Corporation (formed October 30, 1957) as
a continuation of the old.7 At most, it is the transferee of the properties of the
old corporation (or more properly, the assets of the stockholders) plus the
certificate of public convenience to operate the ice plant in Naga and
Magarao.8 And yet, as stated, the new corporation has not filed any
application for certificate of public convenience in Sabang, and has not
published such application.
On these grounds, we think it was error to grant preferential treatment to the
new Camarines Corporation over Jaime T. Buenaflor who, besides being
qualified, in the eyes of the Commission, had applied for the privilege months
in advance of the old Camarines Corporation, and of the incorporation of the
new Camarines Corporation.
1095
Wherefore, revoking the appealed decision in so far as it awarded the
certificate to said Corporation, we hereby approve Buenaflor's application for
five tons, instead of one ton, subject to the usual conditions imposed by the
Public Service Commission on ice plant establishments.

Costs against Camarines Corporation.

Paras, C. J., Montemayor, Bautista Angelo, Labrador, Concepcion, Barrera,

and Gutierrez David, JJ., concur.

G.R. No. L-16779 August 16, 1961

NATIONAL ABACA AND OTHER FIBERS CORPORATION, plaintiff-

appellant,
vs.
APOLONIA PORE, defendant-appellee.

A. LLamas & Arsenio P. Roman for plaintiff-appellant.

Serafin Ramento for defendant-appellee.

CONCEPCION, J.:

Appeal by plaintiff National Abaca and other Fibers Corporation, from two (2)
orders of the Court of First Instance of Leyte.

On November 14, 1953, plaintiff filed with the Municipal Court of Tacloban,
Leyte, a complaint, against defendant Apolonia Pore, for the recovery of
P1,213.34, allegedly advanced to her for the purchase of hemp for the
account of the former and for which she had allegedly failed to account. In
her answer, defendant alleged that she had accounted for all cash advances
received by her for the aforementioned purpose from the plaintiff. In due
course, said court rendering judgment on April 11, 1956, finding that the
defendant had not accounted for cash advances in the sum of P272.49,
which she was, accordingly, sentenced to pay to the plaintiff, with legal
interest from November 18, 1953, in addition to the costs.

1096
Said court having subsequently denied a reconsideration of this decision, as
well a new trial prayed for the plaintiff, the latter appealed to the Court of First
Instance of Leyte, in which defendant moved to dismiss the complaint upon
the ground that plaintiff has no legal capacity to sue, it having abolished by
Executive Order No. 372 of the President of the Philippines, dated November
24,1950. Plaintiff objected thereto upon the ground that pursuant to said
executive order, plaintiff "shall nevertheless be continued as a body
corporate for a period of three (3) years from the effective date" of said
executive order, which was November 30, 1950, "for the purpose of
prosecuting and defending suits by or against it and of enabling the Board of
Liquidators" thereby created "gradually to settle and close its affairs", . .
. and that this case was begun on November 14, 1953, or before the
expiration of the period aforementioned. After due hearing, the court of first
instance issued an order dated August 1, 1956, directing plaintiff to amend
the complaint, within ten (10) days from notice, by including the Board of
Liquidators as co-party plaintiff, with the admonition that otherwise the case
would be dismissed.
On September 1, 1956, said court issued another order dismissing the case,
without pronouncement as to costs, it appearing that the aforementioned
amended had not been made, despite the fact that copy of said order of
August 1, 1956 had been sent, by registered mail, to plaintiff's counsel on
August 6, 1956. Copy of the last order was delivered, on September 13,
1956, to counsel for the plaintiff, which filed, on September 21, 1956, a
motion alleging that, copy of the order of August 1, 1956 was received by the
plaintiff on August 17, 1956; that thereupon said counsel prepared an
amended complaint copy of which was annexed to the motion as
directed by the court; that on August 24, 1956, said counsel handed two
copies of said amended complaint to Mrs. Receda Vda. de Ocampo, the
employee of the aforesaid Board of Liquidators in charge of plaintiff's
incoming and outgoing correspondence, with instructions to them mail said
copies to the Court of First Instance of Leyte and to counsel for defendant
herein; that on September 13, 1956, plaintiff's counsel received copy of the
order of September 1, 1956; that thereupon he inquired from plaintiff's
mailing clerk whether or not his instructions, concerning the mailing of copies
of said amended complaint, had been complied with; that he then found out
that, although said copies of the amended complaint were entered in the
record book of plaintiff's outgoing correspondence on August 24, 1956, only
the copy addressed to defendant's counsel had actually been mailed (as
evidenced by registry receipt No. 57209 dated August 25, 1956); that the
original copy of the amended complaint, addressed to the clerk of court,
could not be located, despite diligent efforts made to find the same; that
plaintiff's failure to file in court the original of said amended complaint is
imputable to the excusable negligence of the aforementioned Mrs. Ocampo,
whose affidavit was annexed, also, to the motion for reconsideration; and
that, plaintiff has a just and valid claim against the defendant. Plaintiff prayed,
therefore, that said order of September 1, 1956 be reconsidered and set
aside and that its aforementioned amended complaint be admitted.
Said motion for reconsideration was denied by an order dated October 2,
1956, whereupon plaintiff brought the case for review, by Record on Appeal,
to the Court of Appeals which, however, forwarded the records to us, the
issues raised in the appeal being purely of law, namely;(1) whether an action,
commenced within three (3) years after the abolition of plaintiff, as a
corporation, may be continued by the same after the expiration of said
period; and (2) whether, under the facts set forth above, the lower court
should have granted plaintiff's motion for reconsideration of its order of
September 1, 1956.
With respect to the first question, the rule appears to be well settled that, in
the absence of statutory provision to the contrary, pending actions by or
against a corporation are abated upon expiration of the period allowed by law
for the liquidation of its affairs.
It is generally held, that where a statute continues the existence of a
corporation for a certain period after its dissolution for the purpose of
prosecuting and defending suits, etc., the corporation becomes
defunct upon the expiration of such period, at least in the absence of
a provision to the contrary, so that no action can afterwards be
brought by or against it, and must be dismissed. Actions pending by
or against the corporation when the period allowed by the statute
expires, ordinarily abate.
1097
 . . . This time limit does not apply unless the circumstances are such
as to bring the corporation within the provision of the statute.
However, the wording of the statutes, in some jurisdictions authorize
suits after the expiration of the time limit, where the statute provides
that for the purpose of any suit brought by or against the corporation
shall continue beyond such period for a further named period after
final judgment. (Fletcher's Cyclopedia on Corporations, Vol. 16, pp.
892-893.).
Our Corporation Law contains no provision authorizing a corporation, after
three (3) years from the expiration of its lifetime, to continue in its corporate
name actions instituted by it within said period of three (3) years. in fact,
section 77 of said law provides that the corporation shall "be continued as a
body corporate for three (3) years after the time when it would have been . . .
dissolved, for the purposed of prosecuting and defending suits by or against
it . . .", so that, thereafter, it shall no longer enjoy corporate existence for such
purpose. For this reason, section 78 of the same law authorizes the
corporation, "at any time during said three years . . . to convey all of its
property to trustees for the benefit of members, stockholders, creditors and
other interested", evidently for the purpose, among others, of enabling said
trustees to prosecute and defend suits by or against the corporation begun
before the expiration of said period. Hence, commenting on said sections,
Judge Fisher, in his work entitled Philippines Law on Stock Corporations
(1929 ed.), has the following to say:
It is to be noted that the time during which the corporation, through
its own officers, may conduct the liquidation of its assets and sue
and be sued as a corporation is limited to three years from the time
the period of dissolution commences; but that there is no time limited
within the trustees must complete a liquidation placed in their hands.
It is provided only (Corp. Law, Sec. 78) that the conveyance to the
trustees must be made within the three-year period. It may be found
impossible to complete the work of liquidation within the three-year
period or to reduce disputed claims to judgment. The authorities are
to the effect that suits by or against a corporation abate when it
ceased to be an entity capable of suing or being sued (7 R.C.L.
Corps., Par. 750); but trustees to whom the corporate assets have
been conveyed pursuant to the authority of section 78 may used and
be sued as such in all matters connected with the liquidation. By the
terms of the statute the effect of the conveyance is to make the
trustees the legal owners of the property conveyed, subject to the
beneficial interest therein of creditors and stockholders. (pp. 389-
390; see also Sumera v. Valencia [67 Phil. 721, 726-727).
Obviously, the complete loss of plaintiff's corporate existence after the
expiration of the period of three (3) years for the settlement of its affairs is
what impelled the President to create a Board of Liquidators, to continue the
management of such matters as may then be pending. The first question
must, therefore, be answered in the negative.
With respect, however, to the second question, we hold that the lower court
erred in not granting plaintiff's motion for reconsideration of September 21,
1956. To begin with, the judgment of the municipal court of Tacloban against
the defendant is a strong indication of the validity and justice of plaintiff's
claim against her. Moreover, the record satisfactorily shows that plaintiff had
prepared an amended complaint, as directed in the order of August 1, 1956,
upon receipt thereof; that copy of said amended complaint had actually been
sent by registered mail to defendant's counsel; that plaintiff's counsel had
given to its mailing clerk the proper instructions for the filing of the original of
said amended complaint with the office of the Court of First Instance of
Leyte; that said mailing clerk had endeavored to comply with the
aforementioned instructions, as evidenced by the corresponding entry in the
record book of plaintiff's outgoing correspondence; and that the failure to file
in court said original of the amended complaint must have been due,
therefore, either to accident or to excusable negligence on the part of said
mailing clerk.
WHEREFORE, the orders appealed from, dated September 1 and October 3,
1956 are reversed, plaintiff's amended complaint is hereby admitted, and the
record remanded to the lower court for further proceedings, with the costs of
this instance against defendant-appellee, Apolonio Pore.
It is so ordered.
1098
Bengzon, C.J., Padilla, Labrador, Reyes, J.B.L., Barrera, Paredes, Dizon, De
Leon and Natividad, JJ., concur.
Bautista Angelo, J., is on leave.

G.R. No. L-15778 April 23, 1962

TAN TIONG BIO, ET AL., petitioners,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

Sycip, Salazar and Associates for petitioners.

Office of the Solicitor General for respondent.

BAUTISTA ANGELO, J.:

1099
On October 19, 1946, the Central Syndicate, a corporation organized under
the laws of the Philippines, thru its General Manager, David Sycip, sent a
letter to the Collector of Internal Revenue advising the latter that it purchased
from Dee Hong Lue the entire stock of surplus properties which the said Dee
Hong Lue had bought from the Foreign Liquidation Commission and that as it
assumed Dee Hong Lue's obligation to pay the 3-1/2% sales tax on said
surplus goods, it was remitting the sum of P43,750.00 in his behalf as
deposit to answer for the payment of said sales tax with the understanding
that it would later be adjusted after the determination of the exact
consideration of the sale.
On January 31, 1948, the syndicate again wrote the Collector requesting the
refund of P1,103.28 representing alleged excess payment of sales tax due to
the adjustment and reduction of the purchase price in the amount of
P31,522.18. Said letter was referred to an agent for verification and report.
On September 18, 1951, after a thorough investigation of the facts and
circumstances surrounding the transaction, the agent reported (1) that Dee
Hong Lue purchased the surplus goods as trustee for the Central Syndicate
which was in the process of organization at the time of the bidding; (2) that it
was the representatives of the Central Syndicate that removed the surplus
goods from their base at Leyte on February 21, 1947; (3) that the syndicate
must have realized a gross profit of 18.8% from its sales thereof; and (4) that
if the sales tax were to be assessed on its gross sales it would still be liable
for the amount of P33,797.88 as deficiency sales tax and surcharge in
addition to the amount of P43,750.00 which the corporation had deposited in
the name of Dee Hong Lue as estimated sales tax due from the latter.
Based on the above findings of the agent in charge of the investigation, the
Collector decided that the Central Syndicate was the importer and original
seller of the surplus goods in question and, therefore, the one liable to pay
the sales tax. Accordingly, on January 4, 1952, the Collector assessed
against the syndicate the amount of P33,797.88 and P300.00 as deficiency
sales tax, inclusive of the 25% surcharge and compromise penalty,
respectively, and on the same date, in a separate letter, he denied the
request of the syndicate for the refund of the sum of P1,103.28.
On September 8, 1954, the Central Syndicate elevated the case to the Court
of Tax Appeals questioning the ruling of the Collector which denies its claim
for refund as well as the assessment made against it of the sum of
P33,797.88, plus the sum of P300.00 as compromise penalty, as stated
above. The Collector filed his answer thereto wherein he reiterated his ruling
and prayed that the Central Syndicate be ordered to pay the deficiency sales
tax and surcharge as demanded in his letters dated January 4, 1952 and
August 5, 1954. On October 28, 1954, the syndicate filed a motion
requesting that the issue of prescription it has raised against the collection of
the tax be first determined as a preliminary question, but action thereon was
deferred by the Court of Tax Appeals until after the trial of the case on the
merits.
On November 5, 1954, the Collector filed a motion requiring the syndicate to
file a bond to guarantee the payment of the tax assessed against it which
motion was denied by the Court of Tax Appeals on the ground that cannot be
legally done it appearing that the syndicate is already a non-existing entity
due to the expiration of its corporate existence. In view of this development,
the Collector filed a motion to dismiss the appeal on the ground of lack of
personality on the part of the syndicate, which met an opposition on the part
of the latter, but on January 25, 1955, the Court of Tax Appeals issued a
resolution dismissing the appeal primarily on the ground that the Central
Syndicate has no personality to maintain the action then pending before it.
From this order the syndicate appealed to the Supreme Court wherein it
intimated that the appeal should not be dismissed because it could be
substituted by its successors-in-interest, to wit: Tan Tiong Bio, Yu Khe Thai,
Alfonso Sycip, Dee Hong Lue, Lim Shui Ty, Sy Seng Tong, Sy En, Co Giap
and David Sycip. And taking cue from this suggestion, this Court ruled
against the dismissal and held: "The resolution appealed from is set aside
and the respondent court is ordered to permit the substitution of the officers
and directors of the defunct Central Syndicate as appellants, and to proceed
with the hearing of the appeal upon its merits." In permitting the substitution,
this Court labored under the premise that said officers and directors "may be
held personally liable for the unpaid deficiency assessments made by the
Collector of Internal Revenue against the defunct syndicate."
1100
After trial, the Court of Tax Appeals rendered decision the dispositive part of
which reads as follows:
WHEREFORE, in view of the foregoing considerations, the decision
of the Collector of Internal Revenue appealed from is hereby
affirmed, except with regard to the imposition of the compromise
penalty of P300.00 the collection of which is unauthorized and illegal
in the absence of a compromise agreement between the parties.
(Collector of Internal Revenue vs. University of Sto. Tomas, G. R. No.
L-11274, November 28, 1958; Collector of Internal Revenue vs.
Bautista & Tan, G.R. No. L-12250, May 27, 1959.) .
The petitioners Tan Tiong Bio, Yu Khe Thai, Lim Shui Ty, Alfonso
Sycip, Sy En alias Sy Seng Sui, Dee Hong Lue, and Sy Seng Tong,
who appear in the Articles of Incorporation of the Central Syndicate
Annex A (pp. 60-66, CTA rec.) as incorporators and directors of the
corporation, the second named being in addition its President and
the seventh its Treasurer, are hereby ordered to pay jointly and
severally, to the Collector of Internal Revenue, the sum of
P33,797.88 as deficiency sales tax and surcharge on the surplus
goods purchased by them from the Foreign Liquidation Commission
on July 5, 1946, from which they realized an estimated gross sales of
P1,447,551.65, with costs. ..
Petitioners interposed the present appeal.
The important issues to be determined in this appeal are: (1) whether the
importer of the surplus goods in question the sale of which is subject to the
present tax liability is Dee Hong Lue or the Central Syndicate who has been
substituted by the present petitioners; (2) whether the deficiency sales tax
which is now sought to be collected has already prescribed; and (3) the
Central Syndicate having already been dissolved because of the expiration of
its corporate existence, whether the sales tax in question can be enforced
against its successors-in-interest who are the present petitioners.
1. Petitioners contend that the Central Syndicate cannot be held liable for the
deficiency sales tax in question because it is not the importer of the surplus
goods purchased from the Foreign Liquidation Commission for the reason
that said surplus goods were purchased by Dee Hong Lue as shown by the
contract executed between him and the Foreign Liquidation Commission and
the fact that the Central Syndicate only purchased the same from Dee Hong
Lue and not from the Foreign Liquidation Commission as shown by Exhibit
13.
This contention cannot be sustained. As correctly observed by the Court of
Tax Appeals, the overwhelming evidence presented by the Collector points to
the conclusion that Dee Hong Lue purchased the surplus goods in question
not for himself but for the Central Syndicate which was then in the process of
incorporation such that the deed of sale Exhibit 13 which purports to show
that Dee Hong Lue sold said goods to the syndicate for a consideration of
P1,250,000.00 (the same amount paid by Dee Hong Lue to the Foreign
Liquidation Commission) "is but a ruse to evade payment of a greater
amount of percentage tax." The aforesaid conclusion of the lower court was
arrived at after a thorough analysis of the evidence on record, pertinent
portion of which we quote hereunder with approval:
Exhibit "38-A" for the respondent (p. 178, BIR rec.) shows that as
early as July 23, 1946, or before the organization and incorporation
of Central Syndicate, Mr. David Sycip, who was subsequently
appointed General Manager of the corporation, together with Messrs.
Sy En alias Sy Seng Sui (one of the incorporators of Central
Syndicate), Serge Gordeof and Chin Siu Bun (an employee of the
same corporation), for and in the name of Central Syndicate then in
the process of organization, went to Leyte to take over the surplus
properties sold by the FLC to Dee Hong Lue, which the latter held in
trust for the corporation. Exhibit 38-A, which is a certificate issued by
no less than David Sycip himself who was subsequently appointed
General Manager of the corporation admits in express terms the
following "... the surplus property sold by the Foreign Liquidation
Commission to Dee Hong Lue (and held in trust by the latter for the
Syndicate ...." (Emphasis ours.) We give full weight and credence to
the adverse admissions made by David Sycip against the petitioners
1101
as appearing in his certificate Exhibit 38-A (p. 178, BIR rec.)
considering that at the time he made them, he was a person jointly
interested with the petitioners in the transaction over which there was
yet no controversy over any sales tax liability. (Secs. 11 and 33, Rule
123, Rules of Court; Clem vs. Forbeso, Tex. Cir App. 10 S.W. 2d 223;
Street vs. Masterson, Tex. Cir. App. 277 S.W. 407.) .
Exhibit '39' for the respondent (pp. 184-187, BIR rec.) which is a
letter of Mr. Yu Khe Thai President, Director and biggest stockholder
of Central Syndicate (Exhibit A, pp. 60-65, CTA rec.) dated
September 17, 1946 and addressed to the Commanding General
AFWESPAC, Manila, contains the following categorical admissions
which corroborate the admissions made by David Sycip; that the so-
called Leyte 'Mystery Pile' surplus properties were owned by Central
Syndicate by virtue of a purchase from the FLC, effected in the
name of Dee Hong Lue on July 5, 1946, inasmuch as Central
Syndicate was then still in the process of organization; that Dee
Hong Lue held the said surplus properties in trust until the mere
formal turnover to the corporation on August 20, 1946, when the
corporation had already been organized and incorporated under the
laws of the Philippines; and that on July 23, 1946 viz., twenty-two
(22) days before the incorporation of Central Syndicate on August
15, 1946 'our General Manager, Mr. David Sycip accompanied by
one of our directors, Mr. Sy En, arrived in Leyte to take over the
properties.'
Before passing on to the rest of the evidence supporting the finding
of respondent, we would like to call attention to this significant detail.
It is stated in the letter, Exhibit 39 (pp. 184-187, BIR rec.) of Mr. Yu
Khe Thai that 'on July 23, 1946, our General Manager, Mr. David
Sycip, accompanied by one of our directors, Mr. Sy En, arrived in
Leyte to take over the properties,' We ask: Why was there such a
hurry on the part of the promoters of Central Syndicate in taking over
the surplus properties when the formal agreement, Exhibit 13 (p. 66,
BIR rec.), purporting to be a contract of sale of the 'Mystery Pile'
between Dee Hong Lue as vendor, and the Central Syndicate, as
vendee, for the amount of P1,250,000.00, was effected twenty-eight
(28) days later viz., on August 20, 1946? Is this not another clear and
unmistakable indication that from the very start, as is the theory of
the respondent, the real purchasers of the 'Mystery Pile' from the
FLC and as such the 'importers' of the goods, were the Central
Syndicate and/or the group of big financiers composing it before said
corporation was incorporated on August 15, 1946; and, that Dee
Hong Lue acted merely as agent of these persons when he
purchased the pile from the FLC? As a general rule, one does not
exercise all the acts of ownership over a property especially if it
involves a big amount until after the documents evidencing such
ownership are fully accomplished.
Moreover, it appears that on October 3, 1946, Dee Hong Lue was
investigated by Major Primitivo San Agustin, Jr., G-2 of the Philippine
Army, because of the discovery of some gun parts found in his
shipment of surplus material from Palo, Leyte.
In his sworn statement, Exhibit 16 (pp. 133-139, BIR rec.) before
said officer, Dee Hong Lue admitted the following: That he paid the
FLC the amount of P1,250,000.00 "with the checks of Yu Khe Thai,
maybe also Alfonso Sycip and my checks with many others"; that "at
the beginning I was trying to buy the pile for myself without telling
other people and other friends of mine." "Watkins came to me and he
bid for me for P600,000 or P700,000, but later on when the price
went up to P1,250,000, I talked to my friends who said I could get
money." "So, I bought it with their checks and mine" (Exhibit 16-B, p.
138, BIR rec.) and, that after buying the "Mystery Pile", he (Dee
Hong Lue) never inspected the same personally. (p. 141, BIR rec.)
In his affidavit, Exhibit 15 (p. 144, BIR rec.) Dee Hong Lue admitted
that of the amount of P1,250,000.00 which he paid in two
installments sometime in July, 1946, to the FLC, P1,181,250.00
(should be P1,181,000.00) of the amount came from the following:
Yu Khe Thai who advanced to him P250,000.00; Sy Seng Tong
P375,000.00; Alfonso Z. Sycip - P375,000.00; Tan Tiong Bio -
P125,000.00; Robert Dee Se Wee P25,000.00; and, Jose S. Lim
P31,000.00 that his understanding with these persons was that
1102
should they eventually join him in Central Syndicate, such advances
would be adjusted to constitute their investments; and, that soon
after the "Mystery Pile" was purchased from the FLC, all the above-
named persons with the exception of Robert Dee Se Wee and Jose
S. Lim, formed the Central Syndicate and a re-allocation of shares
was made corresponding to the amounts advanced by them.
Added to these, we have before us other documentary evidence for
the respondent consisting of Exhibits 18, 19, 20, 21, 23, 24, 25, 26,
27, 28 and 29 (pp. 85, 88, 92-96, 99-103, 117-128, 119-120, 121-
128, BIR rec.) all tending to prove the same thing - that the Central
Syndicate and/or the group of big financiers composing it and not
Dee Hong Lue was the real purchaser (importer) of the "Mystery
Pile" from the FLC; that in the contract of sale between Dee Hong
Lue and the FLC the former acted principally as agent (Article 1930,
New Civil Code) of the petitioners Yu Khe Thai, Sy Seng Tong,
Alfonso Z. Sycip and Tan Tiong Bio who advanced the purchased
price of P1,125,000.00 out of the P1,250,000.00 paid to the FLC,
Dee Hong Lue being the purchaser in his own right only with respect
to the amount of P69,000.00; and, that the deed, Exhibit 13 (p. 77,
BIR rec.) purporting to show that Dee Hong Lue sold the "Mystery
Pile" to the Central Syndicate for consideration of P1,250.000.00 is
but a ruse to evade payment of a greater amount of percentage
tax. 1wph1.t Lue was the smallest subscriber to the capital stock of the
To our mind, the deed of sale, Exhibit 13 (p. 66, BIR rec.) as well as
the circumstances surrounding the incorporation of the Central
Syndicate, are shrouded with as much mystery as the so-called
"Mystery Pile" subject of the transaction. But, as oil is to water, the
truth and underlying motives behind these transactions have to
surface in the end. Petitioners would want us to believe that Dee
Hong Lue bought in his own right and for himself the surplus goods
in question for P1,250,000.00 from the FLC and then, by virtue of a
valid contract of sale, Exhibit 13 (p. 66, BIR rec.) transferred and
conveyed the same to the Central Syndicate at cost. If this be so,
what need was there for Dee Hong Lue to agree in the immediate
organization and incorporation of the Central Syndicate with six other
capitalists when he could very well have disposed of the surplus
goods to the public in his individual capacity and keep all the profits
to himself without sharing 9/10th of it to the other six incorporators
and stockholders of the newly incorporated Syndicate.
It appears that Dee Hong Lue "sold" the pile to the Central Syndicate
for exactly the same price barely forty-six (46) days after acquiring it
from FLC and exactly five (5) days after the Syndicate was
registered with the Securities and Exchange Commission on August
19, 1946. This is indeed most unusual for a businessman like Dee
Hong Lue who, it is to be presumed, was out to make a killing when
he acquired the surplus goods from the FLC for the staggering
amount of P1,750,000.00 in cash.
Again, why did Dee Hong Lue waste all his time and effort not to say
his good connections with the FLC by acquiring the goods from that
agency only to sell it for the same amount to the Central Syndicate?
This would have been understandable if Dee Hong Lue were the
biggest and controlling stockholder of the Syndicate. He could
perhaps reason out to himself, "the profits which I am sacrificing now
in this sale to the Syndicate, I will get it anyway in the form of
dividends from it after it shall have disposed of all the "Mystery Pile"
to the public.' But then, how could this be possible when Dee Hong
Syndicate? It appears from the Articles of Incorporation that of the
authorized capital stock of the corporation in the amount of
P500,000.00, Dee Hong Lue subscribes to only P20,000.00 or 1/25th
of the capital stock authorized and of this amount only P5,000.00
was paid by him at the time of incorporation. So here is an
experienced businessman like Dee Hong Lue who, following the
theory of petitioners' counsel, bought the "'Mystery Pile" for himself
for P1,250,000.00 in cash, and after a few days sold the same at
cost to a corporation wherein he owned only 1/25th of the authorized
capital stock and wherein he was not even an officer, thus doling out
to the other six incorporators and stockholders net profits in the sum
conservatively estimated by the respondent to be P206,116.45 out of
a total of P229,073.83 which normally could all go to him. We take
1103
judicial notice of the fact that as a result of our immense losses in
property throughout the archipelago the during the Japanese
occupation, either through destruction or systematic commandering
by the enemy and our forces, surplus properties commanded a very
good price in the open market after the liberation and that quite a
number of surplus dealers made immense fortunes out of it. We
believe the respondent was quite charitable if not more than fair to
the Central Syndicate in computing the profits realized by it in the
resale of the "Mystery Pile" to the public at only 18.8% of the
acquisition price.
Now, from the side of the Central Syndicate. This corporation, as its
articles of incorporation, Exhibit A (pp. 60-66, CTA rec.) will show,
was incorporated on August 15, 1946 with an authorized capital
stock of P500,000.00 of which P200,000.00 worth was subscribed by
seven (7) persons and P50,000.00 paid-up in cash at the time of
incorporation. Five (5) days after its incorporation, as the Deed of
Sale, Exhibit 13 (p. 66, BIR rec.) purports to show, the said
corporation bought from Dee Hong Lue the "Mystery Pile" for
P1,250,000.00 in cash. This is indeed quite phenomenal and
fantastic not to say the utmost degree of finance considering that the
corporation had a subscribed capital stock of only P200,000.00 of
which only P50,000.00 was paid-up at the time of incorporation and
with not the least proof showing that it never borrowed money in its
own name from outside source to raise the enormous amount
allegedly paid to Dee Hong Lue nor evidence to show that it had by
then in so short a time is five (5) days accumulated a substantial
reserve to meet Dee Hong Lue's selling price.
Furthermore, at first blush it would seem quite difficult to understand
why the seven (7) incorporators and stockholders of the Central
Syndicate formed a corporation with a subscribed capital stock of
only P200,000.00, and with cash on hand of only P50,000.00
knowing fully well that there was a transaction awaiting the newly
registered corporation involving an outlay of P1,250,000.00 in cash.
We believe this was done after mature deliberation and for some
ulterior motive. As we see it, the only logical answer is that the
incorporator wanted to limit whatever civil liability that might arise in
favor of third persons, as the present tax liability has now arisen, up
to the amount of their subscriptions, although the surplus deal they
transacted and which we believe was the only purpose in the
incorporation of the Central Syndicate, was very much over and
above their authorized capital. Moreover, by limiting its capital, the
corporation was also able to save on incidental expenses, such as
attorney's fee and the filing fee paid to the Securities and Exchange
Commission, which were based on the amount of the authorized
capital stock.
Another mystery worth unravelling is what happened to the
P1,181,240.00 (should be P1,181,000.00) which Dee Hong Lue in
his affidavit, Exhibit 15 (p. 144, BIR rec.) claims to have received
from Messrs. Uy Khe Thai, Sy Seng Tong, Alfonso Z. Sycip, Tan
Tiong Bio (all incorporators of the Syndicate) and two others as
'advances' with which to pay the FLC. There is no evidence on
record to show that Dee Hong Lue ever returned this amount to
those six (6) persons after he supposedly received P1,250,000.00
from the newly incorporated Syndicate by virtue of the Deed of Sale,
Exhibit 13. This is the explanation that Dee Hong Lue gave in this
regard as appearing in his affidavit, Exhibit 15: "That soon after the
above-mentioned property was purchased, the above parties, with
the exception of Robert Dee Se Wee and Jose S. Lim decided to join
the proposed Central Syndicate and a re-allocation of shares was
made for the reason that some of the above parties in turn had to get
advances from third parties." If this were true, why was it that
Messrs. Yu Khe Thai, Sy Seng Tong, Alfonso Z. Sycip and Tan Tiong
Bio who advanced P250,000.00; P375,000.00 and P125,000.00 to
Dee Hong Lue were made to appear in the Articles of incorporation
of the Central Syndicate as having subscribed to shares worth only
P40,000.00; P30,000.00; P30,000.00 and P20,000.00 and of having
paid only P10,000.00, P7,500.00, P7,500.00, and P5,000.00 on their
subscriptions, respectively? Would it not be more in keeping with
corporate practice, following the explanation of Dee Hong Lue, to just
credit those four (4) persons in the corporation with shares worth the
amount advanced by them to Dee Hong Lue?
1104
On the basis of the above figures, the re-allocation of shares in favor
of the four (4) incorporators who advanced enormous sums for the
Syndicate seems at first glance to be totally disproportionate and
unfair to them. However, in the final analysis it is not so as we will
now show. Immediately after the incorporation of the Syndicate, as
the evidence shows, Dee Hong Lue was made to execute a deed of
transfer under the guise of a contract of sale, conveying full and
complete ownership of the "Mystery Pile" to the newly organized
corporation. So we have, on the face of the Articles of Incorporation
and Exhibit 13, a corporation with assets worth only P50,000.00 cash
owning properties worth over a million pesos. Obviously, the
incorporators of the Syndicate, particularly those four who advanced
enormous sums to Dee Hong Lue, are not ordinary businessmen
who could easily be taken for a ride. With the precipitated execution
of the "Deed of Sale" by Dee Hong Lue in favor of the Syndicate,
transferring and conveying ownership over the entire pile to the
latter, the recoupment of their advances from the newly acquired
assets of the corporation was sufficiently secured, and at the same
time, by making the document appear to be a deed of sale instead of
a deed of transfer as it should be under Article 1891 of the New Civil
Code, they have reduced (at least attempted to) their sales tax
liability with the argument that Dee Hong Lue was the original
"purchaser" or "importer" of the goods and therefore the taxable sale
was that one made by him to the Syndicate and not the sales made
by the latter to the public. After going over the Articles of
Incorporation of the Central Syndicate and the other circumstances
of this case, we draw the conclusion that it was organized just for this
particular transaction that its life span was expressly limited to two
(2) years from and after the date of incorporation just to give it time
to dispose of the "Mystery Pile" to the public and then liquidate all its
assets among the seven incorporators-stockholders as in fact it was
done on August 15, 1948; that from the very start, the seven (7)
incorporators had intended it to be a closed corporation without the
least intention of ever selling to other persons the remaining
authorized capital stock of P300,000.00 still unsubscribed; and, that
upon its liquidation, the seven (7) incorporators composing it got
much more than their investments including those who advanced
P1,181,000.00 to the FLC for the corporation.
Petitioners would dispute the finding that Dee Hong Lue merely acted as a
trustee of the Central Syndicate when he purchased the surplus goods in
question from the Foreign Liquidation Commission on July 5, 1946
considering that on that date the syndicate has not yet been incorporated on
the theory that no legal relation may exist between parties one of whom has
yet no legal existence. Technically this may be true, but the fact remains that
it cannot be denied that Dee Hong Lue purchased the goods on behalf of
those who advanced the money for the purchase thereof who later became
the incorporators and only stockholders of the syndicate with the
understanding that the amounts they had respectively advanced would be
their investment and would represent their interest in the corporation. And
this is further evidenced by the fact that this purchase made by Dee Hong
Lue was later approved and adopted as the act of the Central Syndicate itself
as can be gleaned from the certificate executed by David Sycip, general
manager of said syndicate, on September 16, 1946, wherein he emphasized
that the persons named therein (from whom Dee Hong Lue obtained the
money) merely acted on behalf of the syndicate and in fact were the ones
who went to Leyte to take over the aforesaid surplus goods. In any event,
even if Dee Hong Lue may be deemed as the purchaser of the surplus goods
in his own right, nevertheless, the corporation still may be regarded as the
importer of the same goods for the reason that Dee Hong Lue transferred to
it all his rights and interests in the contract with the Foreign Liquidation
Commission, and it was said corporation that took delivery thereof from the
place where they were stored in Leyte as may be seen from the letter of Dee
Hong Lue to the Foreign Liquidation Commission dated September 2, 1946
and the letter of the Central Syndicate to the said Commission bearing the
same date. Under these facts, it is clear that the Central Syndicate is the
importer of the surplus goods as correctly observed by Judge Umali in his
concurring opinion, from which we quote: .
It is now well settled that a person who bought surplus goods from
the Foreign Liquidation Commission and who removed the goods
bought from the U.S. military bases in the Philippines is considered
an importer of such goods and is subject to the sales tax or
1105
 compensating tax, as the case may be. (Go Cheng Tee v. Meer, 47
O.G. 269; Saura Import and Export v. Meer, G.R. No. L-2927, Jan.
26, 1951; P.M.P. Navigation v. Meer, G.R. No. L-4621, March 24,
1953; Soriano y Cia v. Coll. of Int. Rev., 51 O.G. 4548.) In this case it
appearing that the Central Syndicate was the owner of the 'Mystery
Pile' before its removal from Base K and that it was the one which
actually took delivery thereof and removed the same from the U.S.
military base, it is the importer within the meaning of Section 186 of
the Revenue Code, as it stood before the enactment of Republic Act
No. 594, and its sales of the surplus goods are the original sales
taxable under said section and not the sale to it by Dee Hong Lue.
2. Since the Central Syndicate, as we have already pointed out, was the
importer of the surplus goods in question, it was its duty under Section 183 of
the Internal Revenue Code to file a return of its gross sales within 20 days
after the end of each quarter in order that the office of the internal revenue
may assess the sales tax that may be due thereon, but, as the record shows,
the Central Syndicate failed to file any return of its quarterly sales on the
pretext that it was Dee Hong Lue who imported the surplus goods and it
merely purchased them from said importer. This is in fact what the syndicate
intended to impress upon the Collector when it wrote to him its letter of
October 19, 1946 informing him that it purchased from Dee Hong Lue the
entire stock of the surplus goods which the latter had bought from the
Foreign Liquidation Commission and was therefore depositing in his name
the sum of P43,750.00 to answer for his sales tax liability, but this letter
certainly cannot be considered as a return that may set in operation the
application of the prescriptive period provided for in Section 331 of the Tax
Code, for, evidently, said letter if at all could only be considered as such in
behalf of Dee Hong Lue and not in behalf of the Central Syndicate because
such is the only nature and import of the letter. Besides, how can such letter
be considered as a return of the sales of the Central Syndicate when it was
only on February 21, 1947 when it removed the surplus goods in question
from their base at Leyte? How can such return inure to the benefit of the
syndicate when the same surplus goods which were removed on said date
could not have been sold by the corporation earlier than the aforesaid date?
It is obvious that the letter of October 19, 1946 cannot possibly be
considered as a return filed by the syndicate and so cannot serve as basis
for the computation of the prescriptive period of five years prescribed by law.
Nor can the fact that the Collector did not include in the assessment a
surcharge of 50% serve as an argument that a return had already been filed,
for such failure can only mean that an oversight had been committed in the
non-inclusion of said surcharge. The syndicate having failed to file its
quarterly returns as required by Section 183 of the Tax Code, the period that
has to be reckoned with is that embodied in Section 332 of the same Code
which provides that in case of failure to file the return the tax may be
assessed within 10 years after discovery of the falsity, fraud or omission of
the payment of the proper tax. Since it appears that the Collector discovered
the failure of the syndicate to file the return only on September 12, 1951 he
has therefore up to September 18, 1961 within which to assess or collect the
deficiency tax in question. Consequently the assessment made on January
4, 1952 was made within the prescribed period.
3. Petitioners argue (1) that the Court of Tax Appeals acted in excess of its
jurisdiction in holding them liable as officers or directors of the defunct
Central Syndicate for the tax liability of the latter; (2) that petitioners cannot
be held liable for said tax liability there being no statutory provision in this
jurisdiction authorizing the government to proceed against the stockholders
of a defunct corporation as transferees of the corporate assets upon
liquidation; (3) that assuming that the stockholders can be held so liable, they
are only liable to the extent of the benefits derived by them from the
corporation and there is no evidence showing that petitioners had been the
beneficiaries of the defunct syndicate; (4) that considering that the Collector
instituted the present action on September 23, 1954 when he filed his answer
to the appeal of petitioners, said action was already barred by prescription
pursuant to Sections 77 and 78 of the Corporation Law which allows
corporations to continue as a body corporate only for three years from its
dissolution; and (5) that assuming that petitioners are liable to pay the tax,
their liability is not solidary, but only limited to the benefits derived by them
from the corporation.
It should be stated at the outset that it was petitioners themselves who
caused their substitution as parties in the present case, being the
1106
successors-in-interest of the defunct syndicate, when they appealed this
case to the Supreme Court for which reason the latter Court declared that
"the respondent Court of Tax Appeals should have allowed the substitution of
its former officers and directors is parties-appellants, since they are proper
parties in interest insofar as they may be (and in fact are) held personally
liable for the unpaid deficiency assessments made by the Collector of
Internal Revenue against the defunct Syndicate." In fact, because of this
directive their substitution was effected. They cannot, therefore, be now
heard to complain if they are made responsible for the tax liability of the
defunct syndicate whose representation they assumed and whose assets
were distributed among them.
In the second place, there is good authority to the effect that the creditor of a
dissolved corporation may follow its assets once they passed into the hands
of the stockholders. Thus, recognized are the following rules in American
jurisprudence: The dissolution of a corporation does not extinguish the debts
due or owing to it (Bacon v. Robertson, 18 How. 480, 15 L. Ed., 406; Curron
v. State, 16 How. 304, 14 L. Ed., 705). A creditor of a dissolve corporation
may follow its assets, as in the nature of a trust fund, into the hands of its
stockholders (MacWilliams v. Excelsier Coal Co. [1924] 298 Fed. 384). An
indebtedness of a corporation to the federal government for income and
excess profit taxes is not extinguished by the dissolution of the corporation
(Quinn v. McLeudon, 152 Ark. 271, 238 S.W., 32). And it has been stated,
with reference to the effect of dissolution upon taxes due from a corporation,
"that the hands of the government cannot, of course, collect taxes from a
defunct corporation, it loses thereby none of its rights to assess taxes which
had been due from the corporation, and to collect them from persons, who by
reason of transactions with the corporation, hold property against which the
tax can be enforced and that the legal death of the corporation no more
prevents such action than would the physical death of an individual prevent
the government from assessing taxes against him and collecting them from
his administrator, who holds the property which the decedent had formerly
possessed" (Wonder Bakeries Co. v. U.S. [1934] Ct. Cl. 6 F. Supp. 288).
Bearing in mind that our corporation law is of American origin, the foregoing
authorities have persuasive effect in considering similar cases in this
jurisdiction. This must have been taken into account when in G.R. No. L-
8800 this Court said that petitioners could be held personally liable for the
taxes in question as successors-in-interest of the defunct corporation.
Considering that the Central Syndicate realized from the sale of the surplus
goods a net profit of P229,073.83, and that the sale of said goods was the
only transaction undertaken by said syndicate, there being no evidence to
the contrary, the conclusion is that said net profit remained intact and was
distributed among the stockholders when the corporation liquidated and
distributed its assets on August 15, 1948, immediately after the sale of the
said surplus goods. Petitioners are therefore the beneficiaries of the defunct
corporation and as such should be held liable to pay the taxes in question.
However, there being no express provision requiring the stockholders of the
corporation to be solidarily liable for its debts which liability must be express
1107
and cannot be presumed, petitioners should be held to be liable for the tax in
question only in proportion to their shares in the distribution of the assets of
the defunct corporation. The decision of the trial court should be modified
accordingly.

WHEREFORE, with the above modification, we hereby affirm the decision

appealed from, with costs against petitioners.

Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes. J.B.L., Paredes and

Dizon, JJ., concur.
Barrera, J., took no part.

G.R. No. L-39050 February 24, 1981

CARLOS GELANO and GUILLERMINA MENDOZA DE

GELANO, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and INSULAR SAWMILL,
INC., respondents.

1108
DE CASTRO, J.:
Private respondent Insular Sawmill, Inc. is a corporation organized on
September 17, 1945 with a corporate life of fifty (50) years, or up to
September 17, 1995, with the primary purpose of carrying on a general
lumber and sawmill business. To carry on this business, private respondent
leased the paraphernal property of petitioner-wife Guillermina M. Gelano at
the corner of Canonigo and Otis, Paco, Manila for P1,200.00 a month. It was
while private respondent was leasing the aforesaid property that its officers
and directors had come to know petitioner-husband Carlos Gelano who
received from the corporation cash advances on account of rentals to be paid
by the corporation on the land.
Between November 19, 1947 to December 26, 1950 petitioner Carlos Gelano
obtained from private respondent cash advances of P25,950.00. The said
sum was taken and received by petitioner Carlos Gelano on the agreement
that private respondent could deduct the same from the monthly rentals of
the leased premises until said cash advances are fully paid. Out of the
aforementioned cash advances in the total sum of P25,950.00, petitioner
Carlos Gelano was able to pay only P5,950.00 thereby leaving an unpaid
balance of P20,000.00 which he refused to pay despite repeated demands
by private respondent. Petitioner Guillermina M. Gelano refused to pay on
the ground that said amount was for the personal account of her husband
asked for by, and given to him, without her knowledge and consent and did
not benefit the family.
On various occasions from May 4, 1948 to September 11, 1949 petitioners
husband and wife also made credit purchases of lumber materials from
private respondent with a total price of P1,120.46 in connection with the
repair and improvement of petitioners' residence. On November 9, 1949
partial payment was made by petitioners in the amount of P91.00 and in view
of the cash discount in favor of petitioners in the amount of P83.00, the
amount due private respondent on account of credit purchases of lumber
materials is P946.46 which petitioners failed to pay.
On July 14, 1952, in order to accommodate and help petitioners renew
previous loans obtained by them from the China Banking Corporation, private
respondent, through Joseph Tan Yoc Su, executed a joint and several
promissory note with Carlos Gelano in favor of said bank in the amount of
P8,000.00 payable in sixty (60) days. For failure of Carlos Gelano to pay the
promissory note upon maturity, the bank collected from the respondent
corporation the amount of P9,106.00 including interests, by debiting it from
the corporation's current account with the bank. Petitioner Carlos Gelano was
able to pay private respondent the amount of P5,000.00 but the balance of
P4,106.00 remained unsettled. Guillermina M. Gelano refused to pay on the
ground that she had no knowledge about the accommodation made by the
corporation in favor of her husband.
On May 29, 1959 the corporation, thru Atty. German Lee, filed a complaint for
collection against herein petitioners before the Court of First Instance of
Manila. Trial was held and when the case was at the stage of submitting
memorandum, Atty. Lee retired from active law practice and Atty. Eduardo F.
Elizalde took over and prepared the memorandum.
In the meantime, private respondent amended its Articles of Incorporation to
shorten its term of existence up to December 31, 1960 only. The amended
Articles of Incorporation was filed with, and approved by the Securities and
Exchange Commission, but the trial court was not notified of the amendment
shortening the corporate existence and no substitution of party was ever
made. On November 20, 1964 and almost four (4) years after the dissolution
of the corporation, the trial court rendered a decision in favor of private
respondent the dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered, ordering:
1. Defendant Carlos Gelano to pay plaintiff the sum of:
(a) P19,650.00 with interest thereon at the
legal rate from the date of the filing of the
complaint on May 29, 1959, until said sum is
fully paid;
1109
 (b) P4,106.00, with interest thereon at the
legal rate from the date of the filing of the
complaint until said sum is fully paid;
2. Defendants Carlos Gelano and Guillermina Mendoza to
pay jointly and severally the sum of:
(a) P946.46, with interest thereon, at the
agreed rate of 12% per annum from October
6, 1946, until said sum is fully paid;
(b) P550.00, with interest thereon at the
legal rate from the date of the filing of the
complaint until the said sum is fully paid;
(c) Costs of the suit; and
3. Defendant Carlos Gelano to pay the plaintiff the sum of
P2,000.00 attorney's fees.
The Countered of defendants are dismissed.
SO ORDERED. 1
Both parties appealed to the Court of Appeals, private respondent also
appealing because it insisted that both Carlos Gelano and Guillermina
Gelano should be held liable for the substantial portion of the claim.
On August 23, 1973, the Court of Appeals rendered a decision modifying the
judgment of the trial court by holding petitioner spouses jointly and severally
liable on private respondent's claim and increasing the award of P4,106.00.
The dispositive portion of the decision reads as follows:
WHEREFORE, modified in the sense that the amount of
P4,160.00 under paragraph 1 (b) is raised to P8,160.00 and
the clarification that the conjugal partnership of the spouses
is jointly and severally liable for the obligations adjudged
against defendant Carlos Gelano, the judgment appealed
from is affirmed in all other respects. 2
After petitioners received a copy of the decision on August 24, 1973, they
came to know that the Insular Sawmill Inc. was dissolved way back on
December 31, 1960. Hence, petitioners filed a motion to dismiss the case
and/or reconsideration of the decision of the Court of Appeals on grounds
that the case was prosecuted even after dissolution of private respondent as
a corporation and that a defunct corporation cannot maintain any suit for or
against it without first complying with the requirements of the winding up of
the affairs of the corporation and the assignment of its property rights within
the required period.
Incidentally, after receipt of petitioners' motion to dismiss and/or
reconsideration or on October 28, 1973, private respondent thru its former
directors filed a Petition for Receivership before the Court of First Instance of
Manila, docketed as Special Proceedings No. 92303, 3 which petition is still
pending before said court.
On November 5, 1973, private respondent filed comment on the motion to
dismiss and or reconsideration and after the parties have filed reply and
rejoinder, the Court of Appeals on July 5, 1974 issued a resolution 4 denying
the aforesaid motion.
Hence, the present petition for review, petitioners assigning the following
errors:
I
THE "RESPONDENT COURT" ERRED IN DENYING
PETlTIONERS MOTION TO DISMISS THIS CASE DESPITE
THE CLEAR FINDING THAT "RESPONDENT" HAD
ALREADY CEASED TO EXIST AS A CORPORATION
SINCE DECEMBER 31, 1960 YET.
1110
II
THE "RESPONDENT COURT" ERRED IN NOT HOLDING
THAT ACTIONS PENDING FOR OR AGAINST A DEFUNCT
CORPORATION ARE DEEMED ABATED.
III
THE "RESPONDENT COURT" ERRED IN HOLDING
INSTEAD THAT EVEN IF THERE WAS NO COMPLIANCE
WITH SECTIONS 77 AND 78 OF THE CORPORATION
LAW FOR THE WINDING UP OF THE AFFAIRS OF THE
CORPORATION BY THE CONVEYANCE OF CORPORATE
PROPERTY AND PROPERTY RIGHTS TO AN ASSIGNEE,
OR TRUSTEE OR THE APPOINTMENT OF A RECEIVER
WITHIN THREE YEARS FROM THE DISSOLUTION OF
SUCH CORPORATION, ANY LITIGATION FILED BY OR
AGAINST THE DISSOLVED CORPORATION, INSTITUTED
WITHIN THREE YEARS AFTER SUCH DISSOLUTION BUT
WHICH COULD NOT BE TERMINATED WITHIN SAID
PERIOD, MAY STILL BE CONTINUED AS IT IS NOT
DEEMED ABATED.
IV
THE "RESPONDENT COURT" ERRED IN THE
APPLICATION TO THIS CASE OF ITS RULING IN PASAY
CREDIT AND FINANCE CORPORATION, VERSUS
LAZARO, ET AL., 46 O.G. (11) 5528, AND IN
OVERLOOKING THE DISTINCTION LAID DOWN BY THIS
HONORABLE COURT IN NUMEROUS DECIDED CASES
THAT ONLY CASES FILED IN THE NAME OF ASSIGNEES,
TRUSTEES OR RECEIVERS (FOR A DEFUNCT
CORPORATION), AI)POINTED WITHIN THREE YEARS
FROM ITS DISSOLUTION, MAY BE PROSECUTED
BEYOND THE SAID THREE YEAR PERIOD, AND THAT,
ALL OTHERS ARE DEEMED ABATED.
V
THE "RESPONDENT COURT" ERRED IN HOLDING THAT
WITH THE FILING OF SPECIAL PROCEEDINGS NO.
92303 IN THE COURT OF FIRST INSTANCE OF MANILA
BY FORMER DIRECTORS OF "PRIVATE RESPONDENT"
ON OCTOBER 23,1973, OR, THIRTEEN YEARS AFTER
ITS DISSOLUTION, A LEGAL, PERSONALITY WILL BE
APPOINTED TO REPRESENT THE CORPORATION.
VI
THE "RESPONDENT COURT" ERRED IN PRACTICALLY
RULING THAT THE THREE-YEAR PERIOD PROVIDED
FOR BY THE CORPORATION LAW WITHIN WHICH
ASSIGNEES, TRUSTEES FOR RECEIVERS MAY BE
APPOINTED MAY BE EXTENDED.
VII
THE "RESPONDENT COURT" ERRED IN NOT HOLDING
THAT THE FAILURE OF "PRIVATE RESPONDENT" OR ITS
AUTHORIZED COUNSEL TO NOTIFY THE TRIAL COURT
1111
 OF ITS DISSOLUTION OR OF ITS "CIVIL DEATH" MAY BE
CONSIDERED AS AN ABANDONMENT OF ITS CAUSE OF
ACTION AMOUNTING TO A FAILURE TO PROSECUTE
AND RESULTING IN THE ABATEMENT OF THE SUIT.
VIII
THE "RESPONDENT COURT" ERRED IN RECOGNIZING
THE PERSONALITY OF COUNSEL APPEARING FOR
PRIVATE RESPONDENT' DESPITE HIS ADMISSION THAT
HE DOES NOT KNOW THE "PRIVATE RESPONDENT"
NOR HAS HE MET ANY OF ITS DIRECTORS AND
OFFICERS.
IX
THE "RESPONDENT COURT" ERRED IN AFFIRMING THE
DECISION OF THE TRIAL COURT HOLDING IN FAVOR OF
"PRIVATE RESPONDENT".
X
THE "RESPONDENT COURT" ERRED IN MODIFYING THE
TRIAL COURT'S DECISION AND HOLDING EVEN THE
CONJUGAL PARTNERSHIP OF PETITIONERS JOINTLY
AND SEVERALLY LIABLE FOR THE OBLIGATION
ADJUDGED AGAINST PETITIONER-HUSBAND, CARLOS
GELANO.
The main issue raised by petitioner is whether a corporation, whose
corporate life had ceased by the expiration of its term of existence, could still
continue prosecuting and defending suits after its dissolution and beyond the
period of three years provided for under Act No. 1459, otherwise known as
the Corporation law, to wind up its affairs, without having undertaken any
step to transfer its assets to a trustee or assignee.
The complaint in this case was filed on May 29, 1959 when private
respondent Insular Sawmill, Inc. was still existing. While the case was being
tried, the stockholders amended its Articles of Incorporation by shortening the
term of its existence from December 31, 1995 to December 31, 1960, which
was approved by the Securities and Exchange Commission.
In American corporate law, upon which our Corporation Law was patterned, it
is well settled that, unless the statutes otherwise provide, all pending suits
and actions by and against a corporation are abated by a dissolution of the
corporation. 5 Section 77 of the Corporation Law provides that the
corporation shall "be continued as a body corporate for three (3) years after
the time when it would have been ... dissolved, for the purpose of
prosecuting and defending suits By or against it ...," so that, thereafter, it shall
no longer enjoy corporate existence for such purpose. For this reason,
Section 78 of the same law authorizes the corporation, "at any time during
said three years ... to convey all of its property to trustees for the benefit of
members, Stockholders, creditors and other interested," evidently for the
purpose, among others, of enabling said trustees to prosecute and defend
suits by or against the corporation begun before the expiration of said
period. 6 Commenting on said sections, Justice Fisher said:
It is to be noted that the time during which the corporation,
through its own officers, may conduct the liquidation of its
assets and sue and be sued as a corporation is limited to
three years from the time the period of dissolution
commences; but that there is no time limited within which the
trustees must complete a liquidation placed in their hands. It
is provided only (Corp. Law, Sec. 78) that the conveyance to
the trustees must be made within the three-year period. It
may be found impossible to complete the work of liquidation
within the three-year period or to reduce disputed claims to
judgment. The authorities are to the effect that suits by or
against a corporation abate when it ceased to be an entity
capable of suing or being sued (7 R.C.L. Corps., Par. 750);
but trustees to whom the corporate assets have been
conveyed pursuant to the authority of Section 78 may sue
and be sued as such in all matters connected with the
1112
 liquidation. By the terms of the statute the effect of the
conveyance is to make the trustees the legal owners of the
property conveyed, subject to the beneficial interest therein
of creditors and stockholders. 7
When Insular Sawmill, Inc. was dissolved on December 31, 1960, under
Section 77 of the Corporation Law, it stin has the right until December 31,
1963 to prosecute in its name the present case. After the expiration of said
period, the corporation ceased to exist for all purposes and it can no longer
sue or be sued. 8
However, a corporation that has a pending action and which cannot be
terminated within the three-year period after its dissolution is authorized
under Section 78 to convey all its property to trustees to enable it to
prosecute and defend suits by or against the corporation beyond the Three-
year period although private respondent (did not appoint any trustee, yet the
counsel who prosecuted and defended the interest of the corporation in the
instant case and who in fact appeared in behalf of the corporation may be
considered a trustee of the corporation at least with respect to the matter in
litigation only. Said counsel had been handling the case when the same was
pending before the trial court until it was appealed before the Court of
Appeals and finally to this Court. We therefore hold that there was a
substantial compliance with Section 78 of the Corporation Law and as such,
private respondent Insular Sawmill, Inc. could still continue prosecuting the
present case even beyond the period of three (3) years from the time of its
dissolution.
From the above quoted commentary of Justice Fisher, the trustee may
commence a suit which can proceed to final judgment even beyond the
three-year period. No reason can be conceived why a suit already
commenced By the corporation itself during its existence, not by a mere
trustee who, by fiction, merely continues the legal personality of the dissolved
corporation should not be accorded similar treatment allowed to proceed
to final judgment and execution thereof.
The word "trustee" as sued in the corporation statute must be understood in
its general concept which could include the counsel to whom was entrusted
in the instant case, the prosecution of the suit filed by the corporation. The
purpose in the transfer of the assets of the corporation to a trustee upon its
dissolution is more for the protection of its creditor and stockholders. Debtors
like the petitioners herein may not take advantage of the failure of the
corporation to transfer its assets to a trustee, assuming it has any to transfer
which petitioner has failed to show, in the first place. To sustain petitioners'
contention would be to allow them to enrich themselves at the expense of
another, which all enlightened legal systems condemn.
The observation of the Court of Appeals on the issue now before Us that:
Under Section 77 of the Corporation Law, when the
corporate existence is terminated in any legal manner, the
corporation shall nevertheless continue as a body corporate
for three (3) years after the time when it would have been
dissolved, for the purpose of prosecuting and defending suits
by or against it. According to authorities, the corporation
"becomes incapable of making contracts or receiving a
grant. It does not, however, cease to be a body corporate for
all purposes." In the case of Pasay Credit and Finance Corp.
vs. Isidro Lazaro and others, 46 OG (11) 5528, this Court
held that "a corporation may continue a pending 'litigation
even after the lapse of the 3-year period granted by Section
77 of Act 1459 to corporation subsequent to their dissolution
to continue its corporate existence for the purpose of winding
up their affairs and settling all the claims by and against
same." We note that the plaintiff Insular Sawmill, Inc. ceased
as a corporation on December 30, 1960 but the case at bar
was instituted on May 29, 1959, during the time when the
corporation was still very much alive. Accordingly, it is our
view that "any litigation filed by or against it instituted within
the period, but which could not be terminated, must
necessarily prolong that period until the final termination of
said litigation as otherwise corporations in liquidation would
lose what should justly belong to them or would be exempt
1113
 from the payment of just obligations through a mere
technicality, something that courts should prevent"
(Philippine Commercial Laws by Martin, 1962 Ed., Vol. 2, p.
1716).
merits the approval of this Court.
The last two assigned errors refer to the disposition of the main case.
Petitioners contend that the obligations contracted by petitioner Carlos
Gelano from November 19, 1947 until August 18, 1950 (before the effectivity
of the New Civil Code) and from December 26, 1950 until July 14, 1952
(during the effectivity of the New Civil Code) were his personal obligations,
hence, petitioners should not be held jointly and severally liable. As regards
the said issues, suffice it to say that with the findings of the Court of Appeals
that the obligation contracted by petitioner-husband Carlos Gelano
redounded to the benefit of the family, the inevitable conclusion is that the
conjugal property is liable for his debt pursuant to paragraph 1, Article 1408,
Civil Code of 1889 9 which provision incidentally can still be found in
paragraph 1, Article 161 of the New Civil Code. 10 Only the conjugal
partnership is liable, not joint and several as erroneously described by the
Court of Appeals, the conjugal partnership being only a single entity.
WHEREFORE, with the modification that only the conjugal partnership is
liable, the appealed decision is hereby affirmed in all other respects. Without
pronouncement as to costs.
SO ORDERED.
Makasiar, Fernandez, and Guerrero, JJ., concur.
Teehankee, J., concur in the result.
Mr. Justice de Castro was designated to sit with the First Division under
Special Order No. 225.
[G.R. No. 36930. June 30, 1933.]
In the matter of the Voluntary Dissolution of George, OFarrell & Cie.,
Inc. CHINA BANKING CORPORATION and LEOPOLDO KAHN,
claimants-appellants, v. M. MICHELIN & CIE., claimants-appellee.
Feria & La O and Felipe Canillas, for Appellants.
Gutierrez Repide & Monzon and Ramon L. Sunico, for Appellee.
SYLLABUS
1. CORPORATIONS; RECEIVERSHIP; PROCEDURE BY COURT IN
APPROVING CLAIMS. Claims against a corporation in the hands of a
receiver should not be approved and paid without some formal and regular
proceeding whereby their justice and correctness may be inquired into after a
reasonable opportunity has been given to all the parties in interest to present
objections and submit evidence in support of such objections. (Whalen v.
Pasig Iron Works, 13 Phil., 417.)
2. ID.; VOLUNTARY DISSOLUTION; APPOINTMENT OF RECEIVER.
Section 176 of the Code of Civil Procedure dealing with the appointment of
receiver upon decree of a corporation provides that the court "may . . .
appoint a receiver to take charge" of the estate and effects of the corporation,
"and to pay the outstanding debts thereof, and to divide the money and other
properties that shall remain over among the stockholders or members," and
consistent with respect to decrees of dissolution rendered upon voluntary
application that the court "may appoint receivers to collect and take charge of
the assets of the corporation." Such language found in both statutes on the
subject is permissive rather than mandatory and tends to recognize that in
cases of voluntary dissolution there is no occasion for the appointment of a
receiver except under special circumstances and upon proper showing.
There can be no doubt that when enacting the Corporation Law the
Legislature intended to let the shareholders have the control of the assets of
the corporation upon dissolution in winding up its affairs. The normal method
of procedure is for the directors and executive officers to have charge of the
winding up operations, though there is the alternative method of assigning
1114
the property of the corporation to trustees for the benefit of its creditors and
shareholders.
3. ID.; ID.; ID. Statutes authorizing voluntary dissolutions are generally
held to apply only to a dissolution brought about by the stockholders
themselves, and while the appointment of a receiver rests within the sound
judicial discretion of the court, such discretion must, however, always be
exercised with caution and governed by legal and equitable principles, the
violation of which will amount to its abuse, and in making such appointment
the court should take into consideration all the facts and weigh the relative
advantages and disadvantages of appointing a receiver to wind up the
corporate business. The court should only act on facts which have been
proved by competent legal evidence. (8 Thompson on Corp. [2d ed. ], pages
693, 701, 727, and 738.)
4. ID.; ID.; WHEN CLAIMS CAN BE REVIEWED BY COURTS. The
decree of dissolution in the case at bar having been entered on August 22,
1930, and the motion of the appellant, China Banking Corporation, appearing
to have been filed on September 30, 1931, or about thirteen months later, it
follows that the motion was filed on time to have the appellees claim
reviewed by the court under the provisions of the Corporation Law, and the
trial court, therefore, erred in finding that the order of November 8, 1930,
allowing appellees claim was final and unappealable under the provisions of
section 113 of the Code of Civil Procedure.
DECISION
OSTRAND, J.:
This is a joint appeal of the China Banking Corporation and Leopoldo Kahn
from the order of the Court of First Instance of Manila dated November 7,
1931, denying the appellant banks motion for reconsideration of the order of
the said court of November 8, 1930, allowing the claim of the appellee, M.
Michelin & Cie., as a preferred claim against the corporation in dissolution,
George, OFarrell & Cie., Inc., to which reference will be made as the
"corporation."
The appellant, China Banking Corporation, is a claimant against the
corporation as the holder of a note for P8,5000 signed jointly and severally
by the corporation and the other appellant, Leopoldo Kahn, who has joined
the appeal to protect his interest.
George OFarrell & Cie., Inc., is a domestic corporation organized in 1925
and registered in the same year in the mercantile register of the Bureau of
Commerce and Industry, one of its purposes being that of acting as the agent
and representative of foreign firms for the sale and distribution of their
products in the Philippines.
For a number of years prior to its dissolution the corporation had been acting
as the representative of the appellee, M. Michelin & Cie., in the Philippine
Islands for the sale and distribution of the rubber tires for motor cars
produced by the appellee and broadly known as "Michelin tires." These
business relations between the appellee decided to discontinue them, and
upon settlement of accounts between both concerns it was found that the
corporation failed to account for the sum of P23,268.83, the sale price of a
number of rubber tires sold by the corporation. This amount according to
appellees claim and taking appellees own words "was disposed of by the
corporation for its own use and benefit and without the authority or consent"
of the appellee. A few days later, however, the corporation, Gaston OFarrell,
personally, and one Rosario Sanchez, represented by Gaston OFarrell as
her attorney-in-fact, executed a mortgage in favor of the appellee of a house
belonging to Gaston OFarrell and of a number of shares of stock of the
corporation owned by OFarrell and Rosario Sanchez to guarantee payment
1115
of the said amount to the appellee in five monthly installments, the first one to
be made on June 1, 1930, and prior to the filing of the petition for dissolution
the corporation made a partial payment of P1,300 leaving an unpaid balance
of P21,968.83, which is the amount claimed by the appellee and allowed by
the court below as a preferred claim. (Record of Appeal, pages 16, 17, 18,
73-79.)
On July 9, 1930, the board of directors filed the petition for its dissolution and
for the appointment of its president and general manager, Gaston OFarrell,
as receiver and liquidator to wind up the affairs of the corporation which,
according to the petition, had a balance of P57,601.24 over and above its
just debts and liabilities, and upon publication of the notices required by law
and hearing of the petition the trial court decreed the dissolution of the
corporation on August 22, 1930, and appointed the said Gaston OFarrell as
receiver and liquidator to wind up the affairs of the corporation, pay all its
liabilities, collect all debts and obligations and dispose of all the remaining
assets and property of the corporation subject to the order of the court and
as the law may permit and justice may require.
The appellee, M. Michelin & Cie., is a foreign "sociedad annima" organized
under the laws of France and domiciled in said country, and on November 4,
1930, filed its claim against the corporation for the aforesaid balance of
P21,968.83 with a prayer that the claim be allowed as a preferred one
against the corporation on the ground that the said amount represented the
proceeds from the sale of a number of rubber tires which were on deposit
with and sold by the corporation. The attorney for the corporation, Jesus O.
Serrano, gave his conformity to the petition by signing at the foot thereof
under the words "estoy conforme en que la presente reclamacin sea
considerada como credito preferente." Notice setting the hearing of the claim
for Saturday, November 8, 1930, was likewise served on said Jesus O.
Serrano as attorney for the corporation. No notice appears to have been
given to anybody else neither of the claim nor of the hearing thereof, and on
the same date set for the hearing, that is, November 8, 1930, the court
rendered a judgment allowing the claim as a preferred claim against the
corporation and directing the receiver to pay the amount thereof out of any
funds in his possession. Nobody except the claimant and the attorney for the
receiver was notified of such order. Under date of November 26, 1930, was
likewise served on said Jesus O. Serrano as attorney for the corporation. No
notice appears to have been given to anybody else neither of the claim nor of
the hearing thereof, and on the same date set for the hearing, that is,
November 8, 1930, the court rendered a judgment allowing the claim as a
preferred claim against the corporation and directing the receiver to pay the
amount thereof out of any funds in his possession. Nobody except the
claimant and the attorney for the receiver was notified of such order. Under
date of November 26, 1930, the appellee filed an "ex parte petition", praying
for an order directing the liquidator, Gaston OFarrell, to pay appellees claim
within three days, and acting on said petition the court granted the same and
directed the liquidator to pay the claim within three days with preference to all
other claims. Again nobody was served with notice of this order, and
pursuant thereto, the receiver paid the appellee on December 9, 1930, the
sum of P5,000 on account which was receipted for by appellees attorney.
(Record of Appeal, pages 16-21; Main Record, pages 233, 569, 576, 572,
and 579.)
On September 30, 1931, the appellant, China Banking Corporation, filed a
motion praying that the orders of November 8 and November 26, 1930, be
set aside as null and void, that appellees claim be allowed as an ordinary
claim and that the sum of P5,000 paid by the receiver to the appellee on
account of the latters claim be refunded to the funds of the corporation in
liquidation for the benefit of the rest of the creditors. In support of said motion
and with the permission of the court the appellant, Leopoldo Kahn, submitted
a memorandum, arguing on the nullity of the said orders on the ground of
want of notice and on the proposition that under the provisions of the
Insolvency Law appellees claim could not and should not have been allowed
as a preferred claim under the allegations contained therein. Upon
consideration of the motion, the memorandum, appellees opposition and the
arguments of counsel, the trial court denied the motion under order of
November 7, 1931, as far as it referred to the order of November 8, 1930, on
the ground that said order, "whether erroneous or not", had become final and
unappealable and ordered that the order of November 26, 1930, be given no
effect as being manifestly contrary to law. (Record of Appeal, pages 27-32;
page 1266 of the second "Pieza" of the main record.)
The assignment of error made by the appellants contends that the lower
1116
court erred in not finding that the order of November 8, 1930, is null and void
ab initio for lack of jurisdiction on the part of the court when the said order
was issued and in not finding the said order just as contrary to the law as the
court found the order of November 26, 1930, to be, and arguing on this point,
they raise the question as to whether appellees claim can legally be allowed
on its face as a preferred claim.
The appellee, on the other hand, argues at length on the theory that the
appellants have had sufficient constructive notice of the claim and of its
allowance by the court and that under the provisions of section 113 of the
Code of Civil Procedure appellants motion for reconsideration is untenable.
In so far as the service of notice is concerned, we adhere to the rule laid
down in Whalen v. Pasig Iron Works (13 Phil., 417), where this court held
that." . . claims against a corporation in the hands of a receiver should not be
approved and paid without some formal and regular proceeding whereby
their justice and correctness may be inquired into after a reasonable
opportunity has been given to all the parties in interest to present objections
and submit evidence in support of such objections." The said case is a
parallel of the case at bar in that the receiver in that case, together with the
claimant, appeared in open court and without previous notice to any of the
other parties in interest, the claim was submitted upon the favorable
recommendation of the receiver and allowed by the court, and upon appeal
to this court it was held that the trial court erred in rendering judgment in such
a summary manner.
After a careful consideration of the arguments of the attorney for the appellee
to show that under the provisions of section 113 of the Code of Civil
Procedure appellants motion for reconsideration cannot be favorably
considered and upon due consideration having been given also to the
peculiar circumstances surrounding this case, we have reached the
conclusion that the issue should be governed by the provisions of the
Corporation Law or Act No. 1459.
A close examination of the record in this case fails to disclose the reasons
which led the corporation to resort to the court for a decree of voluntary
dissolution. If the corporation was under such a financial condition as alleged
in its petition for dissolution and did not desire to continue doing business
because of failing conditions or of any other reason, we are unable to
understand the necessity of its seeking judicial intervention in the winding up
of its affairs coupled with the appointment for a receiver to deal with its
creditors as though they were the creditors of an insolvent corporation.
Section 176 of the Code of Civil Procedure dealing with the appointment of
receiver upon decree of dissolution of a corporation provides that the court
"may . . . appoint a receiver to take charge" of the estate and effects of the
corporation, "and to pay the outstanding debts thereof, and to divide the
money and other properties that shall remain over among the stockholders or
members", and consistent with said provision section 66 of the Corporation
Law provides with respect to decrees of dissolution rendered upon voluntary
application that the court "may appoint receivers to collect and take charge of
the assets of the corporation." Such language found in both statutes on the
subject is permissive rather than mandatory and tends to recognize that in
cases of voluntary dissolution there is no occasion for the appointment of a
receiver except under special circumstances and upon proper showing.
There can be no doubt that when enacting the Corporation Law the
Legislature intended to let the shareholders have the control of the assets of
the corporation upon dissolution in winding up its affairs. The normal method
of procedure is for the directors and executive officers to have charge of the
winding up operations, though there is the alternative method of assigning
the property of the corporation to trustees for the benefit of its creditors and
shareholders.
Section 77 and 78 of the Corporation Law make the general purpose of the
law manifest. Section 77 provides that every corporation whose charter
expires by its own limitation or whose corporate existence terminates in "any
other manner", shall nevertheless be continued as a body corporate for three
years "after the time when it would have been so dissolved" for winding up
operations; and section 78 provides that "said corporations at any time during
the three years term may convey its property to trustees for the benefit of
creditors, stockholders and others concerned."
Statutes authorizing voluntary dissolutions are generally held to apply only to
a dissolution brought about by the stockholders themselves, and while the
1117
appointment of a receiver rests within the sound judicial discretion of the
court, such discretion must, however, always be exercised with caution and
governed by legal and equitable principles, the violation of which will amount
to its abuse, and in making such appointment the court should take into
consideration all the facts and weigh the relative advantages and
disadvantages of appointing a receiver to wind up the corporate business.
The court should only act on facts which have been proved by competent
legal evidence. (8 Thompson on Corp. [2d ed. ], pages 693, 701, 727, and
738.)
The appointment of a receiver by the court to wind up the affairs of the
corporation upon petition of voluntary dissolution does not empower the court
to hear and pass on the claims of the creditors of the corporation at first
hand. In such cases the receiver does not act as a receiver of an insolvent
corporation. Since "liquidation" as applied to the settlement of the affairs of a
corporation consists of adjusting the debts and claims, that is, of collecting all
that is due the corporation, the settlement and adjustment of claims against it
and the payment of its just debts, all claims must be presented for allowance
to the receiver or trustee or other proper persons during the winding up
proceedings which in this jurisdiction would be within the three years
provided by sections 77 and 78 of the Corporation Law as the term for the
corporate existence of the corporation, and if a claim is disputed or
unliquidated so that the receiver cannot safely allow the same, it should be
transferred to the proper court for trial and allowance, and the amount so
allowed then presented to the receiver or trustee for payment. The rulings of
the receiver on the validity of claims submitted are subject to review by the
court appointing such receiver though no appeal is taken to the latters ruling
(8 Thompson on Corp., 718), and during the winding up proceedings after
dissolution, no creditor will be permitted by legal process or otherwise to
acquire priority, or to enforce his claim against the property held for
distribution as against the rights of other creditors. (5 Thompson on Corp. [2d
ed. ], pages 1389, 1391, 1402, and 1403.)
The decree of dissolution in the case at bar having been entered on August
22, 1930, and the motion of the appellant, China Banking Corporation,
appearing to have been filed on September 30, 1931, or about thirteen
months later, it follows that the motion was filed on time to have the
appellees claim reviewed by the court under the provisions of the said
sections of the Corporation Law, and the trial court, therefore, erred in finding
that the order of November 8, 1930, allowing appellees claim was final and
unappealable under the provisions of section 113 of the Code of Civil
Procedure.
The record in this case shows that Gaston OFarrell, the receiver herein,
besides being the principal promoter of the corporation and the holder of the
largest number of shares was elected president and general manager and
that he held the said offices ever since the organization of the corporation
and his conduct in executing a mortgage on his own house and giving a
pledge on his shares of stock and on those of Rosario Sanchez represented
by him as attorney in fact, in favor of the appellee to guarantee the latters
claim, lends itself to a serious suspicion. The facts appearing of record leave
no room for doubt that his administration of the business of the corporation
left much to be desired and that he alone ought to be blamed for the
shortage claimed by the appellee, but to save himself from personal liability
he made the corporation shoulder the burden of the obligation in exchange
for a simulated conveyance of his house to the corporation. No sooner had
the corporation become delinquent in the payment of the obligation under the
terms of the written agreement than he resorted to a judicial proceeding of
voluntary dissolution in an attempt to settle appellees claim and to free
himself from all harm, but fearing that the alleged preference of appellees
claim might be defeated, in collusion with the appellee they had the claim
allowed summarily as a preferred claim ignoring the rest of the world.
Appellants contention that appellees claim cannot be allowed as a preferred
claim is well taken for even admitting for the sake of argument that the
merchandise which sale price is the subject of appellees claim was shipped
to the corporation under a commission agreement or any other agreement
carrying the obligation to return either the goods or its price, the fact is that
the merchandise in the case at bar was no longer in the corporations
possession nor could the appellee trace the proceeds from its sale, and this
is made manifest by the very fact of the written agreement entered into
between the appellee and the corporation whereby the appellee accepted
payment of the obligation by installments duly secured with a mortgage of
property to guarantee its payment. But such is not the case, however, for the
1118
very agreement of May 31, 1930, mentioned in paragraph 5 of appellees
claim, shows that the rubber tires consigned to the corporation were to be
sold by the latter "por orden, cuenta y riesgo de los Sres. M. Michelin & Cie."
and that the customers accounts were opened "por orden, cuenta y riesgo
de M. Michelin & Cie.", and so much is this true that the uncollected accounts
were turned over to and received by the appellee, M. Michelin & Cie. Under
such circumstances the amount of appellees claim appears to be in the
nature of a balance of a current account between the two firms more than
anything else. (Record of Appeal, page 68, together with the 4th and 5th
paragraphs of the agreement.)

The order appealed from is reversed, and the appellees claim is hereby
declared to be an ordinary claim. The appellee is ordered to refund to the
corporation the sum of P5,000 erroneously paid by the receiver, with costs
against the appellee. So ordered.

Avancea, C.J., Street, Malcolm, Villa-Real, Abad Santos and Imperial, JJ.,
concur.

G.R. No. L-18956 April 27, 1972

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
MARSMAN DEVELOPMENT COMPANY and/or F.H. BURGESS, in his
capacity as Liquidator of the Marsman Development
Company, defendants-appellants.

1119
BARREDO, J.:p
Appeal from the decision of the Court of First Instance of Manila, the
Honorable Conrado, M. Vasquez, presiding, sentencing defendants-
appellants to pay the amounts of P44,134.35, P6,603.20 and P456.12, plus
legal interest from August 26, 1959, on the first item, and, from September 5,
1958, on the later two, representing sales taxes and forest charges, together
with surcharges and penalties.
As found by His Honor, the factual setting of the decision is as follows:
Defendant corporation was a timber licensee holding Timber
Licensee Agreement No. 37-A, with concessions in the
Municipality of Basud and Mondazo, Camarines Norte.
Sometime before October 15, 1953 an investigation was
conducted on the business operation and activities of the
corporation leading to the discovery that certain taxes were
due (from) it on logs produced from its concession. On
October 15, 1953, the Deputy Collector of Internal Revenue
demanded the payment of P13,136.00 representing forest
charges due from May 18, 1950 to September 30, 1953, and
a surcharge of 25% (Exh. M). On September 13, 1954, after
further investigation another assessment was sent to the
defendant corporation by the Bureau of Internal Revenue
demanding from it the total sum of P45,541.66 representing
deficiency sales tax, forest charges, surcharges and
penalties (Exh. A). On November 8, 1954 another
assessment was addressed to the defendant corporation for
the payment of P456.12 as 25% surcharge for discharging
lumber without permit (Exh. P). The three assessments
totalling P59,133.78 are the subject matter of the instant
case for collection.
xxx xxx xxx
The-contention of the defendant that the assessment in
question have not yet become final and executory is not
borne out by the record. The Bureau of Internal Revenue
made its first demand for the payment of P13,136.00 as
forest charges and surcharges in the letter dated October
15, 1953 (Exh. M). After further investigation, a second
assessment in the total amount of P45,541.66 was
demanded from the defendant corporation representing
sales tax and surcharges, and is contained in the letter dated
September 13, 1954 (Exh. A). The third assessment for the
payment of P456.12 representing 25% surcharge for
discharging lumber without permit was made on November
8, 1954 (Exh. B).
The first acknowledgment by the defendant corporation of its
receipt of assessment contained in the letter of September
13, 1954, Exh. A, was the letter of the defendant corporation
under the signature of its counsel, Atty. Pedro L. Moya dated
December 28, 1954, wherein it is requested that said
defendant be furnished with an itemized statement of the
said taxes and wherein notice is served of its intention to
question the validity and the legality of the assessments and
to appear before the Conference Staff of the Bureau of
Internal Revenue in connection with the said tax (Exhibit B).
In reply to the letter, Exhibit B, the Bureau of Internal
Revenue wrote Atty. Moya a letter dated February 11, 1955
informing him that before the case may be acted upon by the
Conference Staff, it was necessary that the defendant
corporation comply within 10 days from date of said letter,
with the provisions of Dept. Order No. 213 dated November
2, 1954 which required, among others, that requests for
reinvestigation or reexamination of tax assessments shall be
made in writing under oath of the taxpayer concerned,
specifying the ground or grounds relied upon for the revision
of the assessment and accompanied by such documents
and other documents relied upon in support of the request;
and that, as a general rule, the revision will be granted only
1120
upon payment of one-half of the total assessments and upon
filing of a bond to guarantee the payment of the balance of
the tax (Exhibit C). Acknowledgment of Exhibit C was made
by Atty. Moya in the latter's letter of February 23, 1955
wherein, for the reasons therein stated, he requested
exemption from the requirements contained in the letter
Exhibit C (Exhibit D). In Reply to Exhibit D, the Collector of
Internal Revenue wrote Atty. Moya on May 3, 1955 informing
him that his request to exempt his client from the
requirements contained in the letter dated February 11,
1955, cannot be favorably considered and that in order that
the Conference Staff may be directed to hear the case on
the merits, the said requirements must be complied with
within five days from receipt of said letter; otherwise, the
"assessment will be considered final" (Exhibit E). A follow-up
letter dated June 4, 1955, was addressed to Atty. Moya after
discovering that the requirements mentioned in the letters
dated February 11, 1955 and March 3, 1955 have not been
complied with inspite of the considerable length of time that
had already elapsed (Exhibit F). In the last paragraph of the
said letter, Exhibit F, the defendant corporation was warned
that unless the aforementioned requirements are complied
with within five (5) days from receipt, the "case will be
considered abandoned and appropriate action will be taken
in accordance with law". Again on November 14, 1955, after
discovering that the letters dated February 11, 1955, March
3, 1955 and June 4, 1955 have remained unheeded by the
defendant corporation, the latter was given another chance
of complying with the requirements mentioned within five
days from receipt of said letter otherwise, the Bureau of
Internal Revenue "will be constrained to enforce the
immediate collection of the deficiency percentage tax and
forest charges due" (Exhibit G).
On April 27, 1956, the Bureau of Internal Revenue issued
"final tax notices" to the defendant corporation. Although the
letters containing the "final tax notices" were not presented in
evidence, the defendants admit having received the same,
as shown by the contents of defendant corporation's letters
dated May 10, 1956, Exhibit H, and August 7, 1956, Exhibit
J. In said Exhibit H defendant corporation again protested
the assessment of P45,541.66 and reiterated its request for
specification of the items disputing the assessment in
question. It further requests for a period of 30 days from the
receipt of the specifications within which to consider its tax
liability, further reserving its right to contest the legality or
validity of the assessment or any particular items thereof
within the said period of 30 days. Defendant corporation also
protested the sending of final notices and requested that
they be countermanded or withheld. Finding no merit in the
protests of the defendant corporation, a warrant of distraint
and levy was issued against it by the Bureau of Internal
Revenue on July 3, 1956 (Exhibit O).
On August 3, 1956, defendant corporation again wrote the
Collector of Internal Revenue acknowledging the receipt of
the warrant of distraint and levy served upon it and
reiterating its request for a specification of the different items
of the assessment, subject to the right to contest the legality
and validity of the same within 30 days after receipt of said
specifications (Exh. J). The record does not show what
action was taken on the request contained in said letter on
August 3, 1956. The next communication appearing in the
record is that of the Commissioner of Internal Revenue
dated July 30, 1959, addressed to the defendant corporation
demanding on the letter the payment of the assessment of
P45,541.66 which has remained unpaid, and informing the
said corporation that if they do not settle said tax obligation
within five days from receipt thereof, the Bureau of Internal
Revenue will be constrained to file an action in Court for the
collection thereof without further notice (Exhibit I). Defendant
corporation replied to Exhibit I in a letter dated August 17,
1959 stating that it needed more time to go over the records
and vouchers, and requesting for an extension of 10 days
1121
 (Exhibit E). In another letter of same date, the defendant
corporation reiterated its exception to the validity and legality
of the assessment against it in the sum of P45,541.66 and
its request for a detailed statement of the transactions
involved (Exhibit L). [Record on Appeal pp. 188-189, 190-
195.]
According to the Record on Appeal, and as additionally stated also by the
trial court, the original complaint filed on September 5, 1958 prayed for the
payment of only P13,695.96, and it was only in an amended complaint filed
on August 26, 1959 and admitted on September 23, 1959 that, for the first
time, the amount of P59,133.78 was judicially demanded to be paid.
Upon these facts, appellants now complain that
I Pedro L. Moya acknowledged receipt on December 28, 1954, on behalf of
THE LOWER COURT ERRED IN DECLARING THAT THE
NOTICES OF THE COMMISSIONER OF INTERNAL
REVENUE DATED APRIL 27, 1956 WERE THE
"ASSESSMENTS" THAT BECAME FINAL AND
EXECUTORY.
II
THE LOWER COURT ERRED IN DECLARING THAT THE
GOVERNMENT'S RIGHT TO ASSESS AND COLLECT THE
TAXES FOR THE YEARS 1947 TO SEPTEMBER 23, 1949
HAS NOT PRESCRIBED.
III
THE LOWER COURT LIKEWISE ERRED IN DECLARING
THAT THE GOVERNMENT'S RIGHT TO COLLECT THE
SUM OF P45,541.66 HAS NOT PRESCRIBED.
IV
THE LOWER COURT FURTHER ERRED IN NOT
DECLARING THAT SUIT AGAINST F.H. BURGESS IN HIS
CAPACITY AS LIQUIDATOR OF MARSMAN
DEVELOPMENT COMPANY HAS PRESCRIBED AND IN
ORDERING HIM TO PAY THE SUMS CONTAINED IN ITS
DECISION.
The Court does not agree.
Anent the first assignment of error, it may be stated that regardless of what
might have been alleged in appellee's pleadings and memoranda, the facts
proven by evidence, which are not alleged to have been objected to as
varying supposed judicial admissions, unmistakably show that when Atty.
appellant corporation, of the Bureau of Internal Revenue's assessments of
September 13, 1954 and November 8, 1954, requesting at the same time for
a reinvestigation before the Conference Staff, he was informed that his
request for investigation would not be given due course unless his client
priorly complied within ten (10) days from Februaxy 11, 1955, the date of the
letter of the Bureau, with the provisions of Department Order No. 213, dated
November 2, 1954, which required inter alia, that requests for reinvestigation
or reexamination of tax assessments should be made in writing and under
oath of the taxpayer concerned, specifying the ground or grounds relied upon
for the requested revision and accompanied by the documents relied upon, in
support of the request, as well as by the payment of one-half of the total
assessments, plus a bond to guarantee payment of the balance, but
appellants failed to comply with said conditions: that in reply to Atty. Moya's
request for exemption from the Department order, on March 3, 1955 (not
May), the attorney was advised that his request was denied and that if the
corporation failed to comply therewith within five (5) days from receipt of the
letter, "the assessment (would) be considered final"; that on June 4, 1955,
said Atty. Moya was reminded in writing that the previous demands had not
been properly attended to, with the warning that should appellants further fail
to comply with the requirements in the letter of February 11, 1955, within five
(5) days from receipt thereof, the "case (would) be considered abandoned
1122
and appropriate action (would) be taken in accordance with law"; that even
as late as November 14, 1955, the corporation was again advised to comply
with the earlier communications of February 11, 1955, March 3, 1955 and
June 4, 1955, within five days, otherwise, the Bureau of Internal Revenue
would "be constrained to enforce immediate collection of the deficiency
percentage tax and forest charges due"; that as nothing was done by it to
comply with this last letter, the Bureau of Internal Revenue issued, on April
27, 1956, "final tax notices" to it, and all that the latter did after receipt thereof
was to reiterate, by its letters of May 19, 1956 and August 7, 1956, its
request for specification of the items involved in the assessment and for
another period of 30 days within which to consider its tax liabilities, reserving
once more its right to contest the legality or validity of the assessment and to
protest the issuance of the "final tax notices"; that evidently tired of awaiting
compliance by the said appellant, the Bureau of Internal Revenue issued on
July 3, 1956 a warrant of distraint and levy against it, which it acknowledged
on August 3, 1956, only to reiterate again its position previously stated of
asking for specification and reserving its right to contest the validity of the
assessment; that, finally, on July 30, 1959, after three years, the
Commissioner of Internal Revenue made extrajudicial demand for payment
of the amounts in question within five (5) days, and since no payment came,
and instead, defendants asked for more time to go over the records and,
under separate cover, questioned for the nth time, the validity of the
assessment, the present action was filed.
Under these circumstances, it is plain that His Honor committed no error in
holding that the period to question the tax assessments herein involved had
already expired when the Commissioner of Internal Revenue initiated this
suit against defendants. Defendant corporation aknowledged receipt of the
said assessments way back on December 28, 1954, and, in fact, it requested
for a reinvestigation before the Conference Staff, but when the Bureau
demanded compliance with the prerequisites aforementioned of such
reinvestigation, the corporation failed to comply. The corporation did ask for
exemption, but when this request was denied, again there was no
compliance. In view of such non-compliance, in its letter of March 3, 1955,
the Bureau unequivocally warned the corporation that should it fail further to
comply, within five days from receipt thereof, the "assessments (would) be
considered final". still no compliance came. Subsequent follow-up letters
brought no better results.
As it appears, therefore, appellant corporation, by its own omission, made it
impossible for the Bureau of Internal Revenue to act on its motion for
reconsideration. Not that it would have otherwise mattered, for it has been
held that the mere filing of such a motion does not suspend the running of
the period for the collection of the tax, 1which implies that any assessment
made by the Bureau is supposed to be final and executory, insofar as the
taxpayer is concerned, unless revised by the Bureau in accordance with law
and regulations, but it is to be emphasized that a taxpayer cannot delay the
collection of taxes by the simple expedient of barely asking for clarification or
reconsideration, very often unnecessary and unwarranted, without doing
anything to comply with the statutory and reglementary requirements for the
reconsideration of the assessment made against him. In any event, since
appellant corporation did nothing from December, 1954 when it
acknowledged receipt of the assessment now impugned to appeal the same,
if such an appeal was possible, to the Court of Tax Appeals, even after it was
warned by the Bureau of Internal Revenue that its failure to comply with the
requirements for reconsideration within five (5) days would result in its being
"considered" final, We find no merit in appellants' posture that the
assessments here in question has not yet become final and executory.
Consequently, overruling of appellants' first assignment of error is clearly in
order.
1123
In their second assignment of error, appellants raise the issue of prescription.
They point out that the Collector of Internal Revenue had only five years
within which to assess the percentage and forest charges herein involved.
Since it does not appear, however, that appellant corporation had filed any
return in relation to the taxes herein involved, and it was incumbent upon
appellants to show that such a return had been submitted, 2 We find the
following holding of His Honor to be fully in accordance with law:
Defendants' contention that the right to assess the
percentage and forest charges for the period from 1947 to
September 23, 1949 had already prescribed is based on the
provision of Section 231 of the Revenue Code which
requires the Collector of Internal Revenue to assess the tax
within the period of five years. The Court agrees with the
plaintiff that said Section 231 is not applicable in this case
inasmuch as defendant corporation did not file returns for the
taxes in question. The pertinent provision applicable herein
is Section 332 (a) which provides that "in case of a false or
fraudulent return or of a failure to file a return, the tax may be
assessed ... at anytime within ten years after the discovery
of the falsity, fraud or omission." The assessments made on
October 15, 1953, September 13, 1954, and November 3,
1954 were all within the aforecited 10-year period for the
assessment of the tax.
Even if the Court were to consider, as appellants suggest, the fact brought
out in their brief but not found by the trial court that what are being sought to
be collected are deficiency taxes, thereby implying a return must have been
filed, nothing can he gained by appellants, for in order that the filing of a
return may serve as the starting point of the period for the making of an
assessment, the return must be as substantive complete as to include the
needed details on which the full assessment may be made, and appellants
have not shown that such was the nature of the return they would infer had
been filed by the corporation. 3
Appellants' third assignment of error does not require any extended
discussion. The argument thereunder that the judicial action for the recovery
of the bigger amount of P45,541.66 was not filed within five (5) years from
September 13, 1954, the date of the earliest assessment, has neither factual
nor legal basis. As aptly explained by his Honor, such argument proceeds
from the erroneous premises that because the amended complaint in which
the said amount was first alleged and demanded was formally admitted by
the court only on September 23, 1959 and that the filing of said amended
complaint on August 26, 1959 is immaterial. While in the procedural sense,
especially in relation to the possible necessity of and time for the filing of
responsive and other corresponding pleadings, an amended complaint is
deemed filed only as of the date of its admission, nothing in Breslin v. Luzon,
84 Phil. 625, relied upon by appellant, was intended to modify the self-
evident proposition that for practical reasons and to avoid the complications
that may rise from undue delays in the admission thereof, such an amended
complaint must be considered as filed, for the purposes of such a substantive
matter as prescription, on the date it is actually filed with the court, regardless
of when it is ultimately formally admitted by the court. After all, the only
purpose of requiring leave of and formal admission by the court of an
amended pleading after issues have already been joined as to the original
ones is to prevent the injection of other issues which might either to be
considered as barred already or made the subject of another proceeding, if
they are not anyway indispensable for the resolution of the original ones and
no unnecessary multiplicity of suits would result; so, when the court
ultimately admits the amendment, the legal effect, for substantive purposes,
of such admission retroacts as a rule to the date of its actual filing.
Appellants' last assignment of error was disposed of by the trial court this
wise:
The defendants further contend that the present action is
already barred under section 77 of the Corporation Law, Act
No. 1459, as amended, which allows the corporate existence
of a corporation to continue only for three years after its
dissolution, for the purpose of presenting or defending suits
by or against it, and to settle and close its affairs. They point
out that inasmuch as the Marsman Development Co. was
extra-judicially dissolved on April 23, 1954, a fact admitted in
the amended complaint, the filing of both the original
1124
 complaint on September 8, 1958 and the amended
complaint on August 26, 1956 was beyond the aforesaid
three-year period.
The record shows that the filing of the amended complaint
was intended, among others, to include as a party
defendant, in an alternative capacity, Mr. F.H. Burgess, who
is the liquidator of the Marsman Development Co. Although it
is an admitted fact that the defendant corporation was
extrajudicially dissolved on April 23, 1954, there is no claim
that the affairs of said corporation had already been finally
liquidated or settled. Evidently, Mr. F.H. Burgess is still
continuing in his aforesaid capacity as liquidator of the
Marsman Development Co. While section 77 of the
Corporation Law provides for a three-year period for the
continuation of the corporate existence of the corporation for
purposes of liquidation, there is nothing in said provision
which bars an action for the recovery of the debts of the
corporation against the liquidator thereof, after the lapse of
the said three-year period.
We agree with His Honor. The stress given by appellants to the extinction of
the corporate and juridical personality as such of appellant corporation by
virtue of its extra-judicial dissolution which admittedly took place on April 23,
1954 is misdirected. While Section 77 of the Corporation Law does provide
that:
Every corporation whose charter expires by its own limitation
or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other
manner, shall nevertheless be continued as a body
corporate for three years after the time when it would have
been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually to
settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the
purpose of continuing the business for which it was
established.
the next provision, Section 78, adds for clarification:
At any time during said three years said corporation is
authorized and empowered to convey all of its property to
trustees for the benefit of members, stock-holders, creditors,
and others interested. From and after any such conveyance
by the corporation of its property in trust for the benefit of its
members, stockholders, creditors, and others in interest, all
interest which the corporation had in the property terminates,
the legal interest vests in the trustee, and the beneficial
interest in the members, stockholders, creditors, or other
persons in interest.
It is to be recalled that the assessments against appellant corporation for
deficiency taxes due for its operations since 1947 were made by the Bureau
of Internal Revenue on October 15, 1953, September 13, 1954 and
November 8, 1954, such that the first was before its dissolution and the last
two not later than six months after such dissolution. Thus, in whatever way
the matter may be viewed, the Government became the creditor of the
corporation before the completion of its dissolution by the liquidation of its
assets. Appellant F.H. Burgess, whom it chose as liquidator, became in law
the trustee of all its assets for the benefit of all persons enumerated in
Section 78, including its creditors, among whom is the Government, for the
taxes herein involved. To assume otherwise would render the extra-judicial
dissolution illegal and void, since, according to Section 62 of the Corporation
Law, such kind of dissolution is permitted only when it "does not affect the
rights of any creditor having a claim against the corporation." It is immaterial
that the present action was filed after the expiration of three years after April
23, 1954, for at the very least, and assuming that judicial enforcement of
taxes may not be initiated after said three years despite the fact that the
actual liquidation has not been terminated and the one in charge thereof is
still holding the assets of the corporation, obviously for the benefit of all the
creditors thereof, the assessment aforementioned, made within the three
years, definitely established the Government as a creditor of the corporation
1125
for whom the liquidator is supposed to hold assets of the corporation. And
since the suit at bar is only for the collection of taxes finally assessed against
the corporation within the three years invoked by appellants, their fourth
assignment of error cannot be sustained. As to the allegation that appellant
Burgess has not in fact received any property or asset of the corporation, that
is a matter that can well be taken care of in the execution of the judgment
which may be rendered herein, albeit it seems some kind of fraud would be
perceptible, if the corporation had been dissolved without leaving any assets
whatsoever with the liquidator.

ACCORDINGLY, the judgment of the trial court is affirmed with costs against
the appellants. [G.R. No. 97642. August 29, 1997]

Reyes, J.B.L., Makalintal, Zaldivar, Castro, Fernando, Teehankee, Makasiar AVON INSURANCE PLC, BRITISH RESERVE INSURANCE. CO. LTD.,
and Antonio, JJ., concur. CORNHILL INSURANCE PLC, IMPERIO REINSURANCE CO. (UK)
LTD., INSTITUTE DE RESEGURROS DO BRAZIL, INSURANCE
CORPORATION OF IRELAND PLC, LEGAL AND GENERAL
Concepcion,C.J., is on leave.
ASSURANCE SOCIETY LTD., PROVINCIAL INSURANCE PLC,
QBL INSURANCE (UK) LTD., ROYAL INSURANCE CO. LTD.,
TRINITY INSURANCE CO. LTD., GENERAL ACCIDENT FIRE AND
LIFE ASSURANCE CORP. LTD., COOPERATIVE INSURANCE
SOCIETY and PEARL ASSURANCE CO. LTD., petitioners,
vs.COURT OF APPEALS, REGIONAL TRIAL COURT OF MANILA,
BRANCH 51, YUPANGCO COTTON MILLS, WORLDWIDE
SURETY & INSURANCE CO., INC., respondents.

DECISION

TORRES, JR., J.:

Just how far can our court assert jurisdiction over the persons of foreign
entities being charged with contractual liabilities by residents of the
Philippines?

Appealing from the Court of Appeals October 11, 1990 Decision [1] in CA-
G.R. No. 22005, petitioners claim that the trial courts jurisdiction does not

1126
extend to them, since they are foreign reinsurance companies that are not
doing business in the Philippines. Having entered into reinsurance contracts
abroad, petitioners are beyond the jurisdictional ambit of our courts and
cannot be rendered summons through extraterritorial service, as under
Section 17, Rule 14 of the Rules of Court, nor through the Insurance
Commissioner, under Section 14. Private respondent Yupangco Cotton Mills
contend on the other hand that petitioners are within our courts cognitive
powers, having submitted voluntarily to their jurisdiction by filing motions to
dismiss[2] the private respondents suit below.
The antecedent facts, as found by the appellate court, are as follows:
Respondent Yupangco Cotton Mills filed a complaint against several foreign
reinsurance companies (among which are petitioners) to collect their alleged
percentage liability under contract treaties between the foreign insurance
companies and the international insurance broker C.J. Boatright, acting as
agent for respondent Worldwide Surety and Insurance Company. Inasmuch
as petitioners are not engaged in business in the Philippines with no offices,
places of business or agents in the Philippines, the reinsurance treaties
having been rendered abroad, service of summons upon motion of
respondent Yupangco, was made upon petitioners through the office of the
Insurance Commissioner. Petitioners, by counsel on special appearance,
seasonably filed motions to dismiss disputing the jurisdiction of respondent
Court and the extra-territorial service of summons. Respondent Yupangco
filed its opposition to the motion to dismiss, petitioners filed their reply, and
respondent Yupangco filed its rejoinder. In an order dated April 30, 1990
respondent Court denied the motions to dismiss and directed petitioners to
file their answer. On May 29, 1990, petitioners filed their notice of appeal. In
an order dated June 4, 1990, respondent court denied due course to the
appeal.[3]
To this day, trial on the merits of the collection suit has not proceeded as
in the present petition, petitioners continue vigorously to dispute the trial
courts assumption of jurisdiction over them.
It will be remembered that in the plaintiffs complaint, [4] it was contended
that on July 6, 1979 and on October 1, 1980, Yupangco Cotton Mills engaged
to secure with Worldwide Security and Insurance Co. Inc., several of its
properties for the periods July 6, 1979 to July 6, 1980 as under Policy No.
20719 for a coverage of P100,000,000.00 and from October 1, 1980 to
October 1, 1981, under Policy No. 25896, also for P100,000,000.00. Both
contracts were covered by reinsurance treaties between Worldwide Surety
and Insurance and several foreign reinsurance companies, including the
petitioners. The reinsurance arrangements had been made through
international broker C.J. Boatright and Co. Ltd., acting as agent of Worldwide
Surety and Insurance.
As fate would have it, on December 16, 1979 and May 2, 1981, with in
the respective effectivity periods of Policies 20719 and 25896, the properties
therein insured were razed by fire , thereby giving rise to the obligation of the
insurer to indemnify the Yupangco Cotton Mills. Partial payments were made
by Worldwide Surety and Insurance and some of the reinsurance companies.
On May 2, 1983, Worldwide Surety and Insurance, in a deed of
Assignment, acknowledge a remaining balance of P19,444,447.75 still due
Yupangco Cotton Mills, and assigned to the latter all reinsurance proceeds
still collectible from all the foreign reinsurance companies. Thus, in its
interest as assignee and original insured, Yupangco Cotton Mills instituted
this collection suit against the petitioners.
Service of summons upon the petitioners was made by notification to
the Insurance Commissioner, pursuant to Section 14, Rule 14 of the Rules of
Court.[5]
In a Petition for Certiorari filed with the Court of Appeals, petitioners
submitted that respondent Court has no jurisdiction over them, being all
foreign corporations not doing business in the Philippines with no office,
place of business or agents in the Philippines. The remedy of Certiorari was
resorted to by petitioners on the premise that if petitioners had filed an
answer to the complaint as ordered by the respondent court, they would risk
abandoning the issue of jurisdiction. Moreover, extra-territorial service of
1127
summons on petitioners is null and void because the complaint for collection
is not one affecting plaintiffs status and not relating to property within the
Philippines.
The Court of Appeals found the petition devoid of merit, stating that:
1. Petitioners were properly served with summons and whatever
defect, if any, in the service of summons were cured by their
voluntary appearance in court, via motion to dismiss.
2. Even assuming that petitioners have not yet voluntarily appeared
as co-defendants in the case below even after having filed the
motion to dismiss adverted to, still the situation does not
deserve dismissal of the complaint as far as they are
concerned, since as held by this Court in Linger Fisher
GMBH vs. IAC, 125 SCRA 253.
A case should not be dismissed simply because an original summons was
wrongfully served. It should be difficult to conceive for example, that when a
defendant personally appears before a court complaining that he had not
been validly summoned, that the case filed against him should be
dismissed. An alias summons can be actually served on said defendant.
3. Being reinsurers of respondent Worlwide Surety and Insurance
of the risk which the latter assumed when it issued the fire
insurance policies in dispute in favor of respondent Yupangco,
petitioners cannot now validly argue that they do not do
business in this country. At the very least, petitioners must be
deemed to have engaged in business in the Philippines no
matter how isolated or singular such business might be, even
on the assumption that among the local domestic insurance
corporations of this country, it is only in favor of Worldwide
Surety and Insurance that they have ever reinsured any risk
arising from reinsurance within the territory.
4. The issue of whether or not petitioners are doing business in the
country is a matter best reffered to a trial on the merits of the
case and so should be addressed there.
Maintaining its submission that they are beyond the jurisdiction of the
Philippine Courts, petitioners are now before us, stating:
Petitioners, being foreign corporations, as found by the trial court, not doing
business in the Philippines with no office, place of business or agents in the
Philippines, are not subject to the jurisdiction of the Philippine courts.
The complaint for sum of money being a personal action not affecting status
or relating to property, extraterritorial service of summons on petitioners all
not doing business in the Philippines is null and void.
The appearance of counsel for petitioners being explicitly by special
appearance without waiving objections to the jurisdiction over their persons
or the subject matter and the motions do dismiss having excluded non-
jurisdictional grounds, there is no voluntary submission to the jurisdiction of
the trial court.[6]
For its part, private respondent Yupangco counter-submits:
1. Foreign corporations, such as petitioners, not doing business in the
Philippines, can be sued in the Philippine Courts, not withstanding petitioners
claim to the contrary.
2. While the complaint before the Honorable Trial Court is for a sum of
money, not affecting status or relating to property, petitioners (then
defendants) can submit themselves voluntarily to the jurisdiction of Philippine
Courts, even if there is no extra-judicial (sic) service of summons upon them.
3. The voluntary appearance of the petitioners (then defendants) before the
Honorable Trial Court amounted, in effect, to voluntary submission to its
jurisdiction over their persons.[7]
1128
 In the decisions of the courts below, there is much left to speculation
and conjecture as to whether or not the petitioners were determined to be
doing business in the Philippines or not.
To qualify the petitioners business of reinsurance within the Philippine
forum, resort must be made to established principles in determining what is
meant by doing business in the Philippines. In Communication Materials and
Design, Inc. et. al vs. Court of Appeals,[8] it was observed that:
There is no exact rule of governing principle as to what constitutes doing or
engaging in or transacting business. Indeed, such case must be judged in
the light of its peculiar circumstances, upon its peculiarfacts and upon the
language of the statute applicable. The true test, however, seems to be
whether the foreign corporation is continuing the body or substance of the
business or enterprise for which it was organized.
Article 44 of the Omnibus Investments Code of 1987 defines the phrase to
include:
'soliciting orders, purchases, service contracts opening offices, whether
called liaison offices of branches; appointing representatives or distributors
who are domiciled in the Philippines or who in any calendar year stay in the
Philippines for a period or periods totaling one hundred eighty (180) days or
more; participating in the management, supervision or control of any
domestic business firm, entity or corporation in the Philippines, and any other
act or acts that imply a continuity or commercial dealings or arrangements
and contemplate to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to and in progressive
prosecution of, commercial gain or of purpose and object of the business
organization.
The term ordinarily implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of the functions normally incident to and in progressive
prosecution of the purpose and object of its organization. [9]
A single act or transaction made in the Philippines, however, could not
qualify a foreign corporation to be doing business in the Philippines, if such
singular act is not merely incidental or casual, but indicates the foreign
corporations intention to do business in the Philippines. [10]
There is no sufficient basis in the records which would merit the
institution of this collection suit in the Philippines. More specifically, there is
nothing to substantiate the private respondents submission that the
petitioners had engaged in business activities in this country. This is not an
instance where the erroneous service of summons upon the defendant can
be cured by the issuance and service of alias summons, as in the absence of
showing that petitioners had been doing business in the country, they cannot
be summoned to answer for the charges leveled against them.
The Court is cognizant of the doctrine is Signetics Corp. vs. Court of
Appeals[11] that for the purpose of acquiring jurisdiction by way of summons
on a defendant foreign corporation, there is no need to prove first the fact
that defendant is doing business in the Philippines. The plaintiff only has to
allege in the complaint that the defendant has an agent in the Philippines for
summons to be validly served thereto, even without prior evidence advancing
such factual allegation.
As it is, private respondent has made no allegation or demonstration of
the existence of petitioners domestic agent, but avers simply that they are
doing business not only abroad but in the Philippines as well. It does not
appear at all that the petitioners had performed any act which would give the
general public the impression that it had been engaging, or intends to
engage in its ordinary and usual business undertakings in the country. The
reinsurance treaties between the petitioners and Worldwide Surety and
Insurance were made through an international insurance brokers, and not
through any entity of means remotely connected with the
Philippines. Moreover there is authority to the effect that a reinsurance
company is not doing business in a certain state merely because the
property of lives which are insured by the original insurer company are
located in that state.[12] The reason for this is that a contract or reinsurance is
generally a separate and distinct arrangement from the original contract of
insurance, whose contracted risk is insured in the reinsurance agreement.
1129
[13]
Hence, the original insured has generally no interest in the contract of
reinsurance.[14]
A foreign corporation, is one which owes its existence to the laws of
another state,[15] and generally has no legal existence within the state in
which it is foreign. In Marshall Wells Co. vs. Elser,[16] it was held that
corporations have no legal status beyond the bounds of sovereignty by which
they are created. Nevertheless, it is widely accepted that foreign corporations
are, by reason of state comity, allowed to transact business in other states
and to sue in the courts of such fora. In the Philippines foreign corporations
are allowed such privileges, subject to certain restrictions, arising from the
states sovereign right of regulation.
Before a foreign corporation can transact business in the country, it
must first obtain a license to transact business here [17] and secure the proper
authorizations under existing law.
If a foreign corporation engages in business activities without the
necessary requirements, it opens itself to court actions against it, but it shall
not be allowed maintain or intervene in an action, suit or proceeding for its
own account in any court or tribunal or agency in the Philippines. [18]
The purpose of the law in requiring that foreign corporations doing
business in the country be licensed to do so, is to subject the foreign
corporations doing business in the Philippines to the jurisdiction of the courts,
[19]
otherwise, a foreign corporation illegally doing business here because of
its refusal or neglect to obtain the required license and authority to do
business may successfully though unfairly plead such neglect or illegal act so
as to avoid service and thereby impugn the jurisdiction of the local courts.
The same danger does not exist among foreign corporations that are
indubitably not doing business in the Philippines. Indeed, if a foreign
corporation does not do business here, there would be no reason for it to be
subject to the States regulation. As we observed, in so far as State is
concerned, such foreign corporation has no legal existence. Therefore, to
subject such corporation to the courts jurisdiction would violate the essence
of sovereignty.
In the alternative, private respondent submits that foreign corporations
not doing business in the Philippines are not exempt from suits leveled
against them in courts, citing the case of Facilities Management
Corporation vs. Leonardo Dela Osa, et. al.[20] where we ruled that indeed, if a
foreign corporation, not engaged in business in the Philippines, is not barred
from seeking redress from Courts in the Philippines, a fortiori, that same
corporation cannot claim exemption from being sued in the Philippines
Courts for acts done against a person or persons in the Philippines.
We are not persuaded by the position taken by the private
respondent. In Facilities Management case, the principal issue presented
was whether the petitioner had been doing business in the Philippines, so
that service of summons upon its agent as under Section 14, Rule 14 of the
Rules of Court can be made in order that the Court of First Instance could
assume jurisdiction over it. The court ruled that the petitioner was doing
business in the Philippines, and that by serving summons upon its resident
agent, the trial court had effectively acquired jurisdiction. In that case, the
court made no prescription as the absolute suability of foreign corporations
not doing business in the country, but merely discounts the absolute
exemption of such foreign corporations from liabilities particularly arising from
acts done against a person or persons in the Philippines.
As we have found, there is no showing that petitioners had performed
any act in the country that would place it within the sphere of the courts
jurisdiction. A general allegation standing alone, that a party is doing
business in the Philippines does not make it so. A conclusion of fact or law
cannot be derived from the unsubstantiated assertions of parties
notwithstanding the demands of convenience or dispatch in legal actions,
otherwise, the Court would be guilty of sorcery; extracting substance out of
1130
nothingness. In addition, the assertion that a resident of the Philippines will
be inconvenienced by an out-of-town suit against a foreign entity, is irrelevant
and unavailing to sustain the continuance of a local action, for jurisdiction is
not dependent upon the convenience or inconvenience of a party.[21]
It is also argued that having filed a motion to dismiss in the proceedings
before the trial court, petitioners have thus acquiesced to the courts
jurisdiction, and they cannot maintain the contrary at this juncture.
This argument is at the most, flimsy.
In civil cases, jurisdiction over the person of the defendant is acquired
either by his voluntary appearance in court and his submission to its authority
or by service of summons.[22]
Fundamentally, the service of summons is intended to give official notice
to the defendant or respondent that an action had been commenced against
it. The defendant or respondent is thus put on guard as to the demands of
the plaintiff as stated in the complaint. [23] The service of summons, upon the
defendant becomes an important element in the operation of a courts
jurisdiction upon a party to a suit, as service of summons upon the defendant
is the means by which the court acquires jurisdiction over his person.
[24]
Without service of summons, or when summons are improperly made,
both the trial and the judgment, being in violation of due process, are null and
void,[25] unless the defendant waives the service of summons by voluntarily
appearing and answering the suit.[26]
When a defendant voluntarily appears, he is deemed to have submitted
himself to the jurisdiction of the court. [27] This is not, however, always the
case. Admittedly, and without subjecting himself to the courts jurisdiction, the
defendant in an action can, by special appearance object to the courts
assumption on the ground of lack of jurisdiction. If he so wishes to assert this
defense, he must do so seasonably by motion for the purpose of objecting to
the jurisdiction of the court, otherwise, he shall be deemed to have submitted
himself to that jurisdiction.[28] In the case of foreign corporations, it has been
held that they may seek relief against the wrongful assumption of jurisdiction
by local courts. In Time, Inc. vs. Reyes,[29] it was held that the action of a
court in refusing to rule of deferring its ruling on a motion to dismiss for lack
or excess of jurisdiction is correctable by a writ of prohibition
or certiorari sued out in the appellate court even before trial on the merits is
had. The same remedy is available should the motion to dismiss be denied,
and the court, over the foreign corporations objections, theratens to impose
its jurisdiction upon the same.
If the defendant, besides setting up in a motion to dismiss his objections
to the jurisdiction of the court, alleges at the same time any other ground for
dismissing the action, or seeks an affirmative refief in the motion, [30] he is
deemed to have submitted himself to the jurisdiction of the court.
In this instance, however, the petitioners from the time they filed their
motions to dismiss, their submission have been consistently and unfailingly
to object to the trial courts assumption of jurisdiction, anchored on the fact
that they are all foreign corporations not doing business in the Philippines.
As we have consistently held, if the appearance of a party in a suit is
precisely to question the jurisdiction of the said tribunal over the person of
the defendant, then this appearance is not equivalent to service of summons,
nor does is constitute an acquiescence to the courts jurisdiction. [31] Thus it
cannot be argued that the petitioners had abandoned their objections to the
jurisdiction of the court, as their motions to dismiss in the trial court, and all
their subsequent posturings, were all in protest of the private respondent's
insistence on holding them so answer a charge in a forum where they believe
they are not subject to. Clearly, to continue the proceedings in a case such
as those before Us would just be useless and a waste of time. [32]
ACCORDINGLY, the decision appealed from dated October 11, 1990, is
SET ASIDE and the instant petition is hereby GRANTED. The respondent
Regional Trial Court of Manila, Branch 51 is declared without jurisdiction to
take cognizance of Civil Case No. 86-37932, and all its orders and issuances
in connection therewith are hereby ANNULLED and SET ASIDE.The
respondent court is hereby ORDERED to DESIST from maintaining further
proceeding in the case aforestated.
1131
 SO ORDERED.
Romero, Puno and Mendoza, JJ., concur.
Regalado, J. (Chairman), on leave.
[G.R. No. 110318. August 28, 1996]
COLUMBIA PICTURES, INC., ORION PICTURES CORPORATION,
PARAMOUNT PICTURES CORPORATION, TWENTIETH
CENTURY FOX FILM CORPORATION, UNITED ARTISTS
CORPORATION, UNIVERSAL CITY STUDIOS, INC., THE WALT
DISNEY COMPANY, and WARNER BROTHERS, INC., petitioners,
vs. COURT OF APPEALS, SUNSHINE HOME VIDEO, INC. and
DANILO A. PELINDARIO, respondents.
DECISION
REGALADO, J.:
Before us is a petition for review on certiorari of the decision of the Court
of Appeals[1] promulgated on July 22, 1992 and its resolution [2] of May 10,
1993 denying petitioners motion for reconsideration, both of which sustained
the order[3] of the Regional Trial Court, Branch 133, Makati, Metro Manila,
dated November 22, 1988 for the quashal of Search Warrant No. 87-053
earlier issued per its own order [4] on September 5, 1988 for violation of
Section 56 of Presidential Decree No. 49, as amended, otherwise known as
the Decree on the Protection of Intellectual Property.
The material facts found by respondent appellate court are as follows:
Complainants thru counsel lodged a formal complaint with the National
Bureau of Investigation for violation of PD No. 49, as amended, and sought
its assistance in their anti-film piracy drive. Agents of the NBI and private
researchers made discreet surveillance on various video establishments in
Metro Manila including Sunshine Home Video Inc. (Sunshine for brevity),
owned and operated by Danilo A. Pelindario with address at No. 6 Mayfair
Center, Magallanes, Makati, Metro Manila.
On November 14, 1987, NBI Senior Agent Lauro C. Reyes applied for a
search warrant with the court a quo against Sunshine seeking the seizure,
among others, of pirated video tapes of copyrighted films all of which were
enumerated in a list attached to the application; and, television sets, video
cassettes and/or laser disc recordings equipment and other machines and
paraphernalia used or intended to be used in the unlawful exhibition,
showing, reproduction, sale, lease or disposition of videograms tapes in the
premises above described.In the hearing of the application, NBI Senior Agent
Lauro C. Reyes, upon questions by the court a quo, reiterated in substance
his averments in his affidavit. His testimony was corroborated by another
witness, Mr. Rene C. Baltazar. Atty. Rico V. Domingos deposition was also
taken. On the basis of the affidavits and depositions of NBI Senior Agent
Lauro C. Reyes, Rene C. Baltazar and Atty. Rico V. Domingo, Search
Warrant No 87-053 for violation of Section 56 of PD No. 49, as amended,
was issued by the court a quo.
1132
 The search warrant was served at about 1:45 p.m. on December 14,
1987 to Sunshine and/or their representatives. In the course of the search of
the premises indicated in the search warrant, the NBI Agents found and
seized various video tapes of duly copyrighted motion pictures/films owned
or exclusively distributed by private complainants, and machines, equipment,
television sets, paraphernalia, materials, accessories all of which were
included in the receipt for properties accomplished by the raiding team. Copy
of the receipt was furnished and/or tendered to Mr. Danilo A. Pelindario,
registered owner-proprietor of Sunshine Home Video.
On December 16, 1987, a Return of Search Warrant was filed with the
Court.
A Motion To Lift the Order of Search Warrant was filed but was later
denied for lack of merit (p. 280, Records).
A Motion for reconsideration of the Order of denial was filed. The
court a quo granted the said motion for reconsideration and justified it in this
manner:
It is undisputed that the master tapes of the copyrighted films from which the
pirated films were allegedly copies (sic), were never presented in the
proceedings for the issuance of the search warrants in question. The orders
of the Court granting the search warrants and denying the urgent motion to
lift order of search warrants were, therefore, issued in error. Consequently,
they must be set aside. (p. 13, Appellants Brief)[5]
Petitioners thereafter appealed the order of the trial court granting
private respondents motion for reconsideration, thus lifting the search
warrant which it had therefore issued, to the Court of Appeals. As stated at
the outset, said appeal was dismissed and the motion for reconsideration
thereof was denied. Hence, this petition was brought to this Court particularly
challenging the validity of respondent courts retroactive application of the
ruling in 20th Century Fox Film Corporation vs. Court of Appeals, et al.,[6] in
dismissing petitioners appeal and upholding the quashal of the search
warrant by the trial court.
I
Inceptively, we shall settle the procedural considerations on the matter
of and the challenge to petitioners legal standing in our courts, they being
foreign corporations not licensed to do business in the Philippines.
Private respondents aver that being foreign corporations, petitioners
should have such license to be able to maintain an action in Philippine
courts. In so challenging petitioners personality to sue, private respondents
point to the fact that petitioners are the copyright owners or owners of
exclusive rights of distribution in the Philippines of copyrighted motion
pictures or films, and also to the appointment of Atty. Rico V. Domingo as
their attorney-in-fact, as being constitutive of doing business in the
Philippines under Section 1(f) (1) and (2), Rule 1 of the Rules of the Board of
Investments. As foreign corporations doing business in the Philippines,
Section 133 of Batas Pambansa Blg. 68, or the Corporation Code of the
Philippines, denies them the right to maintain a suit in Philippine courts in the
absence of a license to do business. Consequently, they have no right to ask
for the issuance of a search warrant.[7]
In refutation, petitioners flatly deny that they are doing business in the
Philippines,[8] and contend that private respondents have not adduced
evidence to prove that petitioners are doing such business here, as would
require them to be licensed by the Securities and Exchange Commission,
other than averments in the quoted portions of petitioners Opposition to
Urgent Motion to Lift Order of Search Warrant dated April 28, 1988 and Atty.
Rico V. Domingos affidavit of December 14, 1987. Moreover, an exclusive
right to distribute a product or the ownership of such exclusive right does not
conclusively prove the act of doing business nor establish the presumption of
doing business.[9]
The Corporation Code provides:
Sec. 133. Doing business without a license. No foreign corporation
transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or
1133
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under
Philippine laws.
The obtainment of a license prescribed by Section 125 of the
Corporation Code is not a condition precedent to the maintenance of any
kind of action in Philippine courts by a foreign corporation. However, under
the aforequoted provision, no foreign corporation shall be permitted to
transact business in the Philippines, as this phrase is understood under the
Corporation Code, unless it shall have the license required by law, and until it
complies with the law in transacting business here, it shall not be permitted to
maintain any suit in local courts. [10] As thus interpreted, any foreign
corporation not doing business in the Philippines may maintain an action in
our courts upon any cause of action, provided that the subject matter and the
defendant are within the jurisdiction of the court. It is not the absence of the
prescribed license but doing business in the Philippines without such license
which debars the foreign corporation from access to our courts. In other
words, although a foreign corporation is without license to transact business
in the Philippines, it does not follow that it has no capacity to bring an
action.Such license is not necessary if it is not engaged in business in the
Philippines.[11]
Statutory provisions in many jurisdictions are determinative of what
constitutes doing business or transacting business within that forum, in which
case said provisions are controlling there. In others where no such definition
or qualification is laid down regarding acts or transactions falling within its
purview, the question rests primarily on facts and intent. It is thus held that all
the combined acts of a foreign corporation in the State must be considered,
and every circumstance is material which indicates a purpose on the part of
the corporation to engage in some part of its regular business in the State. [12]
No general rule or governing principles can be laid down as to what
constitutes doing or engaging in or transacting business. Each case must be
judged in the light of its own peculiar environmental circumstances. [13] The
true tests, however, seem to be whether the foreign corporation is continuing
the body or substance of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to
another.[14]
As a general proposition upon which many authorities agree in principle,
subject to such modifications as may be necessary in view of the particular
issue or of the terms of the statute involved, it is recognized that a foreign
corporation is doing, transacting, engaging in, or carrying on business in the
State when, and ordinarily only when, it has entered the State by its agents
and is there engaged in carrying on and transacting through them some
substantial part of its ordinary or customary business, usually continuous in
the sense that it may be distinguished from merely casual, sporadic, or
occasional transactions and isolated acts.[15]
The Corporation Code does not itself define or categorize what acts
constitute doing or transacting business in the Philippines. Jurisprudence
has, however, held that the term implies a continuity of commercial dealings
and arrangements, and contemplates, to that extent, the performance of acts
or works or the exercise of some of the functions normally incident to or in
progressive prosecution of the purpose and subject of its organization. [16]
This traditional case law definition has evolved into a statutory definition,
having been adopted with some qualifications in various pieces of legislation
in our jurisdiction.
For instance, Republic Act No. 5455[17] provides:
SECTION 1. Definitions and scope of this Act. (1) x x x; and the phrase doing
business shall include soliciting orders, purchases, service contracts,
opening offices, whether called liaison offices or branches; appointing
representatives or distributors who are domiciled in the Philippines or who in
any calendar year stay in the Philippines for a period or periods totalling one
hundred eighty days or more; participating in the management, supervision
or control of any domestic business firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the performance of
acts or works, or the exercise of some of the functions normally incident to,
1134
and in-progressive prosecution of, commercial gain or of the purpose and
object of the business organization.
Presidential Decree No. 1789,[18] in Article 65 thereof, defines doing
business to include soliciting orders, purchases, service contracts, opening
offices, whether called liaison offices or branches; appointing representatives
or distributors who are domiciled in the Philippines or who in any calendar
year stay in the Philippines for a period or periods totalling one hundred
eighty days or more; participating in the management, supervision or control
of any domestic business firm, entity or corporation in the Philippines, and
any other act or acts that imply a continuity of commercial dealings or
arrangements and contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and object of
the business organization.
The implementing rules and regulations of said presidential decree
conclude the enumeration of acts constituting doing business with a catch-all
definition, thus:
Sec. 1(g). Doing Business shall be any act or combination of acts
enumerated in Article 65 of the Code. In particular doing business includes:
xxx xxx xxx
(10) Any other act or acts which imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally incident to, or in the
progressive prosecution of, commercial gain or of the purpose and object of
the business organization.
Finally, Republic Act No. 7042[19] embodies such concept in this wise:
SEC. 3. Definitions. As used in this Act:
xxx xxx xxx
(d) the phrase doing business shall include soliciting orders, service
contracts, opening offices, whether called liaison offices or branches;
appointing representatives or distributors domiciled in the Philippines or who
in any calendar year stay in the country for a period or periods totalling one
hundred eight(y) (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in
the Philippines; and any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of, commercial gain or of
the purpose and object of the business organization: Provided, however,
That the phrase doing business shall not be deemed to include mere
investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investors; nor
having a nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own
account.
Based on Article 133 of the Corporation Code and gauged by such
statutory standards, petitioners are not barred from maintaining the present
action. There is no showing that, under our statutory or case law, petitioners
are doing, transacting, engaging in or carrying on business in the Philippines
as would require obtention of a license before they can seek redress from
our courts. No evidence has been offered to show that petitioners have
performed any of the enumerated acts or any other specific act indicative of
an intention to conduct or transact business in the Philippines.
Accordingly, the certification issued by the Securities and Exchange
Commission[20] stating that its records do not show the registration of
petitioner film companies either as corporations or partnerships or that they
have been licensed to transact business in the Philippines, while undeniably
true, is of no consequence to petitioners right to bring action in the
Philippines. Verily, no record of such registration by petitioners can be
expected to be found for, as aforestated, said foreign film corporations do not
transact or do business in the Philippines and, therefore, do not need to be
licensed in order to take recourse to our courts.
1135
 Although Section 1(g) of the Implementing Rules and Regulations of the
Omnibus Investments Code lists, among others
(1) Soliciting orders, purchases (sales) or service contracts. Concrete and
specific solicitations by a foreign firm, or by an agent of such foreign firm, not
acting independently of the foreign firm amounting to negotiations or fixing of
the terms and conditions of sales or service contracts, regardless of where
the contracts are actually reduced to writing, shall constitute doing business
even if the enterprise has no office or fixed place of business in the
Philippines. The arrangements agreed upon as to manner, time and terms of
delivery of the goods or the transfer of title thereto is immaterial. A foreign
firm which does business through the middlemen acting in their own names,
such as indentors, commercial brokers or commission merchants, shall not
be deemed doing business in the Philippines. But such indentors,
commercial brokers or commission merchants shall be the ones deemed to
be doing business in the Philippines.
(2) Appointing a representative or distributor who is domiciled in the
Philippines, unless said representative or distributor has an independent
status, i.e., it transacts business in its name and for its own account, and not
in the name or for the account of a principal. Thus, where a foreign firm is
represented in the Philippines by a person or local company which does not
act in its name but in the name of the foreign firm, the latter is doing business
in the Philippines.
as acts constitutive of doing business, the fact that petitioners are admittedly
copyright owners or owners of exclusive distribution rights in the Philippines
of motion pictures or films does not convert such ownership into an indicium
of doing business which would require them to obtain a license before they
can sue upon a cause of action in local courts.
Neither is the appointment of Atty. Rico V. Domingo as attorney-in-fact of
petitioners, with express authority pursuant to a special power of
attorney, inter alia
To lay criminal complaints with the appropriate authorities and to provide
evidence in support of both civil and criminal proceedings against any person
or persons involved in the criminal infringement of copyright, or concerning
the unauthorized importation, duplication, exhibition or distribution of any
cinematographic work(s) films or video cassettes of which x x x is the owner
of copyright or the owner of exclusive rights of distribution in the Philippines
pursuant to any agreement(s) between x x x and the respective owners of
copyright in such cinematographic work(s), to initiate and prosecute on
behalf of x x x criminal or civil actions in the Philippines against any person or
persons unlawfully distributing, exhibiting, selling or offering for sale any films
or video cassettes of which x x x is the owner of copyright or the owner of
exclusive rights of distribution in the Philippines pursuant to any
agreement(s) between x x x and the respective owners of copyright in such
works.[21]
tantamount to doing business in the Philippines. We fail to see how
exercising ones legal and property rights and taking steps for the vigilant
protection of said rights, particularly the appointment of an attorney-in-fact,
can be deemed by and of themselves to be doing business here.
As a general rule, a foreign corporation will not be regarded as doing
business in the State simply because it enters into contracts with residents of
the State, where such contracts are consummated outside the State. [22] In
fact, a view is taken that a foreign corporation is not doing business in the
state merely because sales of its product are made there or other business
furthering its interests is transacted there by an alleged agent, whether a
corporation or a natural person, where such activities are not under the
direction and control of the foreign corporation but are engaged in by the
alleged agent as an independent business.[23]
It is generally held that sales made to customers in the State by an
independent dealer who has purchased and obtained title from the
corporation to the products sold are not a doing of business by the
corporation.[24] Likewise, a foreign corporation which sells its products to
persons styled distributing agents in the State, for distribution by them, is not
doing business in the State so as to render it subject to service of process
therein, where the contract with these purchasers is that they shall buy
1136
exclusively from the foreign corporation such goods as it manufactures and
shall sell them at trade prices established by it.[25]
It has moreover been held that the act of a foreign corporation in
engaging an attorney to represent it in a Federal court sitting in a particular
State is not doing business within the scope of the minimum contact test.
[26]
With much more reason should this doctrine apply to the mere retainer of
Atty. Domingo for legal protection against contingent acts of intellectual
piracy.
In accordance with the rule that doing business imports only acts in
furtherance of the purposes for which a foreign corporation was organized, it
is held that the mere institution and prosecution or defense of a suit,
particularly if the transaction which is the basis of the suit took place out of
the State, do not amount to the doing of business in the State. The institution
of a suit or the removal thereof is neither the making of a contract nor the
doing of business within a constitutional provision placing foreign
corporations licensed to do business in the State under the same regulations,
limitations and liabilities with respect to such acts as domestic
corporations. Merely engaging in litigation has been considered as not a
sufficient minimum contact to warrant the exercise of jurisdiction over a
foreign corporation.[27]
As a consideration aside, we have perforce to comment on private
respondents basis for arguing that petitioners are barred from maintaining
suit in the Philippines. For allegedly being foreign corporations doing
business in the Philippines without a license, private respondents repeatedly
maintain in all their pleadings that petitioners have thereby no legal
personality to bring an action before Philippine courts.[28]
Among the grounds for a motion to dismiss under the Rules of Court are
lack of legal capacity to sue [29] and that the complaint states no cause of
action.[30] Lack of legal capacity to sue means that the plaintiff is not in the
exercise of his civil rights, or does not have the necessary qualification to
appear in the case, or does not have the character or representation he
claims.[31] On the other hand, a case is dismissible for lack of personality to
sue upon proof that the plaintiff is not the real party-in-interest, hence
grounded on failure to state a cause of action. [32] The term lack of capacity to
sue should not be confused with the term lack of personality to sue. While
the former refers to a plaintiffs general disability to sue, such as on account
of minority, insanity, incompetence, lack of juridical personality or any other
general disqualifications of a party, the latter refers to the fact that the plaintiff
is not the real party- in-interest.Correspondingly, the first can be a ground for
a motion to dismiss based on the ground of lack of legal capacity to sue;
[33]
whereas the second can be used as a ground for a motion to dismiss
based on the fact that the complaint, on the face thereof, evidently states no
cause of action.[34]
Applying the above discussion to the instant petition, the ground
available for barring recourse to our courts by an unlicensed foreign
corporation doing or transacting business in the Philippines should properly
be lack of capacity to sue, not lack of personality to sue. Certainly, a
corporation whose legal rights have been violated is undeniably such, if not
the only, real party-in-interest to bring suit thereon although, for failure to
comply with the licensing requirement, it is not capacitated to maintain any
suit before our courts.
Lastly, on this point, we reiterate this Courts rejection of the common
procedural tactics of erring local companies which, when sued by unlicensed
foreign corporations not engaged in business in the Philippines, invoke the
latters supposed lack of capacity to sue. The doctrine of lack of capacity to
sue based on failure to first acquire a local license is based on
considerations of public policy. It was never intended to favor nor insulate
from suit unscrupulous establishments or nationals in case of breach of valid
obligations or violations of legal rights of unsuspecting foreign firms or
entities simply because they are not licensed to do business in the country.[35]
II
We now proceed to the main issue of the retroactive application to the
present controversy of the ruling in 20th Century Fox Film Corporation vs.
Court of Appeals, et al., promulgated on August 19, 1988, [36] that for the
1137
determination of probable cause to support the issuance of a search warrant
in copyright infringement cases involving videograms, the production of the
master tape for comparison with the allegedly pirated copies is necessary.
Petitioners assert that the issuance of a search warrant is addressed to
the discretion of the court subject to the determination of probable cause in
accordance with the procedure prescribed therefor under Sections 3 and 4 of
Rule 126. As of the time of the application for the search warrant in question,
the controlling criterion for the finding of probable cause was that enunciated
in Burgos vs. Chief of Staff[37] stating that:
Probable cause for a search warrant is defined as such facts and
circumstances which would lead a reasonably discrete and prudent man to
believe that an offense has been committed and that the objects sought in
connection with the offense are in the place sought to be searched.
According to petitioners, after complying with what the law then
required, the lower court determined that there was probable cause for the
issuance of a search warrant, and which determination in fact led to the
issuance and service on December 14, 1987 of Search Warrant No. 87-
053. It is further argued that any search warrant so issued in accordance with
all applicable legal requirements is valid, for the lower court could not
possibly have been expected to apply, as the basis for a finding of probable
cause for the issuance of a search warrant in copyright infringement cases
involving videograms, a pronouncement which was not existent at the time of
such determination, on December 14, 1987, that is, the doctrine in the 20th
Century Fox case that was promulgated only on August 19, 1988, or over
eight months later.
Private respondents predictably argue in support of the ruling of the
Court of Appeals sustaining the quashal of the search warrant by the lower
court on the strength of that 20th Century Fox ruling which, they claim, goes
into the very essence of probable cause. At the time of the issuance of the
search warrant involved here, although the 20th Century Fox case had not
yet been decided, Section 2, Article III of the Constitution and Section 3, Rule
126 of the 1985 Rules on Criminal Procedure embodied the prevailing and
governing law on the matter. The ruling in 20th Century Fox was merely an
application of the law on probable cause. Hence, they posit that there was no
law that was retrospectively applied, since the law had been there all
along. To refrain from applying the 20th Century Fox ruling, which had
supervened as a doctrine promulgated at the time of the resolution of private
respondents motion for reconsideration seeking the quashal of the search
warrant for failure of the trial court to require presentation of the master tapes
prior to the issuance of the search warrant, would have constituted grave
abuse of discretion.[38]
Respondent court upheld the retroactive application of the 20th Century
Fox ruling by the trial court in resolving petitioners motion for reconsideration
in favor of the quashal of the search warrant, on this renovated thesis:
And whether this doctrine should apply retroactively, it must be noted that in
the 20th Century Fox case, the lower court quashed the earlier search
warrant it issued. On certiorari, the Supreme Court affirmed the quashal on
the ground among others that the master tapes or copyrighted films were not
presented for comparison with the purchased evidence of the video tapes to
determine whether the latter is an unauthorized reproduction of the former.
If the lower court in the Century Fox case did not quash the warrant, it is Our
view that the Supreme Court would have invalidated the warrant just the
same considering the very strict requirement set by the Supreme Court for
the determination of probable cause in copyright infringement cases as
enunciated in this 20th Century Fox case. This is so because, as was stated
by the Supreme Court in the said case, the master tapes and the pirated
tapes must be presented for comparison to satisfy the requirement of
probable cause. So it goes back to the very existence of probable cause. x x
x[39]
Mindful as we are of the ramifications of the doctrine of stare decisis and
the rudiments of fair play, it is our considered view that the 20th Century
Fox ruling cannot be retroactively applied to the instant case to justify the
quashal of Search Warrant No. 87-053. Herein petitioners consistent position
that the order of the lower court of September 5, 1988 denying therein
1138
defendants motion to lift the order of search warrant was properly issued,
there having been satisfactory compliance with the then prevailing standards
under the law for determination of probable cause, is indeed well taken. The
lower court could not possibly have expected more evidence from petitioners
in their application for a search warrant other than what the law and
jurisprudence, then existing and judicially accepted, required with respect to
the finding of probable cause.
Article 4 of the Civil Code provides that (l)aws shall have no retroactive
effect, unless the contrary is provided. Correlatively, Article 8 of the same
Code declares that (j)udicial decisions applying the laws or the Constitution
shall form part of the legal system of the Philippines.
Jurisprudence, in our system of government, cannot be considered as
an independent source of law; it cannot create law.[40] While it is true that
judicial decisions which apply or interpret the Constitution or the laws are part
of the legal system of the Philippines, still they are not laws. Judicial
decisions, though not laws, are nonetheless evidence of what the laws mean,
and it is for this reason that they are part of the legal system of the
Philippines.[41] Judicial decisions of the Supreme Court assume the same
authority as the statute itself.[42]
Interpreting the aforequoted correlated provisions of the Civil Code and
in light of the above disquisition, this Court emphatically declared in Co vs.
Court of Appeals, et al.[43] that the principle of prospectivity applies not only to
original amendatory statutes and administrative rulings and circulars, but
also, and properly so, to judicial decisions. Our holding in the earlier case
of People vs. Jubinal[44] echoes the rationale for this judicial declaration, viz.:
Decisions of this Court, although in themselves not laws, are nevertheless
evidence of what the laws mean, and this is the reason why under Article 8 of
the New Civil Code, Judicial decisions applying or interpreting the laws or the
Constitution shall form part of the legal system. The interpretation upon a law
by this Court constitutes, in a way, a part of the law as of the date that the
law was originally passed, since this Courts construction merely establishes
the contemporaneous legislative intent that the law thus construed intends to
effectuate. The settled rule supported by numerous authorities is a
restatement of the legal maxim legis interpretation legis vim obtinet the
interpretation placed upon the written law by a competent court has the force
of law. x x x, but when a doctrine of this Court is overruled and a different
view is adopted, the new doctrine should be applied prospectively, and
should not apply to parties who had relied on the old doctrine and acted on
the faith thereof. x x x. (Stress supplied).
This was forcefully reiterated in Spouses Benzonan vs. Court of
Appeals, et al.,[45] where the Court expounded:
x x x. But while our decisions form part of the law of the land, they are also
subject to Article 4 of the Civil Code which provides that laws shall have no
retroactive effect unless the contrary is provided. This is expressed in the
familiar legal maximum lex prospicit, non respicit, the law looks forward not
backward. The rationale against retroactivity is easy to perceive. The
retroactive application of a law usually divests rights that have already
become vested or impairs the obligations of contract and hence, is
unconstitutional (Francisco v. Certeza, 3 SCRA 565 [1961]). The same
consideration underlies our rulings giving only prospective effect to decisions
enunciating new doctrines. x x x.
The reasoning behind Senarillos vs. Hermosisima[46] that judicial
interpretation of a statute constitutes part of the law as of the date it was
originally passed, since the Courts construction merely establishes the
contemporaneous legislative intent that the interpreted law carried into effect,
is all too familiar. Such judicial doctrine does not amount to the passage of a
new law but consists merely of a construction or interpretation of a pre-
existing one, and that is precisely the situation obtaining in this case.
It is consequently clear that a judicial interpretation becomes a part of
the law as of the date that law was originally passed, subject only to the
qualification that when a doctrine of this Court is overruled and a different
view is adopted, and more so when there is a reversal thereof, the new
doctrine should be applied prospectively and should not apply to parties who
relied on the old doctrine and acted in good faith. [47] To hold otherwise would
1139
be to deprive the law of its quality of fairness and justice then, if there is no
recognition of what had transpired prior to such adjudication. [48]
There is merit in petitioners impassioned and well-founded
argumentation:
The case of 20th Century Fox Film Corporation vs. Court of Appeals, et al.,
164 SCRA 655 (August 19, 1988) (hereinafter 20th Century Fox) was
inexistent in December of 1987 when Search Warrant 87-053 was issued by
the lower court. Hence, it boggles the imagination how the lower court could
be expected to apply the formulation of 20th Century Fox in finding probable
cause when the formulation was yet non-existent.
xxx xxx xxx
In short, the lower court was convinced at that time after conducting
searching examination questions of the applicant and his witnesses that an
offense had been committed and that the objects sought in connection with
the offense (were) in the place sought to be searched (Burgos v. Chief of
Staff, et al., 133 SCRA 800). It is indisputable, therefore, that at the time of
the application, or on December 14, 1987, the lower court did not commit any
error nor did it fail to comply with any legal requirement for the valid issuance
of search warrant.
x x x. (W)e believe that the lower court should be considered as having
followed the requirements of the law in issuing Search Warrant No. 87-
053. The search warrant is therefore valid and binding. It must be noted that
nowhere is it found in the allegations of the Respondents that the lower court
failed to apply the law as then interpreted in 1987. Hence, we find it absurd
that it is (sic) should be seen otherwise, because it is simply impossible to
have required the lower court to apply a formulation which will only be
defined six months later.
Furthermore, it is unjust and unfair to require compliance with legal and/or
doctrinal requirements which are inexistent at the time they were supposed
to have been complied with.
xxx xxx xxx
x x x. If the lower courts reversal will be sustained, what encouragement can
be given to courts and litigants to respect the law and rules if they can expect
with reasonable certainty that upon the passage of a new rule, their conduct
can still be open to question? This certainly breeds instability in our system of
dispensing justice. For Petitioners who took special effort to redress their
grievances and to protect their property rights by resorting to the remedies
provided by the law, it is most unfair that fealty to the rules and procedures
then obtaining would bear but fruits of injustice.[49]
Withal, even the proposition that the prospectivity of judicial decisions
imports application thereof not only to future cases but also to cases still
ongoing or not yet final when the decision was promulgated, should not be
countenanced in the jural sphere on account of its inevitably unsettling
repercussions. More to the point, it is felt that the reasonableness of the
added requirement in 20th Century Fox calling for the production of the
master tapes of the copyrighted films for determination of probable cause in
copyright infringement cases needs revisiting and clarification.
It will be recalled that the 20th Century Fox case arose from search
warrant proceedings in anticipation of the filing of a case for the unauthorized
sale or renting out of copyrighted films in videotape format in violation of
Presidential Decree No. 49. It revolved around the meaning of probable
cause within the context of the constitutional provision against illegal
searches and seizures, as applied to copyright infringement cases involving
videotapes.
Therein it was ruled that
The presentation of master tapes of the copyrighted films from which the
pirated films were allegedly copied, was necessary for the validity of search
warrants against those who have in their possession the pirated films. The
petitioners argument to the effect that the presentation of the master tapes at
the time of application may not be necessary as these would be merely
evidentiary in nature and not determinative of whether or not a probable
1140
cause exists to justify the issuance of the search warrants is not
meritorious. The court cannot presume that duplicate or copied tapes were
necessarily reproduced from master tapes that it owns.
The application for search warrants was directed against video tape outlets
which allegedly were engaged in the unauthorized sale and renting out of
copyrighted films belonging to the petitioner pursuant to P.D. 49.
The essence of a copyright infringement is the similarity or at least
substantial similarity of the purported pirated works to the copyrighted
work. Hence, the applicant must present to the court the copyrighted films to
compare them with the purchased evidence of the video tapes allegedly
pirated to determine whether the latter is an unauthorized reproduction of the
former. This linkage of the copyrighted films to the pirated films must be
established to satisfy the requirements of probable cause. Mere allegations
as to the existence of the copyrighted films cannot serve as basis for the
issuance of a search warrant.
For a closer and more perspicuous appreciation of the factual
antecedents of 20th Century Fox, the pertinent portions of the decision
therein are quoted hereunder, to wit:
In the instant case, the lower court lifted the three questioned search
warrants against the private respondents on the ground that it acted on the
application for the issuance of the said search warrants and granted it on the
misrepresentations of applicant NBI and its witnesses that infringement of
copyright or a piracy of a particular film have been committed. Thus the lower
court stated in its questioned order dated January 2, 1986:
According to the movant, all three witnesses during the proceedings in the
application for the three search warrants testified of their own personal
knowledge. Yet, Atty. Albino Reyes of the NBI stated that the counsel or
representative of the Twentieth Century Fox Corporation will testify on the
video cassettes that were pirated, so that he did not have personal
knowledge of the alleged piracy. The witness Bacani also said that the video
cassettes were pirated without stating the manner it was pirated and that it
was Atty. Domingo that has knowledge of that fact.
On the part of Atty. Domingo, he said that the re-taping of the allegedly
pirated tapes was from master tapes allegedly belonging to the Twentieth
Century Fox, because, according to him it is of his personal knowledge.
At the hearing of the Motion for Reconsideration, Senior NBI Agent Atty.
Albino Reyes testified that when the complaint for infringement was brought
to the NBI, the master tapes of the allegedly pirated tapes were shown to
him and he made comparisons of the tapes with those purchased by their
man Bacani. Why the master tapes or at least the film reels of the allegedly
pirated tapes were not shown to the Court during the application gives some
misgivings as to the truth of that bare statement of the NBI agent on the
witness stand.
Again as the application and search proceedings is a prelude to the filing of
criminal cases under P.D. 49, the copyright infringement law, and although
what is required for the issuance thereof is merely the presence of probable
cause, that probable cause must be satisfactory to the Court, for it is a time-
honored precept that proceedings to put a man to task as an offender under
our laws should be interpreted in strictissimi juris against the government and
liberally in favor of the alleged offender.
xxx xxx xxx
This doctrine has never been overturned, and as a matter of fact it had been
enshrined in the Bill of Rights in our 1973 Constitution.
So that lacking in persuasive effect, the allegation that master tapes
were viewed by the NBI and were compared to the purchased and seized
video tapes from the respondents establishments, it should be dismissed as
not supported by competent evidence and for that matter the probable cause
hovers in that grey debatable twilight zone between black and white
resolvable in favor of respondents herein.
1141
But the glaring fact is that Cocoon, the first video tape mentioned in the
search warrant, was not even duly registered or copyrighted in the
Philippines. (Annex C of Opposition, p. 152, record.) So that lacking in the
requisite presentation to the Court of an alleged master tape for purposes of
comparison with the purchased evidence of the video tapes allegedly pirated
and those seized from respondents, there was no way to determine whether
there really was piracy, or copying of the film of the complainant Twentieth
Century Fox.
xxx xxx xxx
The lower court, therefore, lifted the three (3) questioned search warrants in
the absence of probable cause that the private respondents violated P.D.
49. As found by the court, the NBI agents who acted as witnesses did not
have personal knowledge of the subject matter of their testimony which was
the alleged commission of the offense by the private respondents. Only the
petitioners counsel who was also a witness during the application for the
issuance of the search warrants stated that he had personal knowledge that
the confiscated tapes owned by the private respondents were pirated tapes
taken from master tapes belonging to the petitioner. However, the lower court
did not give much credence to his testimony in view of the fact that the
master tapes of the allegedly pirated tapes were not shown to the court
during the application (Italics ours).
The italicized passages readily expose the reason why the trial court
therein required the presentation of the master tapes of the allegedly pirated
films in order to convince itself of the existence of probable cause under the
factual milieu peculiar to that case. In the case at bar, respondent appellate
court itself observed:
We feel that the rationale behind the aforequoted doctrine is that the pirated
copies as well as the master tapes, unlike the other types of personal
properties which may be seized, were available for presentation to the court
at the time of the application for a search warrant to determine the existence
of the linkage of the copyrighted films with the pirated ones. Thus, there is no
reason not to present them (Italics supplied for emphasis). [50]
In fine, the supposed pronunciamento in said case regarding the
necessity for the presentation of the master tapes of the copyrighted films for
the validity of search warrants should at most be understood to merely serve
as a guidepost in determining the existence of probable cause in copyright
infringement cases where there is doubt as to the true nexus between the
master tape and the pirated copies. An objective and careful reading of the
decision in said case could lead to no other conclusion than that said
directive was hardly intended to be a sweeping and inflexible requirement in
all or similar copyright infringement cases. Judicial dicta should always be
construed within the factual matrix of their parturition, otherwise a careless
interpretation thereof could unfairly fault the writer with the vice of
overstatement and the reader with the fallacy of undue generalization.
In the case at bar, NBI Senior Agent Lauro C. Reyes who filed the
application for search warrant with the lower court following a formal
complaint lodged by petitioners, judging from his affidavit [51] and his
deposition,[52] did testify on matters within his personal knowledge based on
said complaint of petitioners as well as his own investigation and surveillance
of the private respondents video rental shop. Likewise, Atty. Rico V.
Domingo, in his capacity as attorney-in-fact, stated in his affidavit [53] and
further expounded in his deposition[54] that he personally knew of the fact that
private respondents had never been authorized by his clients to reproduce,
lease and possess for the purpose of selling any of the copyrighted films.
Both testimonies of Agent Reyes and Atty. Domingo were corroborated
by Rene C. Baltazar, a private researcher retained by Motion Pictures
Association of America, Inc. (MPAA, Inc.), who was likewise presented as a
witness during the search warrant proceedings. [55] The records clearly reflect
that the testimonies of the abovenamed witnesses were straightforward and
stemmed from matters within their personal knowledge. They displayed none
of the ambivalence and uncertainty that the witnesses in the 20th Century
Fox case exhibited. This categorical forthrightness in their statements,
among others, was what initially and correctly convinced the trial court to
make a finding of the existence of probable cause.
There is no originality in the argument of private respondents against
the validity of the search warrant, obviously borrowed from 20th Century Fox,
1142
that petitioners witnesses NBI Agent Lauro C. Reyes, Atty. Rico V. Domingo
and Rene C. Baltazar did not have personal knowledge of the subject matter
of their respective testimonies and that said witnesses claim that the video
tapes were pirated, without stating the manner by which these were pirated,
is a conclusion of fact without basis.[56] The difference, it must be pointed out,
is that the records in the present case reveal that (1) there is no allegation of
misrepresentation, much less a finding thereof by the lower court, on the part
of petitioners witnesses; (2) there is no denial on the part of private
respondents that the tapes seized were illegitimate copies of the copyrighted
ones nor have they shown that they were given any authority by petitioners
to copy, sell, lease, distribute or circulate, or at least, to offer for sale, lease,
distribution or circulation the said video tapes; and (3) a discreet but
extensive surveillance of the suspected area was undertaken by petitioners
witnesses sufficient to enable them to execute trustworthy affidavits and
depositions regarding matters discovered in the course thereof and of which
they have personal knowledge.
It is evidently incorrect to suggest, as the ruling in 20th Century Fox may
appear to do, that in copyright infringement cases, the presentation of master
tapes of the copyrighted films is always necessary to meet the requirement of
probable cause and that, in the absence thereof, there can be no finding of
probable cause for the issuance of a search warrant. It is true that such
master tapes are object evidence, with the merit that in this class of evidence
the ascertainment of the controverted fact is made through demonstrations
involving the direct use of the senses of the presiding magistrate. [57] Such
auxiliary procedure, however, does not rule out the use of testimonial or
documentary evidence, depositions, admissions or other classes of evidence
tending to prove the factum probandum,[58] especially where the production in
court of object evidence would result in delay, inconvenience or expenses out
of proportion to its evidentiary value.[59]
Of course, as a general rule, constitutional and statutory provisions
relating to search warrants prohibit their issuance except on a showing of
probable cause, supported by oath or affirmation. These provisions prevent
the issuance of warrants on loose, vague, or doubtful bases of fact, and
emphasize the purpose to protect against all general searches. [60] Indeed,
Article III of our Constitution mandates in Sec. 2 thereof that no search
warrant shall issue except upon probable cause to be determined personally
by the judge after examination under oath or affirmation of the complainant
and the witnesses he may produce, and particularly describing the place to
be searched and the things to be seized; and Sec. 3 thereof provides that
any evidence obtained in violation of the preceding section shall be
inadmissible for any purpose in any proceeding.
These constitutional strictures are implemented by the following
provisions of Rule 126 of the Rules of Court:
Sec. 3. Requisites for issuing search warrant. A search warrant shall not
issue but upon probable cause in connection with one specific offense to be
determined personally by the judge after examination under oath or
affirmation of the complainant and the witnesses he may produce, and
particularly describing the place to be searched and the things to be seized.
Sec. 4. Examination of complainant; record. The judge must, before issuing
the warrant, personally examine in the form of searching questions and
answers, in writing and under oath the complainant and any witnesses he
may produce on facts personally known to them and attach to the record
their sworn statements together with any affidavits submitted.
Sec. 5. Issuance and form of search warrant. If the judge is thereupon
satisfied of the existence of facts upon which the application is based, or that
there is probable cause to believe that they exist, he must issue the warrant,
which must be substantially in the form prescribed by these Rules.
The constitutional and statutory provisions of various jurisdictions
requiring a showing of probable cause before a search warrant can be issued
are mandatory and must be complied with, and such a showing has been
held to be an unqualified condition precedent to the issuance of a warrant. A
search warrant not based on probable cause is a nullity, or is void, and the
issuance thereof is, in legal contemplation, arbitrary.[61] It behooves us, then,
to review the concept of probable cause, firstly, from representative holdings
in the American jurisdiction from which we patterned our doctrines on the
matter.
1143
 Although the term probable cause has been said to have a well-defined
meaning in the law, the term is exceedingly difficult to define, in this case,
with any degree of precision; indeed, no definition of it which would justify the
issuance of a search warrant can be formulated which would cover every
state of facts which might arise, and no formula or standard, or hard and fast
rule, may be laid down which may be applied to the facts of every situation.
[62]
As to what acts constitute probable cause seem incapable of definition.
[63]
There is, of necessity, no exact test.[64]
At best, the term probable cause has been understood to mean a
reasonable ground of suspicion, supported by circumstances sufficiently
strong in themselves to warrant a cautious man in the belief that the person
accused is guilty of the offense with which he is charged; [65] or the existence
of such facts and circumstances as would excite an honest belief in a
reasonable mind acting on all the facts and circumstances within the
knowledge of the magistrate that the charge made by the applicant for the
warrant is true.[66]
Probable cause does not mean actual and positive cause, nor does it
import absolute certainty. The determination of the existence of probable
cause is not concerned with the question of whether the offense charged has
been or is being committed in fact, or whether the accused is guilty or
innocent, but only whether the affiant has reasonable grounds for his belief.
[67]
The requirement is less than certainty or proof, but more than suspicion or
possibility.[68]
In Philippine jurisprudence, probable cause has been uniformly defined
as such facts and circumstances which would lead a reasonable, discreet
and prudent man to believe that an offense has been committed, and that the
objects sought in connection with the offense are in the place sought to be
searched.[69] It being the duty of the issuing officer to issue, or refuse to issue,
the warrant as soon as practicable after the application therefor is filed, [70] the
facts warranting the conclusion of probable cause must be assessed at the
time of such judicial determination by necessarily using legal standards then
set forth in law and jurisprudence, and not those that have yet to be crafted
thereafter.
As already stated, the definition of probable cause enunciated
in Burgos, Sr. vs. Chief of Staff, et al., supra, vis-a-vis the provisions of
Sections 3 and 4 of Rule 126, were the prevailing and controlling legal
standards, as they continue to be, by which a finding of probable cause is
tested. Since the proprietary of the issuance of a search warrant is to be
determined at the time of the application therefor, which in turn must not be
too remote in time from the occurrence of the offense alleged to have been
committed, the issuing judge, in determining the existence of probable cause,
can and should logically look to the touchstones in the laws therefore
enacted and the decisions already promulgated at the time, and not to those
which had not yet even been conceived or formulated.
It is worth noting that neither the Constitution nor the Rules of Court
attempt to define probable cause, obviously for the purpose of leaving such
matter to the courts discretion within the particular facts of each
case. Although the Constitution prohibits the issuance of a search warrant in
the absence of probable cause, such constitutional inhibition does not
command the legislature to establish a definition or formula for determining
what shall constitute probable cause. [71] Thus, Congress, despite its broad
authority to fashion standards of reasonableness for searches and seizures,
[72]
does not venture to make such a definition or standard formulation of
probable cause, nor categorize what facts and circumstances make up the
same, much less limit the determination thereof to and within the
circumscription of a particular class of evidence, all in deference to judicial
discretion and probity.[73]
Accordingly, to restrict the exercise of discretion by a judge by adding a
particular requirement (the presentation of master tapes, as intimated
by 20th Century Fox) not provided nor implied in the law for a finding of
probable cause is beyond the realm of judicial competence or
statemanship. It serves no purpose but to stultify and constrict the judicious
exercise of a court's prerogatives and to denigrate the judicial duty of
determining the existence of probable cause to a mere ministerial or
mechanical function. There is, to repeat, no law or rule which requires that
the existence of probable cause is or should be determined solely by a
specific kind of evidence. Surely, this could not have been contemplated by
the framers of the Constitution, and we do not believe that the Court intended
1144
the statement in 20th Century Fox regarding master tapes as the dictum for
all seasons and reasons in infringement cases.
Turning now to the case at bar, it can be gleaned from the records that
the lower court followed the prescribed procedure for the issuances of a
search warrant: (1) the examination under oath or affirmation of the
complainant and his witnesses, with them particularly describing the place to
be searched and the things to be seized; (2) an examination personally
conducted by the judge in the form of searching questions and answers, in
writing and under oath of the complainant and witnesses on facts personally
known to them; and, (3) the taking of sworn statements, together with the
affidavits submitted, which were duly attached to the records.
Thereafter, the court a quo made the following factual findings leading to
the issuance of the search warrant now subject to this controversy:
In the instant case, the following facts have been established: (1) copyrighted
video tapes bearing titles enumerated in Search Warrant No. 87-053 were
being sold, leased, distributed or circulated, or offered for sale, lease,
distribution, or transferred or caused to be transferred by defendants at their
video outlets, without the written consent of the private complainants or their
assignee; (2) recovered or confiscated from defendants' possession were
video tapes containing copyrighted motion picture films without the authority
of the complainant; (3) the video tapes originated from spurious or
unauthorized persons; and (4) said video tapes were exact reproductions of
the films listed in the search warrant whose copyrights or distribution rights
were owned by complainants.
The basis of these facts are the affidavits and depositions of NBI Senior
Agent Lauro C. Reyes, Atty. Rico V. Domingo, and Rene C. Baltazar. Motion
Pictures Association of America, Inc. (MPAA) thru their counsel, Atty. Rico V.
Domingo, filed a complaint with the National Bureau of Investigation against
certain video establishments one of which is defendant, for violation of PD
No. 49 as amended by PD No, 1988. Atty. Lauro C. Reyes led a team to
conduct discreet surveillance operations on said video establishments. Per
information earlier gathered by Atty. Domingo, defendants were engaged in
the illegal sale, rental, distribution, circulation or public exhibition of
copyrighted films of MPAA without its written authority or its
members. Knowing that defendant Sunshine Home Video and its proprietor,
Mr. Danilo Pelindario, were not authorized by MPAA to reproduce, lease, and
possess for the purpose of selling any of its copyrighted motion pictures, he
instructed his researcher, Mr. Rene Baltazar to rent two video cassettes from
said defendants on October 21, 1987. Rene C. Baltazar proceeded to
Sunshine Home Video and rented tapes containing Little Shop of Horror. He
was issued rental slip No. 26362 dated October 21, 1987 for P10.00 with a
deposit of P100.00. Again, on December 11, 1987, he returned to Sunshine
Home Video and rented Robocop with a rental slip No. 25271 also
for P10.00. On the basis of the complaint of MPAA thru counsel, Atty. Lauro
C. Reyes personally went to Sunshine Home Video at No. 6 Mayfair Center,
Magallanes Commercial Center, Makati. His last visit was on December 7,
1987. There, he found the video outlet renting, leasing, distributing video
cassette tapes whose titles were copyrighted and without the authority of
MPAA.
Given these facts, a probable cause exists. x x x. [74]
The lower court subsequently executed a volte-face, despite its prior
detailed and substantiated findings, by stating in its order of November 22,
1988 denying petitioners motion for reconsideration and quashing the search
warrant that
x x x. The two (2) cases have a common factual milieu; both involve alleged
pirated copyrighted films of private complainants which were found in the
possession or control of the defendants. Hence, the necessity of the
presentation of the master tapes from which the pirated films were allegedly
copied is necessary in the instant case, to establish the existence of probable
cause.[75]
Being based solely on an unjustifiable and improper retroactive
application of the master tape requirement generated by 20th Century
Fox upon a factual situation completely different from that in the case at bar,
and without anything more, this later order clearly defies elemental fair play
1145
and is a gross reversible error. In fact, this observation of the Court in La III
ChemiseLacoste, S.A. vs. Fernandez, et al., supra, may just as easily apply
to the present case: