Development Bank of The Philippines vs. Court of Appeals

VOL.
363,AUGUST16,2001
307
DevelopmentBankofthePhilippinesvs.CourtofAppeals
G.R.No.126200.August16,2001.*
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.HONORABLE COURT OF APPEALS and REMINGTON
INDUSTRIALSALESCORPORATION,respondents.
CorporationLaw;PiercingtheVeilofCorporateFictionDoctrine;Whenthe
notionoflegalentityisusedtodefeatpublicconvenience,justifywrong,protect
fraud,ordefendcrime,thelawwillregardthecorporationasanassociationof
persons or in case of two corporations, merge them into one.In Yutivo Sons
Hardwarevs.CourtofTaxAppeals,citedbytheCourtofAppealsinitsdecision,this
Courtdeclared:Itisanelementaryandfundamentalprincipleofcorporationlawthat
acorporationisanentityseparateanddistinctfromitsstockholdersandfromother
corporationstowhichitmaybeconnected.However,whenthenotionoflegalentity
isusedtodefeatpublicconvenience,justifywrong,protectfraud,ordefendcrime,
thelawwillregardthecorporationasanassociationofpersonsorincaseoftwo
corporations,mergethemintoone.(Koppel[Phils.],Inc.,vs.Yatco,71Phil.496,
citing1FletcherEncyclopediaofCorporation,PermanentEd.,pp.135136;U.S.vs.
MilwaukeeRefrigerationTransitCo.,142Fed.,247,255perSanborn,J.)xxxIn
accordance with the foregoing rule, this Court has disregarded the separate
personalityofthecorporationwherethecorporateentitywasusedtoescapeliability
to third parties. In this case, however, we do not find any fraud on the part of
MarinduqueMininganditstransfereestowarrantthepiercingofthecorporateveil.
________________
*FIRSTDIVISION.
308
308
SUPREMECOURTREPORTSANNOTATED
Same;BanksandBanking;DevelopmentBankofthePhilippines;Philippine
NationalBank;P.D.385;PNBandDBParemandatedtoforecloseonthemortgage
whenthepastdueaccounthadincurredarrearagesofmorethan20%ofthetotal
outstanding obligations.It bears stressing that PNB and DBP are mandated to
forecloseonthemortgagewhenthepastdueaccounthadincurredarrearagesofmore
than20%ofthetotaloutstandingobligation.Section1ofPresidentialDecreeNo.
385 (The Law on Mandatory Foreclosure) provides: It shall be mandatory for
governmentfinancialinstitutions,afterthelapseofsixty(60)daysfromtheissuance
of this decree, to foreclose the collateral and/or securities for any loan, credit
accommodation,and/orguaranteesgrantedbythemwheneverthearrearagesonsuch
account, including accrued interest and other charges, amount to at least twenty
percent (20%) of the total outstanding obligations, including interest and other
charges,asappearinginthebooksofaccountand/orrelatedrecordsofthefinancial
institution concerned. This shall be without prejudice to the exercise by the
government financial institution of such rights and/or remedies available to them
undertheirrespectivecontractswiththeirdebtors,includingtherighttoforecloseon
loans,credits,accomodationsand/orguaranteesonwhichthearrearagesarelessthan
twenty(20%)percent.
Same; The rule pertaining to transactions between corporations with
interlockingdirectorsresultingintheprejudicetooneofthecorporationsdoesnot
applywherethecorporationallegedlyprejudicedisathirdparty,notoneofthe
corporationswithinterlockingdirectors.TheCourtofAppealsmadereferenceto
two principles in corporation law. The first pertains to transactions between
corporations with interlocking directors resulting in the prejudice to one of the
corporations.Thisruledoesnotapplyinthiscase,however,sincethecorporation
allegedlyprejudiced(Remington)isathirdparty,notoneofthecorporationswith
interlockingdirectors(MarinduqueMiningandDBP).
Same; No bad faith could be discerned in the creation by DBP of three
corporationswherethesamewasnecessarytomanageandoperateassetsacquired
intheforeclosuresalelesttheydeterioratefromnonuseandlosetheirvalue.
NeitherdowediscernanybadfaithonthepartofDBPbyitscreationofNonoc
Mining,MaricalumandIslandCement.AsRemingtonitselfconcedes,DBPisnot
authorizedbyitschartertoengageintheminingbusiness.Thecreationofthethree
corporations was necessary to manage and operate the assets acquired in the
foreclosuresalelesttheydeterioratefromnonuseandlosetheirvalue.Intheabsence
ofanyentitywillingtopurchasetheseassetsfromthebank,whatelsewouldit
309
VOL.363,AUGUST16,2001
309
dowiththesepropertiesinthemeantime?Soundbusinesspracticerequiredthat
theybeutilizedforthepurposesforwhichtheywereintended.anteedbyachattel
mortgage,uponthethingspledgedormortgaged,uptothevaluethereof.xxx
Same;Thedoctrineofpiercingtheveilofcorporatefictionappliesonlywhen
suchcorporatefictionisusedtodefeatpublicconvenience,justifywrong,protect
fraud or defend crimeto disregard juridical personality of a corporation, the
wrongdoingmustbeclearlyandconvincinglyestablished.Toreiterate,thedoctrine
ofpiercingtheveilofcorporatefictionappliesonlywhensuchcorporatefictionis
usedtodefeatpublicconvenience,justifywrong,protectfraudordefendcrime.To
disregardtheseparatejuridicalpersonalityofacorporation,thewrongdoingmustbe
clearlyandconvincinglyestablished.Itcannotbepresumed.Inthiscase,theCourt
findsthatRemingtonfailedtodischargeitsburdenofprovingbadfaithonthepartof
MarinduqueMininganditstransfereesinthemortgageandforeclosureofthesubject
propertiestojustifythepiercingofthecorporateveil.
Concurrence and Preference of Credit; In the absence of liquidation
proceedings,thevendorslienontheunpaidpurchasescannotbeenforcedagainst
thetransfereeofsuchpurchases.TheCourtofAppealsalsoheldthatthereexistsin
RemingtonsfavoralienontheunpaidpurchasesofMarinduqueMining,andas
transfereeofthesepurchases,DBPshouldbeheldliableforthevaluethereof.Inthe
absence of liquidation proceedings, however, the claim of Remington cannot be
enforcedagainstDBP.Article2241oftheCivilCodeprovides:Article2241.With
referencetospecificmovablepropertyofthedebtor,thefollowingclaimsorliens
shallbepreferred:xxx(3)Claimsfortheunpaidpriceofmovablessold,onsaid
movables,solongastheyareinthepossessionofthedebtor,uptothevalueofthe
same;andifthemovablehasbeenresoldbythedebtorandthepriceisstillunpaid,
thelienmaybeenforcedontheprice;thisrightisnotlostbytheimmobilizationof
thethingbydestination,providedithasnotlostitsform,substanceandidentity,
neitheristherightlostbythesaleofthethingtogetherwithotherpropertyforalump
sum,whenthepricethereofcanbedeterminedproportionally;(4)Creditsguaranteed
withapledgesolongasthethingspledgedareinthehandsofthecreditor,orthose
guaranteedbyachattelmortgage,uponthethingspledgeormortgaged,uptothe
valuethereof.xxx
Same;Same;Same;TherulinginBarrettov.Villanueva,1SCRA288(1961),
although involving specific immovable property, should apply equally in a case
wherespecificmovablepropertyisinvolved.TherulinginBarrettowasreiteratedin
Phil.SavingsBankvs.Hon.Lantin,Jr.,etc.,etal.,andintwocasesbothentitled
DevelopmentBankofthePhilippines
310
310
vs.NLRC.AlthoughBarrettoinvolvedspecificimmovableproperty,theruling
thereinshouldapplyequallyinthiscasewherespecificmovablepropertyisinvolved.
AstheextrajudicialforeclosureinstitutedbyPNBandDBPisnottheliquidation
proceedingcontemplatedbytheCivilCode,Remingtoncannotclaimits prorata
sharefromDBP.
PETITIONforreviewoncertiorariofadecisionoftheCourtofAppeals.
ThefactsarestatedintheopinionoftheCourt.
OfficeoftheLegalCounselforpetitioners.
P.C.Nolasco&Associatesforprivaterespondents.
KAPUNAN,J.:
BeforetheCourtisapetitionforreviewoncertiorariunderRule45ofthe
RulesofCourt,seekingareviewoftheDecisionoftheCourtofAppeals
datedOctober6,1995andtheResolutionofthesamecourtdatedAugust
29,1996.
Thefactsareasfollows:
Marinduque Mining Industrial Corporation (Marinduque Mining), a
corporationengagedinthemanufactureofpureandrefinednickel,nickel
andcobaltinmixedsulfides,copperore/concentrates,cementandpyrite
cone, obtained from the Philippine National Bank (PNB) various loan
accommodations.Tosecuretheloans,MarinduqueMiningexecutedon
October9,1978aDeedofRealEstateMortgageandChattelMortgagein
favor of PNB. The mortgage covered all of Marinduque Minings real
properties,locatedatSurigaodelNorte,Sipalay,NegrosOccidental,andat
Antipolo,Rizal,includingtheimprovementsthereon.AsofNovember20,
1980,theloansextendedbyPNBamountedtoP4Billion,exclusiveof
interestandcharges.1
OnJuly13,1981,MarinduqueMiningexecutedinfavorofPNBand
theDevelopmentBankofthePhilippines(DBP)asecondMortgageTrust
Agreement.Insaidagreement,MarinduqueMiningmortgagedtoPNBand
DBPallitsrealpropertieslocatedat
_______________
1Rollo,pp.6162.
311
311
Surigao del Norte, Sipalay, Negros Occidental, and Antipolo, Rizal,
including the improvements thereon. The mortgage also covered all of
MarinduqueMiningschattels,aswellasassetsofwhateverkind,nature
anddescriptionwhichMarinduqueMiningmaysubsequentlyacquirein
substitutionorreplenishmentorinadditiontothepropertiescoveredby
thepreviousDeedofRealandChattelMortgagedatedOctober7,1978.
Apparently, Marinduque Mining had also obtained loans totaling P2
BillionfromDBP,exclusiveofinterestandcharges.2
OnApril27,1984,MarinduqueMiningexecutedinfavorofPNBand
DBPanAmendmenttoMortgageTrustAgreementbyvirtueofwhich
MarinduqueMiningmortgagedinfavorofPNBandDBPallotherreal
and personal properties and other real rights subsequently acquired by
MarinduqueMining.3
ForfailureofMarinduqueMiningtosettleitsloanobligations,PNB
and DBP instituted sometime on July and August 1984 extrajudicial
foreclosureproceedingsoverthemortgagedproperties.
The events following the foreclosure are narrated by DBP in its
petition,asfollows:
Intheensuingpublicauctionsaleconductedon August31,1984, PNBandDBP
emergedandweredeclaredthehighestbiddersovertheforeclosedrealproperties,
buildings,miningclaims,leaseholdrightstogetherwiththeimprovementsthereonas
wellasmachineries[sic]andequipments[sic]ofMMIClocatedatNonocNickel
Refinery Plant at Surigao del Norte for a bid price of P14,238,048,150.00 [and]
[o]vertheforeclosedchattelsofMMIClocatedatNonocRefineryPlantatSurigao
delNorte,PNBandDBPashighestbidders,biddedforP170,577,610.00(Exhs.5
to5A,6,7to7AAPNB/DBP).Fortheforeclosedrealpropertiestogether
withallthebuildings,majormachineries&equipmentandotherimprovementsof
MMIClocatedatAntipolo,Rizal,likewiseheldonAugust31,1984,weresoldto
PNBandDBPashighestbiddersinthesumofP1,107,167,950.00(Exhs.10to
10XPNB/DBP).
Attheauctionsaleconductedon September7,1984[,]overtheforeclosedreal
properties,buildings,&machineries/equipmentofMMIClocatedatSipalay,Negros
OccidentalweresoldtoPNBandDBP,ashighest
________________
2Id.,at62.
3Id.
312
312
bidders, in the amount of P2,383,534,000.00 and P543,040,000.00 respectively
(Exhs.8to8BB,9to90GGGGGGPNB/DBP).
Finally, at the public auction sale conducted on September 18, 1984 on the
foreclosedpersonalpropertiesofMMIC,thesameweresoldtoPNBandDBPasthe
highest bidder in the sum of P678,772,000.00 (Exhs. 11 and 12QQQQQ
PNB).
PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984,
purposely,inordertoensurethecontinuedoperationoftheNickelrefineryplantand
to prevent the deterioration of the assets foreclosed, assigned and transferred to
NonocMiningandIndustrialCorporationalltheirrights,interestandparticipation
overtheforeclosedpropertiesofMMIClocatedatNonocIsland,SurigaodelNorte
foraninitialconsiderationofP14,361,000,000.00(Exh.13PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP
assignedandtransferredinfavorofMaricalumMiningCorp.allitsrights,interest
and participation over the foreclosed properties of MMIC at Sipalay, Negros
OccidentalforaninitialconsiderationofP325,800,000.00(Exh.14PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as
amended,againassigned,transferredandconveyedtotheNationalGovernmentthru
[sic]theAssetPrivatizationTrust(APT)allitsexistingrightsandinterestoverthe
assets of MMIC, earlier assigned to Nonoc Mining and Industrial Corporation,
MaricalumMiningCorporationandIslandCementCorporation(Exh.15&15
APNB/DBP).4
Inthemeantime,betweenJuly16,1982toOctober4,1983,Marinduque
Miningpurchasedandcausedtobedeliveredconstructionmaterialsand
other merchandise from Remington Industrial Sales Corporation
(Remington) worth P921,755.95. The purchases remained unpaid as of
August1,1984whenRemingtonfiledacomplaintforasumofmoneyand
damaged against Marinduque Mining for the value of the unpaid
constructionmaterialsandothermerchandisepurchasedbyMarinduque
Mining,aswellasinterest,attorneysfeesandthecostsofsuit.
OnSeptember7,1984,Remingtonsoriginalcomplaintwasamended
toincludePNBandDBPascodefendantsinviewoftheforeclosureby
thelatteroftherealandchattelmortgagesonthe
_______________
4Rollo,pp.6263.Underscoringintheoriginal.
313
313
real and personal properties, chattels, mining claims, machinery,
equipmentandotherassetsofMarinduqueMining.5
OnSeptember13,1984,Remingtonfiledasecondamendedcomplaint
to include as additional defendant, the Nonoc Mining and Industrial
Corporation(NonocMining).NonocMiningistheassigneeofallrealand
personalproperties,chattels,machinery,equipmentandallotherassetsof
MarinduqueMiningatitsNonocNickelFactoryinSurigaodelNorte.6
On March 26, 1986, Remington filed a third amended complaint
including the Maricalum Mining Corporation (Maricalum Mining) and
IslandCementCorporation(IslandCement)ascodefendants.Remington
assertedthatMarinduqueMining,PNB,DBP,NonocMining,Maricalum
MiningandIslandCementmustbetreatedinlawasoneandthesame
entitybydisregardingtheveilofcorporatefictionsince:
1. 1.
CodefendantsNMIC,MaricalumandIslandCementwhicharenewly
createdentitiesarepracticallyownedwhollybydefendantsPNBand
DBP,andmanagedbytheirofficers,asidefromthefactthatthe
aforesaidcodefendantsNMIC,MaricalumandIslandCementwere
organizedinsuchahurryandinsuchsuspiciouscircumstancesby
codefendantsPNBandDBPafterthesupposedextrajudicial
foreclosureofMMICsassetsastomaketheirsupposedprojects
assets,machineriesandequipmentwhichwereoriginallyownedby
codefendantMMICbeyondthereachofcreditorsofthelatter.
2. 2.
Thepersonnel,keyofficersandrankandfileworkersandemployeesof
codefendantsNMIC,MaricalumandIslandCementcreationsofco
defendantsPNBandDBPwerethepersonnelofcodefendantMMIC
suchthatxxxpracticallytherehasonlybeenachangeofnamefor
alllegalpurposeandintents.
3. 3.
Theplacesofbusinessnottomentiontheminingclaimsandproject
premisesofcodefendantsNMIC,MaricalumandIslandCement
likewiseusedtobetheplacesofbusiness,miningclaimsandproject
premisesofcodefendantMMICastomaketheaforesaidco
defendantsNMIC,MaricalumandIslandCementmereadjunctsand
subsidiariesof
________________
5Id.,at90.
6Id.
314
314
1. codefendants PNB and DBP, and subject to their control and
management.
Ontopofeverything,codefendantsPNB,DBPNMIC,Maricalumand
IslandCementbeingallcorporationscreatedbythegovernmentinthe
pursuitofbusinessventuresshouldnotbeallowedtoignore,xxxor
obliteratewithimpunitynayillegally,thefinancialobligationsofxxx
MMIC whose operations codefendants PNB and DBP had highly
financedbeforetheallegedextrajudicialforeclosureofdefendantMMICs
assets,machineriesandequipmenttotheextentthatmajorpoliciesofco
defendant MMIC were being decided upon by codefendants PNB and
DBPasmajorfinancierswhowererepresentedinitsboardofdirectors
forming part of the majority thereof which through the alleged
extrajudicial foreclosure culminated in a complete takeover by co
defendants PNB and DBP bringing about the organization of their co
defendants NMIC, Maricalum and Island Cement to which were
transferred all the assets, machineries and pieces of equipment of co
defendantMMICusedinitsnickelminingprojectinSurigaodelNorte,
copperminingoperationinSipalay,NegrosOccidentalandcementfactory
in Antipolo, Rizal to the prejudice of creditors of codefendant MMIC
such as plaintiff Remington Industrial Sales Corporation whose
stockholders,officersandrankandfileworkersinthelegitimatepursuitof
itsbusinessactivities,investedconsiderabletime,sweatandprivatemoney
tosupply,amongothers,codefendantMMICwithsomeofitsvitalneeds
for its operation, which codefendant MMIC during the time of the
transactionsmaterialtothiscasebecamexxxcodefendantsPNBand
DBPsinstrumentality,businessconduit,alterego,agency(sic),subsidiary
orauxiliarycorporation,byvirtueofwhichitbecomesdoublynecessaryto
disregardthecorporationfictionthatcodefendantsPNB,DBP,MMIC,
NMIC, Maricalum and Islano Cement, six (6) distinct and separate
entities,wheninfactandinlaw,theyshouldbetreatedasoneandthe
sameatleastasfarasplaintiffstransactionswithcodefendantMMICare
concerned,soasnottodefeatpublicconvenience,justifywrong,subvert
justice,protectfraudorconfuselegitimateissuesinvolvingcreditorssuch
asplaintiff,afactwhichalldefendantswereas(sic)stillareawareof
duringallthetimematerialtothetransactionssubjectofthiscase.7
OnApril3,1989,Remingtonfiledamotionforleavetofileafourth
amendedcomplaintimpleadingtheAssetPrivatization
_________________
7Id.,at9192.
315
315
Trust(APT)ascodefendant.Saidfourthamendedcomplaintwasadmitted
bythelowercourtinitsOrderdatedApril29,1989.
OnApril10,1990,theRegionalTrialCourt(RTC)renderedadecision
infavorofRemington,thedispositiveportionofwhichreads:
WHEREFORE,judgmentisherebyrenderedinfavoroftheplaintiff,orderingthe
defendantsMarinduqueMining&IndustrialCorporation,PhilippineNationalBank,
Development Bank of the Philippines, Nonoc Mining and Industrial Corporation,
MaricalumMiningCorporation,IslandCementCorporationandAssetPrivatization
Trusttopay,jointlyandseverally,thesumofP920,755.95,representingtheprincipal
obligation, includingthe stipulated interest as of June 22,1984, plus tenpercent
(10%)surchargeperannumbywayofpenalty,untiltheamountisfullypaid;thesum
equivalentto10%oftheamountdueasandforattorneysfees;andtopaythecosts.8
UponappealbyPNB,DBP,NonocMining,MaricalumMining,Island
CementandAPT,theCourtofAppeals,initsDecisiondatedOctober6,
1995, affirmed the decision of the RTC. Petitioner filed a Motion for
Reconsideration,whichwasdeniedin theResolution datedAugust 29,
1996.
Hence,thispetition,DBPmaintainingthatRemingtonhasnocauseof
action against it or PNB, nor against their transferees, Nonoc Mining,
IslandCement,MaricalumMining,andtheAPT.
On the other hand, private respondent Remington submits that the
transferofthepropertieswasmadeinfraudofcreditors.Thepresenceof
fraud,accordingtoRemington,warrantsthepiercingofthecorporateveil
suchthatMarinduqueMininganditstransfereescouldbeconsideredas
oneandthesamecorporation.Thetransferees,therefore,arealsoliablefor
thevalueofMarinduqueMiningspurchases.
InYutivoSonsHardwarevs.CourtofTaxAppeals, 9citedbytheCourt
ofAppealsinitsdecision,10thisCourtdeclared:
_________________
8Id.,at89.
91SCRA160(1961).
10Rollo,p.102.
316
316
Itisanelementaryandfundamentalprincipleofcorporationlawthatacorporationis
anentityseparateanddistinctfromitsstockholdersandfromothercorporationsto
whichitmaybeconnected.However,whenthenotionoflegalentityisusedtodefeat
publicconvenience,justifywrong,protectfraud,ordefendcrime,thelawwillregard
thecorporationasanassociationofpersonsorincaseoftwocorporations,merge
them into one. (Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher
Encyclopedia of Corporation, Permanent Ed., pp. 135136; U.S. vs. Milwaukee
RefrigerationTransitCo.,142Fed.,247,255perSanborn,J.)xxx
In accordance with the foregoing rule, this Court has disregarded the
separatepersonalityofthecorporationwherethecorporateentitywasused
toescapeliabilitytothirdparties.11Inthiscase,however,wedonotfind
anyfraudonthepartofMarinduqueMininganditstransfereestowarrant
thepiercingofthecorporateveil.
ItbearsstressingthatPNBandDBParemandatedtoforecloseonthe
mortgagewhenthepastdueaccounthadincurredarrearagesofmorethan
20%ofthetotaloutstandingobligation.Section1ofPresidentialDecree
No.385(TheLawonMandatoryForeclosure)provides:
Itshallbemandatoryforgovernmentfinancialinstitutions,afterthelapseofsixty
(60)daysfromtheissuanceofthisdecree,toforeclosethecollateraland/orsecurities
foranyloan,creditaccommodation,and/orguaranteesgrantedbythemwheneverthe
arrearagesonsuchaccount,includingaccruedinterestandothercharges,amountto
atleasttwentypercent(20%)ofthetotaloutstandingobligations,includinginterest
andothercharges,asappearinginthebooksofaccountand/orrelatedrecordsofthe
financialinstitutionconcerned.Thisshallbewithoutprejudicetotheexercisebythe
government financial institution of such rights and/or remedies available to them
undertheirrespectivecontractswiththeirdebtors,includingtherighttoforecloseon
loans,credits,accomodations
________________
11 TanBonnBee&Co.vs.Jarencio,163SCRA205(1988); Claparols,etal.vs.Courtof
IndustrialRelations,65SCRA613(1975);VillaReyTransit,Inc.vs.EusebioE.Ferrer,25SCRA
849(1968);NationalMarketingCorporationvs.AssociatedFinancingCompany,etal.,19SCRA
962(1967);Palacio,etal.vs.FelyTransportationCompany,5SCRA1011(1962);McConnel,et
al.vs.CourtofAppeals,etal.,1SCRA721(1961).
317
317
and/orguaranteesonwhichthearrearagesarelessthantwenty(20%)percent.
Thus,PNBandDBPdidnotonlyhavearight,butthedutyundersaidlaw,
toforecloseuponthesubjectproperties.Thebankshadnochoicebutto
obeythestatutorycommand.
TheimportofthismandatewaslostontheCourtofAppeals,which
reasonedthatunderArticle19oftheCivilCode,Everypersonmust,in
theexerciseofhisrightsandintheperformanceofhisduties,actwith
justice,giveeveryonehisdue,andobservehonestyandgoodfaith.The
appellatecourt,however,didnotpointtoanyfactevidencingbadfaithon
thepartoftheMarinduqueMininganditstransferees.Indeed,itskirtedthe
issueentirelybyholdingthatthequestionofactualfraudulentintentonthe
part of the interlocking directors of DBP and Marinduque Mining was
irrelevantbecause:
As aptly stated by the appellee in its brief, x x x where the corporations have
directors andofficers in common,there maybe circumstances under whichtheir
interestasofficersinonecompanymaydisqualifytheminequityfromrepresenting
bothcorporationsintransactionsbetweenthetwo.Thus,whereonecorporationwas
insolventandindebtedtoanother,ithasbeenheldthatthedirectorsofthecreditor
corporationweredisqualified,byreasonofselfinterest,fromactingasdirectorsof
the debtor corporation inthe authorization of a mortgage or deed of trust to the
formertosecuresuchindebtednessxxx(page105oftheAppelleesBrief).Inthe
samemannerthatxxxwhenthecorporationisinsolvent,itsdirectorswhoareits
creditors can not secure to themselves any advantage or preference over other
creditors. They can not thus take advantage of their fiduciary relation and deal
directlywiththemselves,totheinjuryofothersinequalright.Iftheydo,equitywill
set aside the transaction at the suit of creditors of the corporation or their
representatives,withoutreferencetothequestionofanyactualfraudulentintenton
thepartofthedirectors,fortherightofthecreditorsdoesnotdependuponfraudin
fact,butupontheviolationofthefiduciaryrelationtothedirectors.xxx.(page106
oftheAppelleesBrief.)
Wealsoconcedethatxxxdirectorsofinsolventcorporation,whoarecreditors
ofthecompany,cannotsecuretothemselvesanypreferenceoradvantageoverother
creditorsinthepaymentoftheirclaims.Itisnotgoodmoralsorgoodlaw.The
governingbodyofofficersthereofarechargedwiththedutyofconductingitsaffairs
strictlyintheinterestofits
318
318
existingcreditors,anditwouldbeabreachofsuchtrustforthemtoundertaketogive
any one of its members any advantage over any other creditors in securing the
paymentofhisdebtsinpreferencetoallothers.Whenvalidityofthesemortgages,to
secure debts upon which the directors were indorsers, was questioned by other
creditorsofthecorporation,theyshouldhavebeenclassedasinstrumentsrendered
voidbythelegalprinciplewhichpreventsdirectorsofaninsolventcorporationfrom
givingthemselvesapreferenceoveroutsidecreditors,xxx(page106107ofthe
AppelleesBrief.)12
TheCourtofAppealsmadereferencetotwoprinciplesincorporationlaw.
Thefirstpertainstotransactionsbetweencorporationswithinterlocking
directorsresultingintheprejudicetooneofthecorporations.Thisrule
does not apply in this case, however, since the corporation allegedly
prejudiced(Remington)isathirdparty,notoneofthecorporationswith
interlockingdirectors(MarinduqueMiningandDBP).
The second principle invoked by respondent court involves
directors...whoarecreditorswhichisalsoinapplicableherein.Here,
the creditor of Marinduque Mining is DBP, not the directors of
MarinduqueMining.
NeitherdowediscernanybadfaithonthepartofDBPbyitscreation
of Nonoc Mining, Maricalum and Island Cement. As Remington itself
concedes,DBPisnotauthorizedbyitschartertoengageinthemining
business.P13PThecreationofthethreecorporationswasnecessaryto
manageandoperatetheassetsacquiredintheforeclosuresalelestthey
deterioratefromnonuseandlosetheirvalue.Intheabsenceofanyentity
willingtopurchasetheseassetsfromthebank,whatelsewoulditdowith
thesepropertiesinthemeantime?Soundbusinesspracticerequiredthat
theybeutilizedforthepurposesforwhichtheywereintended.
Remingtonalsoassertedinitsthirdamendedcomplaintthattheuseof
Nonoc Mining, Maricalum and Island Cement of the premises of
MarinduqueMiningandthehiringofthelattersofficersandpersonnel
alsoconstitutebadgesofbadfaith.
_________________
12Rollo,p.107.Italicsintheoriginal.
13Id.,at232.
319
319
AssumingthatthepremisesofMarinduqueMiningwerenotamongthose
acquired by DBP in the foreclosure sale, convenience and practicality
dictatedthatthecorporationssocreatedoccupythepremiseswherethese
assetswerefoundinsteadofrelocatingthem.Nodoubt,manyofthese
assets are heavy equipment and it may have been impossible to move
them.Thesamereasonsofconvenienceandpracticality,nottomention
efficiency,justifiedthehiringbyNonocMining,MaricalumandIsland
Cement of Marinduque Minings personnel to manage and operate the
propertiesandtomaintainthecontinuityoftheminingoperations.
Toreiterate,thedoctrineofpiercingtheveilofcorporatefictionapplies
onlywhensuchcorporatefictionisusedtodefeatpublicconvenience,
justifywrong,protectfraudordefendcrime. 14 Todisregardtheseparate
juridicalpersonalityofacorporation,thewrongdoingmustbeclearlyand
convincinglyestablished.Itcannotbepresumed.15 Inthiscase,theCourt
findsthatRemingtonfailedtodischargeitsburdenofprovingbadfaithon
thepartofMarinduqueMininganditstransfereesinthemortgageand
foreclosureofthesubjectpropertiestojustifythepiercingofthecorporate
veil.
TheCourtofAppealsalsoheldthatthereexistsinRemingtonsfavora
lienontheunpaidpurchasesofMarinduqueMining,andastransfereeof
thesepurchases,DBPshouldbeheldliableforthevaluethereof.
In the absence of liquidation proceedings, however, the claim of
Remington cannot be enforced against DBP. Article 2241 of the Civil
Codeprovides:
Article 2241. With reference to specific movable property of the debtor, the
followingclaimsorliensshallbepreferred:
xxx
________________
14UnionBankofthePhilippinesvs.CourtofAppeals,290SCRA198(1998).
15 Complex Electronics Employees Association vs. NLRC, 310 SCRA 403(1990);

LuxuriaHomes,Inc.vs.CourtofAppeals,302SCRA315(1999);MatuguinaIntegrated
WoodProductsvs.CourtofAppeals,263SCRA490(1996).
320
320
1. (3)
Claimsfortheunpaidpriceofmovablessold,onsaidmovables,solong
astheyareinthepossessionofthedebtor,uptothevalueofthe
same;andifthemovablehasbeenresoldbythedebtorandtheprice
isstillunpaid,thelienmaybeenforcedontheprice;thisrightisnot
lostbytheimmobilizationofthethingbydestination,providedithas
notlostitsform,substanceandidentity,neitheristherightlostby
thesaleofthethingtogetherwithotherpropertyforalumpsum,
whenthepricethereofcanbedeterminedproportionally;
2. (4)
Creditsguaranteedwithapledgesolongasthethingspledgedareinthe
handsofthecreditor,orthoseguaranteedbyachattelmortgage,
uponthethingspledgedormortgaged,uptothevaluethereof;xxx
In Barrettovs.Villanueva,16 theCourthadoccasiontoconstrueArticle
2242,governingclaimsorliensoverspecificimmovableproperty.The
facts that gave rise to the case were summarized by this Court in its
resolutionasfollows:
xxxRosarioCruzadosoldallherright,title,andinterestandthatofherchildrenin
the house and lot herein involved to Pura L. Villanueva for P19,000.00. The
purchaserpaidP1,500inadvance,andexecutedapromissorynoteforthebalanceof
P17,500.00.However,thebuyercouldonlypayP5,500onaccountofthenote,for
whichreasonthevendorobtainedjudgmentfortheunpaidbalance.Inthemeantime,
thebuyerVillanuevawasabletosecureacleancertificateoftitle(No.32626),and
mortgaged the property to appellant Magdalena C. Barretto, married to Jose C.
Baretto,tosecurealoanofP30,000.03,saidmortgagehavingbeendulyrecorded.
PuraVillanuevadefaultedonthemortgageloaninfavorofBarretto.Thelatter
foreclosedthemortgageinherfavor,obtainedjudgment,anduponitsbecomingfinal
askedforexecutionon31July1958.On14August1958,Cruzadofiledamotionfor
recognitionforhervendorslienintheamountofP12,000.00,pluslegalinterest,
invokingArticles2242,2243,and2249ofthenewCivilCode.Afterhearing,the
court below ordered the lien annotated on the back of Certificate of Title No.
32626,withtheprovisothatincaseofsaleundertheforeclosuredecreethevendors
lienandthemortgagecreditofappellantBarrettoshouldbepaidproratafromthe
proceeds.OuroriginaldecisionaffirmedthisorderoftheCourtofFirstInstanceof
Manila.
______________
161SCRA288(1961).
321
321
In its decision upholding the order of the lower court, the Court
ratiocinatedthus:
Article2242ofthenewCivilCodeenumeratestheclaims,mortgagesandliensthat
constituteanencumbranceonspecificimmovableproperty,andamongthemare:
(2)Fortheunpaidpriceofrealpropertysold,upontheimmovablesold;and
(5)MortgagecreditsrecordedintheRegistryofProperty.Article2249ofthe
sameCodeprovidesthatiftherearetwoormorecreditswithrespecttothesame
specificrealpropertyorrealrights,theyshallbesatisfiedprorata,afterthepayment
ofthetaxesandassessmentsupontheimmovablepropertyorrealrights.
Applicationoftheabovequotedprovisionstothecaseatbarwouldmeanthatthe
hereinappelleeRosarioCruzadoasanunpaidvendorofthepropertyinquestionhas
therighttoshareproratawiththeappellantstheproceedsoftheforeclosuresale.
xxx
As to the point made that the articles of the Civil Code on concurrence and
preferenceofcreditsareapplicableonlytotheinsolventdebtor,sufficeittosaythat
nothinginthelawshowsanysuchlimitation.Ifwearetointerpretthisportionofthe
Codeasintendedonlyforinsolvencycases,thenothercreditordebtorrelationships
wherethereareconcurrenceofcreditswouldbeleftwithoutanyrulestogovern
them,anditwouldrenderpurposelessthespeciallawsoninsolvency.17
Uponmotionbyappellants,however,theCourtreconsidereditsdecision.
JusticeJ.B.L.Reyes,speakingfortheCourt,explainedthereasonsforthe
reversal:
A. The previous decision failed to take fully into account the radical changes
introducedbytheCivilCodeofthePhilippinesintothesystemofprioritiesamong
creditorsordainedbytheCivilCodeof1889.
PursuanttotheformerCode,conflictsamongcreditorsentitledtopreferenceasto
specificrealpropertyunderArticle1923weretoberesolvedaccordingtoanorderof
prioritiesestablishedbyArticle1927,wherebyoneclassofcreditorscouldexclude
thecreditorsoflowerorderuntiltheclaimsoftheformerwerefullysatisfiedoutof
theproceedsofthe
________________
17Id.,at292294.
322
322
saleoftherealpropertysubjectofthepreference,andcouldevenexhaustproceedsif
necessary.
UnderthesystemoftheCivilCodeofthePhilippines,however,onlytaxesenjoy
asimilarabsolutepreference.Alltheremainingthirteenclassesofpreferredcreditors
underArticle2242enjoynopriorityamongthemselves,butmustbepaidprorata,
i.e., in proportion to the amount of the respective credits. Thus, Article 2249
provides:
Iftherearetwoormorecreditswithrespecttothesamespecificrealpropertyor
real rights, they shall be satisfied pro rata, after the payment of the taxes and
assessmentsupontheimmovablepropertyorrealrights.
But in order to make this prorating fully effective, the preferred creditors
enumerated in Nos. 2 to 14 of Article 2242 (or such of them as have credits
outstanding) must necessarily be convened, and the import of their claims
ascertained. ItisthusapparentthatthefullapplicationofArticles2249and2242
demands that there must be first some proceeding where the claims of all the
preferredcreditorsmaybebindinglyadjudicated,suchasinsolvency,thesettlement
of decedents estate under Rule 87 of the Rules of Court, or other liquidation
proceedingsofsimilarimport.
ThisexplainstheruleofArticle2243ofthenewCivilCodethat
The claims or credits enumerated in the two preceding articles shall be
consideredasmortgagesorpledgesofrealorpersonalproperty,orlienswithinthe
purviewoflegalprovisionsgoverninginsolvencyxxx(Italicssupplied).
AndtheruleisfurtherclarifiedintheReportoftheCodeCommission,asfollows:
The question as to whether the Civil Code and the Insolvency Law can be
harmonizedissettledbythisArticle(2243).ThepreferencesnamedinArticles2261
and2262(now2241and2242)aretobeenforcedinaccordancewiththeInsolvency
Law(Italicssupplied)
Thus,itbecomesevidentthat onepreferredcreditorsthirdpartyclaimtothe
proceedsofaforeclosuresale(asinthecasenowbeforeus)isnottheproceeding
contemplatedbylawfortheenforcementofpreferencesunderArticle2242,unless
theclaimantwereenforcingacreditfortaxesthatenjoyabsolutepriority.Ifnoneof
theclaimsisfortaxes,adisputebetweentwocreditorswillnotenabletheCourtto
ascertaintheproratadividendcorrespondingtoeach,becausetherightsofthe
other creditors likewise enjoying preference under Article 2242 can not be
ascertained. Wherefore, the order of the Court of First Instance of Manila now
appealedfrom,decreeingthattheproceedsoftheforeclosuresalebeapportioned
only
323
323
betweenappellantandappellee,isincorrect,andmustbereversed.[Italicssupplied]
The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon.
Lantin,Jr.,etc.,etal.,18andintwocasesbothentitledDevelopmentBank
ofthePhilippinesvs.NLRC.19
Although Barretto involved specific immovable property, the ruling
thereinshouldapplyequallyinthiscasewherespecificmovableproperty
isinvolved.AstheextrajudicialforeclosureinstitutedbyPNBandDBPis
nottheliquidationproceedingcontemplatedbytheCivilCode,Remington
cannotclaimitsproratasharefromDBP.
WHEREFORE,thepetitionisGRANTED.ThedecisionoftheCourt
of Appeals dated October 6, 1995 and its Resolution promulgated on
August29,1996isREVERSEDandSETASIDE.Theoriginalcomplaint
filed in the Regional Trial Court in CV Case No. 8425858 is hereby
DISMISSED.
SOORDERED.
Davide,Jr.(C.J.,Chairman),Puno,Pardo and YnaresSantiago,
JJ.,concur.
Petitiongranted,judgmentandresolutionreversedandsetaside.
Notes.Themerefactthatbothcorporationshavethesamepresident
isnotinitselfsufficienttopiercetheveilofcorporatefictionofthetwo
corporations. (Compex Electronics Employees Association (CEEA) vs.
NationalLaborRelationsCommission,310SCRA403[1999])
Thefactthatacorporationownsfiftypercent(50%)ofthecapitalstock
ofanothercorporationisnotenoughtopiercetheveilofcorporatefiction
betweenthetwocorporations.(ManilaHotelCorp.vs.NationalLabor
RelationsCommission,343SCRA1[2000])
o0o
_______________
18209SCRA383(1983).
19183SCRA328(1990),186SCRA841(1990).
324
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15 Complex Electronics Employees Association vs. NLRC, 310 SCRA 403(1990);

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