G.R. No.

195580 April 21, 2014 Petitioner Narra acquired its MPSA from Alpha Resources and
Development Corporation and Patricia Louise Mining & Development
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO Corporation (PLMDC) which previously filed an application for an MPSA
MINING AND DEVELOPMENT, INC., and MCARTHUR MINING, with the MGB, Region IV-B, DENR on January 6, 1992. Through the said
INC., Petitioners, application, the DENR issued MPSA-IV-1-12 covering an area of 3.277
vs. hectares in barangays Calategas and San Isidro, Municipality of Narra,
REDMONT CONSOLIDATED MINES CORP., Respondent. Palawan. Subsequently, PLMDC conveyed, transferred and/or assigned
its rights and interests over the MPSA application in favor of Narra.
DECISION
Another MPSA application of SMMI was filed with the DENR Region IV-B,
VELASCO, JR., J.: labeled as MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over 3,402
hectares in Barangays Malinao and Princesa Urduja, Municipality of
Narra, Province of Palawan. SMMI subsequently conveyed, transferred
Before this Court is a Petition for Review on Certiorari under Rule 45 filed
and assigned its rights and interest over the said MPSA application to
by Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining
Tesoro.
and Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur),
which seeks to reverse the October 1, 2010 Decision and the February
1

15, 2011 Resolution of the Court of Appeals (CA). On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA)
of the DENR three (3) separate petitions for the denial of petitioners’
applications for MPSA designated as AMA-IVB-153, AMA-IVB-154 and
The Facts
MPSA IV-1-12.
Sometime in December 2006, respondent Redmont Consolidated
In the petitions, Redmont alleged that at least 60% of the capital stock of
Mines Corp. (Redmont), a domestic corporation organized and existing
McArthur, Tesoro and Narra are owned and controlled by MBMI
under Philippine laws, took interest in mining and exploring certain areas
Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont
of the province of Palawan. After inquiring with the Department of
reasoned that since MBMI is a considerable stockholder of petitioners, it
Environment and Natural Resources (DENR), it learned that the areas
was the driving force behind petitioners’ filing of the MPSAs over the
where it wanted to undertake exploration and mining activities where
areas covered by applications since it knows that it can only participate in
already covered by Mineral Production Sharing Agreement (MPSA)
mining activities through corporations which are deemed Filipino citizens.
applications of petitioners Narra, Tesoro and McArthur.
Redmont argued that given that petitioners’ capital stocks were mostly
owned by MBMI, they were likewise disqualified from engaging in mining
Petitioner McArthur, through its predecessor-in-interest Sara Marie activities through MPSAs, which are reserved only for Filipino citizens.
Mining, Inc. (SMMI), filed an application for an MPSA and Exploration
Permit (EP) with the Mines and Geo-Sciences Bureau (MGB), Region IV-
In their Answers, petitioners averred that they were qualified persons
B, Office of the Department of Environment and Natural Resources
under Section 3(aq) of Republic Act No. (RA) 7942 or the Philippine
(DENR).
Mining Act of 1995 which provided:
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the
area of over 1,782 hectares in Barangay Sumbiling, Municipality of
following terms, whether in singular or plural, shall mean:
Bataraza, Province of Palawan and EPA-IVB-44 which includes an area
of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The
MPSA and EP were then transferred to Madridejos Mining xxxx
Corporation (MMC) and, on November 6, 2006, assigned to
petitioner McArthur. 2 (aq) "Qualified person" means any citizen of the Philippines with capacity
to contract, or a corporation, partnership, association, or cooperative
organized or authorized for the purpose of engaging in mining, with
technical and financial capability to undertake mineral resources
development and duly registered in accordance with law at least sixty per
cent (60%) of the capital of which is owned by citizens of the Philippines:
Provided, That a legally organized foreign-owned corporation shall be
deemed a qualified person for purposes of granting an exploration permit,
financial or technical assistance agreement or mineral processing permit.
Additionally, they stated that their nationality as applicants is immaterial
because they also applied for Financial or Technical Assistance
Agreements (FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-
IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to
foreign-owned corporations. Nevertheless, they claimed that the issue on
nationality should not be raised since McArthur, Tesoro and Narra are in
fact Philippine Nationals as 60% of their capital is owned by citizens of
the Philippines. They asserted that though MBMI owns 40% of the shares
of PLMC (which owns 5,997 shares of Narra), 40% of the shares of MMC
3
(which owns 5,997 shares of McArthur) and 40% of the shares of SLMC
4
(which, in turn, owns 5,997 shares of Tesoro), the shares of MBMI will
5
not make it the owner of at least 60% of the capital stock of each of
petitioners. They added that the best tool used in determining the
nationality of a corporation is the "control test," embodied in Sec. 3 of RA
7042 or the Foreign Investments Act of 1991. They also claimed that the
POA of DENR did not have jurisdiction over the issues in Redmont’s
petition since they are not enumerated in Sec. 77 of RA 7942. Finally,
they stressed that Redmont has no personality to sue them because it
has no pending claim or application over the areas applied for by
petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying
petitioners from gaining MPSAs. It held:
[I]t is clearly established that respondents are not qualified applicants to
engage in mining activities. On the other hand, [Redmont] having filed its
own applications for an EPA over the areas earlier covered by the MPSA
application of respondents may be considered if and when they are
qualified under the law. The violation of the requirements for the issuance
and/or grant of permits over mining areas is clearly established thus,
there is reason to believe that the cancellation and/or revocation of
permits already issued under the premises is in order and open the areas
covered to other qualified applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur
Mining Inc., Tesoro Mining and Development, Inc., and Narra Nickel
Mining and Development Corp. as, DISQUALIFIED for being considered
as Foreign Corporations. Their Mineral Production Sharing Agreement
(MPSA) are hereby x x x DECLARED NULL AND VOID. 6
The POA considered petitioners as foreign corporations being "effectively
controlled" by MBMI, a 100% Canadian company and declared their
MPSAs null and void. In the same Resolution, it gave due course to
Redmont’s EPAs. Thereafter, on February 7, 2008, the POA issued an
Order denying the Motion for Reconsideration filed by petitioners.
7
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro
filed a joint Notice of Appeal and Memorandum of Appeal with the Mines
8 9
Adjudication Board (MAB) while Narra separately filed its Notice of
Appeal and Memorandum of Appeal.
10 11
In their respective memorandum, petitioners emphasized that they are
qualified persons under the law. Also, through a letter, they informed the
MAB that they had their individual MPSA applications converted to
FTAAs. McArthur’s FTAA was denominated as AFTA-IVB-09 on May 12
2007, while Tesoro’s MPSA application was converted to AFTA-IVB-
08 on May 28, 2007, and Narra’s FTAA was converted to AFTA-IVB-
13
07 on March 30, 2006.
14
Pending the resolution of the appeal filed by petitioners with the MAB,
Redmont filed a Complaint with the Securities and Exchange
15
Commission (SEC), seeking the revocation of the certificates for
registration of petitioners on the ground that they are foreign-owned or
controlled corporations engaged in mining in violation of Philippine laws.
Thereafter, Redmont filed on September 1, 2008 a Manifestation and
Motion to Suspend Proceeding before the MAB praying for the
suspension of the proceedings on the appeals filed by McArthur, Tesoro
and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional
Trial Court of Quezon City, Branch 92 (RTC) a Complaint for injunction
16
with application for issuance of a temporary restraining order (TRO)
and/or writ of preliminary injunction, docketed as Civil Case No. 08-
63379. Redmont prayed for the deferral of the MAB proceedings pending
the resolution of the Complaint before the SEC.
But before the RTC can resolve Redmont’s Complaint and applications
for injunctive reliefs, the MAB issued an Order on September 10, 2008,
finding the appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board
hereby REVERSES and SETS ASIDE the Resolution dated 14 December
2007 of the Panel of Arbitrators of Region IV-B (MIMAROPA) in POA-
DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07
February 2008 denying the Motions for Reconsideration of the
Appellants. The Petition filed by Redmont Consolidated Mines
Corporation on 02 January 2007 is hereby ordered DISMISSED. 17
Belatedly, on September 16, 2008, the RTC issued an Order granting
18
Redmont’s application for a TRO and setting the case for hearing the
prayer for the issuance of a writ of preliminary injunction on September
19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for
Reconsideration of the September 10, 2008 Order of the MAB.
19
Subsequently, it filed a Supplemental Motion for Reconsideration on20
September 29, 2008.
Before the MAB could resolve Redmont’s Motion for Reconsideration and
Supplemental Motion for Reconsideration, Redmont filed before the RTC
a Supplemental Complaint in Civil Case No. 08-63379.
21
On October 6, 2008, the RTC issued an Order granting the issuance of
22
a writ of preliminary injunction enjoining the MAB from finally disposing of
the appeals of petitioners and from resolving Redmont’s Motion for
Reconsideration and Supplement Motion for Reconsideration of the
MAB’s September 10, 2008 Resolution.
On July 1, 2009, however, the MAB issued a second Order denying
Redmont’s Motion for Reconsideration and Supplemental Motion for
Reconsideration and resolving the appeals filed by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing
the Orders issued by the MAB. On October 1, 2010, the CA rendered a
Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed
Orders, dated September 10, 2008 and July 1, 2009 of the Mining
Adjudication Board are reversed and set aside. The findings of the Panel
of Arbitrators of the Department of Environment and Natural Resources
that respondents McArthur, Tesoro and Narra are foreign corporations is
upheld and, therefore, the rejection of their applications for Mineral
Product Sharing Agreement should be recommended to the Secretary of
the DENR.
With respect to the applications of respondents McArthur, Tesoro and
Narra for Financial or Technical Assistance Agreement (FTAA) or
conversion of their MPSA applications to FTAA, the matter for its rejection
or approval is left for determination by the Secretary of the DENR and the
President of the Republic of the Philippines.
SO ORDERED. 23
In a Resolution dated February 15, 2011, the CA denied the Motion for
Reconsideration filed by petitioners.
After a careful review of the records, the CA found that there was doubt
as to the nationality of petitioners when it realized that petitioners had a
common major investor, MBMI, a corporation composed of 100%
Canadians. Pursuant to the first sentence of paragraph 7 of Department
of Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC
Rules which implemented the requirement of the Constitution and other
laws pertaining to the exploitation of natural resources, the CA used the
"grandfather rule" to determine the nationality of petitioners. It provided:
Shares belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered as of
Philippine nationality, but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine
nationality. Thus, if 100,000 shares are registered in the name of a
corporation or partnership at least 60% of the capital stock or capital,
respectively, of which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, 50% of the
capital stock or capital of the corporation or partnership, respectively,
belongs to Filipino citizens, only 50,000 shares shall be recorded as
belonging to aliens. (emphasis supplied)
24
In determining the nationality of petitioners, the CA looked into their
corporate structures and their corresponding common shareholders.
Using the grandfather rule, the CA discovered that MBMI in effect owned
majority of the common stocks of the petitioners as well as at least 60%
equity interest of other majority shareholders of petitioners through joint
venture agreements. The CA found that through a "web of corporate
layering, it is clear that one common controlling investor in all mining
corporations involved x x x is MBMI." Thus, it concluded that petitioners
25
McArthur, Tesoro and Narra are also in partnership with, or privies-in-
interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of
petitioners into FTAA applications suspicious in nature and, as a
consequence, it recommended the rejection of petitioners’ MPSA
applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining areas, the
CA pointed out that the POA has jurisdiction over them and that it also
has the power to determine the of nationality of petitioners as a
prerequisite of the Constitution prior the conferring of rights to "co-
production, joint venture or production-sharing agreements" of the state
to mining rights. However, it also stated that the POA’s jurisdiction is
limited only to the resolution of the dispute and not on the approval or
rejection of the MPSAs. It stipulated that only the Secretary of the DENR
is vested with the power to approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007
Resolution which considered petitioners McArthur, Tesoro and Narra as
foreign corporations. Nevertheless, the CA determined that the POA’s
declaration that the MPSAs of McArthur, Tesoro and Narra are void is
highly improper.
While the petition was pending with the CA, Redmont filed with the Office
of the President (OP) a petition dated May 7, 2010 seeking the
cancellation of petitioners’ FTAAs. The OP rendered a Decision on April
26
6, 2011, wherein it canceled and revoked petitioners’ FTAAs for violating
and circumventing the "Constitution x x x[,] the Small Scale Mining Law
and Environmental Compliance Certificate as well as Sections 3 and 8 of
the Foreign Investment Act and E.O. 584." The OP, in affirming the
27
cancellation of the issued FTAAs, agreed with Redmont stating that
petitioners committed violations against the abovementioned laws and
failed to submit evidence to negate them. The Decision further quoted the
December 14, 2007 Order of the POA focusing on the alleged
misrepresentation and claims made by petitioners of being domestic or
Filipino corporations and the admitted continued mining operation of
PMDC using their locally secured Small Scale Mining Permit inside the
area earlier applied for an MPSA application which was eventually
transferred to Narra. It also agreed with the POA’s estimation that the
filing of the FTAA applications by petitioners is a clear admission that they
are "not capable of conducting a large scale mining operation and that
they need the financial and technical assistance of a foreign entity in their
operation, that is why they sought the participation of MBMI Resources,
Inc." The Decision further quoted:
28
The filing of the FTAA application on June 15, 2007, during the pendency
of the case only demonstrate the violations and lack of qualification of the
respondent corporations to engage in mining. The filing of the FTAA
application conversion which is allowed foreign corporation of the earlier
MPSA is an admission that indeed the respondent is not Filipino but
rather of foreign nationality who is disqualified under the laws. Corporate
documents of MBMI Resources, Inc. furnished its stockholders in their
head office in Canada suggest that they are conducting operation only
through their local counterparts. 29
The Motion for Reconsideration of the Decision was further denied by the
OP in a Resolution dated July 6, 2011. Petitioners then filed a Petition
30
for Review on Certiorari of the OP’s Decision and Resolution with the CA,
docketed as CA-G.R. SP No. 120409. In the CA Decision dated February
29, 2012, the CA affirmed the Decision and Resolution of the OP.
Thereafter, petitioners appealed the same CA decision to this Court which
is now pending with a different division.
Thus, the instant petition for review against the October 1, 2010 Decision
of the CA. Petitioners put forth the following errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the case for
mootness despite the fact that the subject matter of the
controversy, the MPSA Applications, have already been converted
into FTAA applications and that the same have already been
granted.
II.
The Court of Appeals erred when it did not dismiss the case for
lack of jurisdiction considering that the Panel of Arbitrators has no
jurisdiction to determine the nationality of Narra, Tesoro and
McArthur.
III.
 The Court of Appeals erred when it did not dismiss the case on
account of Redmont’s willful forum shopping.
IV.
The Court of Appeals’ ruling that Narra, Tesoro and McArthur are
foreign corporations based on the "Grandfather Rule" is contrary
to law, particularly the express mandate of the Foreign
Investments Act of 1991, as amended, and the FIA Rules.
V.
The Court of Appeals erred when it applied the exceptions to the
res inter alios acta rule.
VI.
The Court of Appeals erred when it concluded that the conversion
of the MPSA Applications into FTAA Applications were of
"suspicious nature" as the same is based on mere conjectures
and surmises without any shred of evidence to show the same.
We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant
case as moot is without merit.
Basically, a case is said to be moot and/or academic when it "ceases to
present a justiciable controversy by virtue of supervening events, so that
a declaration thereon would be of no practical use or value." Thus, the
32
courts "generally decline jurisdiction over the case or dismiss it on the
ground of mootness." 33
The "mootness" principle, however, does accept certain exceptions and
the mere raising of an issue of "mootness" will not deter the courts from
trying a case when there is a valid reason to do so. In David v.
Macapagal-Arroyo (David), the Court provided four instances where
courts can decide an otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and paramount
public interest is involved;
3.) When constitutional issue raised requires formulation of
controlling principles to guide the bench, the bar, and the public;
and
4.) The case is capable of repetition yet evading review. 34
All of the exceptions stated above are present in the instant case. We of
this Court note that a grave violation of the Constitution, specifically
Section 2 of Article XII, is being committed by a foreign corporation right
under our country’s nose through a myriad of corporate layering under
different, allegedly, Filipino corporations. The intricate corporate layering
utilized by the Canadian company, MBMI, is of exceptional character and
involves paramount public interest since it undeniably affects the
exploitation of our Country’s natural resources. The corresponding
actions of petitioners during the lifetime and existence of the instant case
raise questions as what principle is to be applied to cases with similar
issues. No definite ruling on such principle has been pronounced by the
Court; hence, the disposition of the issues or errors in the instant case
31
will serve as a guide "to the bench, the bar and the public." Finally, the
35
instant case is capable of repetition yet evading review, since the
Canadian company, MBMI, can keep on utilizing dummy Filipino
corporations through various schemes of corporate layering and
conversion of applications to skirt the constitutional prohibition against
foreign mining in Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error
presented by petitioners since both involve the conversion of MPSA
applications to FTAA applications. Petitioners propound that the CA erred
in ruling against them since the questioned MPSA applications were
already converted into FTAA applications; thus, the issue on the
prohibition relating to MPSA applications of foreign mining corporations is
academic. Also, petitioners would want us to correct the CA’s finding
which deemed the aforementioned conversions of applications as
suspicious in nature, since it is based on mere conjectures and surmises
and not supported with evidence.
We disagree.
The CA’s analysis of the actions of petitioners after the case was filed
against them by respondent is on point. The changing of applications by
petitioners from one type to another just because a case was filed against
them, in truth, would raise not a few sceptics’ eyebrows. What is the
reason for such conversion? Did the said conversion not stem from the
case challenging their citizenship and to have the case dismissed against
them for being "moot"? It is quite obvious that it is petitioners’ strategy to
have the case dismissed against them for being "moot."
Consider the history of this case and how petitioners responded to every
action done by the court or appropriate government agency: on January
2, 2007, Redmont filed three separate petitions for denial of the MPSA
applications of petitioners before the POA. On June 15, 2007, petitioners
filed a conversion of their MPSA applications to FTAAs. The POA, in its
December 14, 2007 Resolution, observed this suspect change of
applications while the case was pending before it and held:
The filing of the Financial or Technical Assistance Agreement application
is a clear admission that the respondents are not capable of conducting a
large scale mining operation and that they need the financial and
technical assistance of a foreign entity in their operation that is why they
sought the participation of MBMI Resources, Inc. The participation of
MBMI in the corporation only proves the fact that it is the Canadian
company that will provide the finances and the resources to operate the
mining areas for the greater benefit and interest of the same and not the
Filipino stockholders who only have a less substantial financial stake in
the corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during the
pendency of the case only demonstrate the violations and lack of
qualification of the respondent corporations to engage in mining. The
filing of the FTAA application conversion which is allowed foreign
corporation of the earlier MPSA is an admission that indeed the
respondent is not Filipino but rather of foreign nationality who is
disqualified under the laws. Corporate documents of MBMI Resources,
Inc. furnished its stockholders in their head office in Canada suggest that
they are conducting operation only through their local counterparts. 36
On October 1, 2010, the CA rendered a Decision which partially granted
the petition, reversing and setting aside the September 10, 2008 and July
1, 2009 Orders of the MAB. In the said Decision, the CA upheld the
findings of the POA of the DENR that the herein petitioners are in fact
foreign corporations thus a recommendation of the rejection of their
MPSA applications were recommended to the Secretary of the DENR.
With respect to the FTAA applications or conversion of the MPSA
applications to FTAAs, the CA deferred the matter for the determination of
the Secretary of the DENR and the President of the Republic of the
Philippines.37
In their Motion for Reconsideration dated October 26, 2010, petitioners
prayed for the dismissal of the petition asserting that on April 5, 2010,
then President Gloria Macapagal-Arroyo signed and issued in their favor
FTAA No. 05-2010-IVB, which rendered the petition moot and academic.
However, the CA, in a Resolution dated February 15, 2011 denied their
motion for being a mere "rehash of their claims and defenses." Standing
38
firm on its Decision, the CA affirmed the ruling that petitioners are, in fact,
foreign corporations. On April 5, 2011, petitioners elevated the case to us
via a Petition for Review on Certiorari under Rule 45, questioning the
Decision of the CA. Interestingly, the OP rendered a Decision dated April
6, 2011, a day after this petition for review was filed, cancelling and
revoking the FTAAs, quoting the Order of the POA and stating that
petitioners are foreign corporations since they needed the financial
strength of MBMI, Inc. in order to conduct large scale mining operations.
The OP Decision also based the cancellation on the misrepresentation of
facts and the violation of the "Small Scale Mining Law and Environmental
Compliance Certificate as well as Sections 3 and 8 of the Foreign
Investment Act and E.O. 584." On July 6, 2011, the OP issued a
39
Resolution, denying the Motion for Reconsideration filed by the
petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made
known to the Court the fact of the OP’s Decision and Resolution. In their
Reply, petitioners chose to ignore the OP Decision and continued to
reuse their old arguments claiming that they were granted FTAAs and,
thus, the case was moot. Petitioners filed a Manifestation and
Submission dated October 19, 2012, wherein they asserted that the
40
present petition is moot since, in a remarkable turn of events, MBMI was
able to sell/assign all its shares/interest in the "holding companies" to
DMCI Mining Corporation (DMCI), a Filipino corporation and, in effect,
making their respective corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have this
case dismissed for being "moot." Their final act, wherein MBMI was able
to allegedly sell/assign all its shares and interest in the petitioner "holding
companies" to DMCI, only proves that they were in fact not Filipino
corporations from the start. The recent divesting of interest by MBMI will
not change the stand of this Court with respect to the nationality of
petitioners prior the suspicious change in their corporate structures. The
new documents filed by petitioners are factual evidence that this Court
has no power to verify.
The only thing clear and proved in this Court is the fact that the OP
declared that petitioner corporations have violated several mining laws
and made misrepresentations and falsehood in their applications for
FTAA which lead to the revocation of the said FTAAs, demonstrating that
petitioners are not beyond going against or around the law using shifty
actions and strategies. Thus, in this instance, we can say that their claim
of mootness is moot in itself because their defense of conversion of
MPSAs to FTAAs has been discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners’
nationality, whether Filipino or foreign. In their previous petitions, they had
been adamant in insisting that they were Filipino corporations, until they
submitted their Manifestation and Submission dated October 19, 2012
where they stated the alleged change of corporate ownership to reflect
their Filipino ownership. Thus, there is a need to determine the nationality
of petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality
of a corporation: the control test and the grandfather rule. Paragraph 7 of
DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules
which implemented the requirement of the Constitution and other laws
pertaining to the controlling interests in enterprises engaged in the
exploitation of natural resources owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered as of
Philippine nationality, but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine
nationality. Thus, if 100,000 shares are registered in the name of a
corporation or partnership at least 60% of the capital stock or capital,
respectively, of which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, 50% of the
capital stock or capital of the corporation or partnership, respectively,
belongs to Filipino citizens, only 50,000 shares shall be counted as
owned by Filipinos and the other 50,000 shall be recorded as belonging
to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares
belonging to corporations or partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be considered as of Philippine
nationality," pertains to the control test or the liberal rule. On the other
hand, the second part of the DOJ Opinion which provides, "if the
percentage of the Filipino ownership in the corporation or partnership is
less than 60%, only the number of shares corresponding to such
percentage shall be counted as Philippine nationality," pertains to the
stricter, more stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in
advocating the application of the "control test" under RA 7042, as
amended by RA 8179, otherwise known as the Foreign Investments Act
(FIA), rather than using the stricter grandfather rule. The pertinent
provision under Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or
a domestic partnership or association wholly owned by the citizens of the
Philippines; a corporation organized under the laws of the Philippines of
which at least sixty percent (60%) of the capital stock outstanding and
entitled to vote is wholly owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent (60%) of the fund
will accrue to the benefit of Philippine nationals: Provided, That were a
corporation and its non-Filipino stockholders own stocks in a Securities
and Exchange Commission (SEC) registered enterprise, at least sixty
percent (60%) of the capital stock outstanding and entitled to vote of each
of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board
of Directors, in order that the corporation shall be considered a Philippine
national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the
instant case since the definition of a "Philippine National" under Sec. 3 of
the FIA does not provide for it. They further claim that the grandfather rule
"has been abandoned and is no longer the applicable rule." They also
41
opined that the last portion of Sec. 3 of the FIA admits the application of a
"corporate layering" scheme of corporations. Petitioners claim that the
clear and unambiguous wordings of the statute preclude the court from
construing it and prevent the court’s use of discretion in applying the law.
They said that the plain, literal meaning of the statute meant the
application of the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if
it is used to circumvent the Constitution and pertinent laws, then it
becomes illegal. Further, the pronouncement of petitioners that the
grandfather rule has already been abandoned must be discredited for
lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum
and other mineral oils, all forces of potential energy, fisheries, forests or
timber, wildlife, flora and fauna, and other natural resources are owned by
the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and
utilization of natural resources shall be under the full control and
supervision of the State. The State may directly undertake such activities,
or it may enter into co-production, joint venture or production-sharing
agreements with Filipino citizens, or corporations or associations at least
sixty per centum of whose capital is owned by such citizens. Such
agreements may be for a period not exceeding twenty-five years,
renewable for not more than twenty-five years, and under such terms and
conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned
corporations involving either technical or financial assistance for large-
scale exploration, development, and utilization of minerals, petroleum,
and other mineral oils according to the general terms and conditions
provided by law, based on real contributions to the economic growth and
general welfare of the country. In such agreements, the State shall
promote the development and use of local scientific and technical
resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering
into different types of agreements for the exploration, development, and
utilization of natural resources with entities who are deemed Filipino due
to 60 percent ownership of capital is pertinent to this case, since the
issues are centered on the utilization of our country’s natural resources or
specifically, mining. Thus, there is a need to ascertain the nationality of
petitioners since, as the Constitution so provides, such agreements are
only allowed corporations or associations "at least 60 percent of such
capital is owned by such citizens." The deliberations in the Records of the
1986 Constitutional Commission shed light on how a citizenship of a
corporation will be determined:
Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an
independent national economy is freedom from undue foreign control?
What is the meaning of undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices
national sovereignty and the welfare of the Filipino in the economic
sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word
"undue"? Why not simply freedom from foreign control? I think that is the
meaning of independence, because as phrased, it still allows for foreign
control.
MR. VILLEGAS: It will now depend on the interpretation because if, for
example, we retain the 60/40 possibility in the cultivation of natural
resources, 40 percent involves some control; not total control, but some
control.
MR. BENNAGEN: In any case, I think in due time we will propose some
amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the
phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or
Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in
Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the question:
‘Where do we base the equity requirement, is it on the authorized capital
stock, on the subscribed capital stock, or on the paid-up capital stock of a
corporation’? Will the Committee please enlighten me on this?
MR. VILLEGAS: We have just had a long discussion with the members of
the team from the UP Law Center who provided us with a draft. The
phrase that is contained here which we adopted from the UP draft is ‘60
percent of the voting stock.’
MR. NOLLEDO: That must be based on the subscribed capital stock,
because unless declared delinquent, unpaid capital stock shall be entitled
to vote.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation,
say, a corporation with 60-40 percent equity invests in another
corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
MR. VILLEGAS: Yes. (emphasis supplied)
42
It is apparent that it is the intention of the framers of the Constitution to
apply the grandfather rule in cases where corporate layering is present.
Elementary in statutory construction is when there is conflict between the
Constitution and a statute, the Constitution will prevail. In this instance,
specifically pertaining to the provisions under Art. XII of the Constitution
on National Economy and Patrimony, Sec. 3 of the FIA will have no place
of application. As decreed by the honorable framers of our Constitution,
the grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the
Filipino interest in a corporation for purposes, among others, of
determining compliance with nationality requirements (the ‘Investee
Corporation’). Such manner of computation is necessary since the shares
in the Investee Corporation may be owned both by individual
stockholders (‘Investing Individuals’) and by corporations and
partnerships (‘Investing Corporation’). The said rules thus provide for the
determination of nationality depending on the ownership of the Investee
Corporation and, in certain instances, the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in determining
the nationality of the Investee Corporation. The first case is the ‘liberal
rule’, later coined by the SEC as the Control Test in its 30 May 1990
Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC
Rules which states, ‘(s)hares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality.’ Under the liberal Control Test,
there is no need to further trace the ownership of the 60% (or more)
Filipino stockholdings of the Investing Corporation since a corporation
which is at least 60% Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and
pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which
states, "but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to
such percentage shall be counted as of Philippine nationality." Under the
Strict Rule or Grandfather Rule Proper, the combined totals in the
Investing Corporation and the Investee Corporation must be traced (i.e.,
"grandfathered") to determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be
traced to the level of the Investing Corporation and added to the shares
directly owned in the Investee Corporation x x x.
xxxx
In other words, based on the said SEC Rule and DOJ Opinion, the
Grandfather Rule or the second part of the SEC Rule applies only when
the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases
where the joint venture corporation with Filipino and foreign stockholders
with less than 60% Filipino stockholdings [or 59%] invests in other joint
venture corporation which is either 60-40% Filipino-alien or the 59% less
Filipino). Stated differently, where the 60-40 Filipino- foreign equity
ownership is not in doubt, the Grandfather Rule will not apply. (emphasis Name Nationality Number Amount Amount
supplied) of Subscribed Paid
Shares
After a scrutiny of the evidence extant on record, the Court finds that this Madridejos Filipino 5,997 PhP PhP
case calls for the application of the grandfather rule since, as ruled by the Mining 5,997,000.00 825,000.00
POA and affirmed by the OP, doubt prevails and persists in the corporate Corporation
ownership of petitioners. Also, as found by the CA, doubt is present in the MBMI Canadian 3,998 PhP PhP
60-40 Filipino equity ownership of petitioners Narra, McArthur and Resources, 3,998,000.0 1,878,174.60
Tesoro, since their common investor, the 100% Canadian corporation–– Inc.
MBMI, funded them. However, petitioners also claim that there is "doubt"
Lauro L. Filipino 1 PhP 1,000.00 PhP
only when the stockholdings of Filipinos are less than 60%. 43
Salazar 1,000.00

The assertion of petitioners that "doubt" only exists when the Fernando Filipino 1 PhP 1,000.00 PhP
B. Esguerra 1,000.00
stockholdings are less than 60% fails to convince this Court. DOJ Opinion
No. 20, which petitioners quoted in their petition, only made an example Manuel A. Filipino 1 PhP 1,000.00 PhP
of an instance where "doubt" as to the ownership of the corporation Agcaoili 1,000.00
exists. It would be ludicrous to limit the application of the said word only Michael T. American 1 PhP 1,000.00 PhP
to the instances where the stockholdings of non-Filipino stockholders are Mason 1,000.00
more than 40% of the total stockholdings in a corporation. The
corporations interested in circumventing our laws would clearly strive to Kenneth Canadian 1 PhP 1,000.00 PhP
Cawkell 1,000.00
have "60% Filipino Ownership" at face value. It would be senseless for
these applying corporations to state in their respective articles of Total 10,000 PhP PhP
incorporation that they have less than 60% Filipino stockholders since the 10,000,000.00 2,708,174.60
(emphasis
applications will be denied instantly. Thus, various corporate schemes supplied)
and layerings are utilized to circumvent the application of the
Constitution. Interestingly, looking at the corporate structure of MMC, we take note that
it has a similar structure and composition as McArthur. In fact, it would
Obviously, the instant case presents a situation which exhibits a scheme seem that MBMI is also a major investor and "controls" MBMI and also, 45

employed by stockholders to circumvent the law, creating a cloud of similar nominal shareholders were present, i.e. Fernando B. Esguerra
doubt in the Court’s mind. To determine, therefore, the actual (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and
participation, direct or indirect, of MBMI, the grandfather rule must be Kenneth Cawkell (Cawkell):
used.
Madridejos Mining Corporation
McArthur Mining, Inc.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
To establish the actual ownership, interest or participation of MBMI in
each of petitioners’ corporate structure, they have to be "grandfathered." Olympic Mines & Filipino 6,663 PhP PhP 0
6,663,000.00

Development
As previously discussed, McArthur acquired its MPSA application from
MMC, which acquired its application from SMMI. McArthur has a capital
Corp.
stock of ten million pesos (PhP 10,000,000) divided into 10,000 common
shares at one thousand pesos (PhP 1,000) per share, subscribed to by MBMI Resources, Canadian 3,331 PhP PhP 2,803,900.00
Inc. 3,331,000.00
the following:
44
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00 Tesoro, which acquired its MPSA application from SMMI, has a
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
capital stock of ten million pesos (PhP 10,000,000) divided into
Esguerra ten thousand (10,000) common shares at PhP 1,000 per share,
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00 as demonstrated below:
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00
Hernando Name Nationality Number of Amount Amount Paid

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00 Shares Subscribed

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Sara Marie Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Mining, Inc.
Total 10,000 PhP PhP 2,809,900.00
10,000,000.00 (emphasis supplied)
MBMI Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60
Resources, Inc.
Noticeably, Olympic Mines & Development Corporation (Olympic) did not
pay any amount with respect to the number of shares they subscribed to Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

in the corporation, which is quite absurd since Olympic is the major

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why Esguerra
Olympic failed to pay any amount with respect to the number of shares it
subscribed to. It states that Olympic entered into joint venture Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Agcaoili
agreements with several Philippine companies, wherein it holds directly
and indirectly a 60% effective equity interest in the Olympic
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Properties. Quoting the said Annual report:
46

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

On September 9, 2004, the Company and Olympic Mines & Development
Corporation ("Olympic") entered into a series of agreements including a
Property Purchase and Development Agreement (the Transaction
Documents) with respect to three nickel laterite properties in Palawan,
Philippines (the "Olympic Properties"). The Transaction Documents
effectively establish a joint venture between the Company and Olympic
for purposes of developing the Olympic Properties. The Company holds
directly and indirectly an initial 60% interest in the joint venture. Under
certain circumstances and upon achieving certain milestones, the
Company may earn up to a 100% interest, subject to a 2.5% net revenue
royalty. (emphasis supplied)
47
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
(emphasis supplied)
Except for the name "Sara Marie Mining, Inc.," the table above shows
exactly the same figures as the corporate structure of petitioner McArthur,
down to the last centavo. All the other shareholders are the same: MBMI,
Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under
"Nationality," "Number of Shares," "Amount Subscribed," and "Amount
Paid" are exactly the same. Delving deeper, we scrutinize SMMI’s
corporate structure:

Thus, as demonstrated in this first corporation, McArthur, when it is

Sara Marie Mining, Inc.
"grandfathered," company layering was utilized by MBMI to gain control
over McArthur. It is apparent that MBMI has more than 60% or more
equity interest in McArthur, making the latter a foreign corporation. Name Nationality Number of Amount Amount Paid

Shares Subscribed
Tesoro Mining and Development, Inc.
Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0
 Moving on to the last petitioner, Narra, which is the transferee
Development and assignee of PLMDC’s MPSA application, whose corporate
structure’s arrangement is similar to that of the first two
Corp. petitioners discussed. The capital stock of Narra is ten million
MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00
pesos (PhP 10,000,000), which is divided into ten thousand
Inc. common shares (10,000) at one thousand pesos (PhP 1,000)
per share, shown as follows:
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00 Name Nationality Number of Amount Amount Paid
Esguerra
Shares Subscribed
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Patricia Louise Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00
Hernando Mining &

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00 Development

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00 Corp.

Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00 MBMI Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00
(emphasis supplied) Resources, Inc.

Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

After subsequently studying SMMI’s corporate structure, it is not Mendoza, Jr.
farfetched for us to spot the glaring similarity between SMMI and MMC’s
corporate structure. Again, the presence of identical stockholders, Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernandez
namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar,
Hernando, Mason and Cawkell. The figures under the headings Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
"Nationality," "Number of Shares," "Amount Subscribed," and "Amount Agcaoili
Paid" are exactly the same except for the amount paid by MBMI which
now reflects the amount of two million seven hundred ninety four Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Bocalan
thousand pesos (PhP 2,794,000). Oddly, the total value of the amount
paid is two million eight hundred nine thousand nine hundred pesos (PhP Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
2,809,900).
Robert L. American 1 PhP 1,000.00 PhP 1,000.00
McCurdy
Accordingly, after "grandfathering" petitioner Tesoro and factoring in
Olympic’s participation in SMMI’s corporate structure, it is clear that
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
MBMI is in control of Tesoro and owns 60% or more equity interest in
Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus, Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00
disqualifies it to participate in the exploitation, utilization and development (emphasis supplied)
of our natural resources.
Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili
Narra Nickel Mining and Development Corporation
and Esguerra, is present in this corporate structure.
Patricia Louise Mining & Development Corporation The Philippine companies holding the Olympic Property, and the
ownership and interests therein, are as follows:
Using the grandfather method, we further look and examine
PLMDC’s corporate structure: Olympic- Philippines (the "Olympic Group")

Name Nationality Number of Amount Amount Paid

Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Shares Subscribed

Palawan Alpha South Filipino 6,596 PhP PhP 0

Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Resources Development 6,596,000.00
Corporation
Pursuant to the Olympic joint venture agreement the Company holds
MBMI Resources, Canadian 3,396 PhP PhP directly and indirectly an effective equity interest in the Olympic Property
Inc. 3,396,000.00 2,796,000.00 of 60.0%. Pursuant to a shareholders’ agreement, the Company
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00 exercises joint control over the companies in the Olympic Group.

Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00

(b) Alpha Group
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00

Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

The Philippine companies holding the Alpha Property, and the ownership
interests therein, are as follows:
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00 Alpha- Philippines (the "Alpha Group")
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP

Narra Nickel Mining & Development Corporation (Narra) 60.4%
10,000,000.00 2,708,174.60
(emphasis
supplied) Under a joint venture agreement the Company holds directly and
indirectly an effective equity interest in the Alpha Property of 60.4%.
Pursuant to a shareholders’ agreement, the Company exercises joint
Yet again, the usual players in petitioners’ corporate structures are control over the companies in the Alpha Group. (emphasis supplied)
48

present. Similarly, the amount of money paid by the 2nd tier majority
stock holder, in this case, Palawan Alpha South Resources and
Development Corp. (PASRDC), is zero.
Studying MBMI’s Summary of Significant Accounting Policies dated
October 31, 2005 explains the reason behind the intricate corporate
layering that MBMI immersed itself in:
JOINT VENTURES The Company’s ownership interests in various mining
ventures engaged in the acquisition, exploration and development of
mineral properties in the Philippines is described as follows:
(a) Olympic Group
Concluding from the above-stated facts, it is quite safe to say that
petitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a
100% Canadian corporation, owns 60% or more of their equity interests.
Such conclusion is derived from grandfathering petitioners’ corporate
owners, namely: MMI, SMMI and PLMDC. Going further and adding to
the picture, MBMI’s Summary of Significant Accounting Policies
statement– –regarding the "joint venture" agreements that it entered into
with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC
and Narra. Noticeably, the ownership of the "layered" corporations boils
down to MBMI, Olympic or corporations under the "Alpha" group wherein
MBMI has joint venture agreements with, practically exercising majority
control over the corporations mentioned. In effect, whether looking at the
capital structure or the underlying relationships between and among the
corporations, petitioners are NOT Filipino nationals and must be
considered foreign since 60% or more of their capital stocks or equity
interests are owned by MBMI.
Application of the res inter alios acta rule
Petitioners question the CA’s use of the exception of the res inter alios
acta or the "admission by co-partner or agent" rule and "admission by
privies" under the Rules of Court in the instant case, by pointing out that
statements made by MBMI should not be admitted in this case since it is
not a party to the case and that it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a
partner or agent of the party within the scope of his authority and during
the existence of the partnership or agency, may be given in evidence
against such party after the partnership or agency is shown by evidence
other than such act or declaration itself. The same rule applies to the act
or declaration of a joint owner, joint debtor, or other person jointly
interested with the party.
Sec. 31. Admission by privies.- Where one derives title to property from
another, the act, declaration, or omission of the latter, while holding the
title, in relation to the property, is evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to
a case, "the partnership relation must be shown, and that proof of the fact
must be made by evidence other than the admission itself." Thus,
49
petitioners assert that the CA erred in finding that a partnership
relationship exists between them and MBMI because, in fact, no such
partnership exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the
Rules by stating that "by entering into a joint venture, MBMI have a joint
interest" with Narra, Tesoro and McArthur. They challenged the
conclusion of the CA which pertains to the close characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that
before this particular partnership can be formed, it should have been
formally reduced into writing since the capital involved is more than three
thousand pesos (PhP 3,000). Being that there is no evidence of written
agreement to form a partnership between petitioners and MBMI, no
partnership was created.
We disagree.
A partnership is defined as two or more persons who bind themselves to
contribute money, property, or industry to a common fund with the
intention of dividing the profits among themselves. On the other hand,
50
joint ventures have been deemed to be "akin" to partnerships since it is
difficult to distinguish between joint ventures and partnerships. Thus:
[T]he relations of the parties to a joint venture and the nature of their
association are so similar and closely akin to a partnership that it is
ordinarily held that their rights, duties, and liabilities are to be tested by
rules which are closely analogous to and substantially the same, if not
exactly the same, as those which govern partnership. In fact, it has been
said that the trend in the law has been to blur the distinctions between a
partnership and a joint venture, very little law being found applicable to
one that does not apply to the other. 51
Though some claim that partnerships and joint ventures are totally
different animals, there are very few rules that differentiate one from the
other; thus, joint ventures are deemed "akin" or similar to a partnership.
In fact, in joint venture agreements, rules and legal incidents governing
partnerships are applied. 52
Accordingly, culled from the incidents and records of this case, it can be
assumed that the relationships entered between and among petitioners
and MBMI are no simple "joint venture agreements." As a rule,
corporations are prohibited from entering into partnership agreements;
consequently, corporations enter into joint venture agreements with other
corporations or partnerships for certain transactions in order to form
"pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among
petitioners and MBMI was executed to circumvent the legal prohibition
against corporations entering into partnerships, then the relationship
created should be deemed as "partnerships," and the laws on partnership
should be applied. Thus, a joint venture agreement between and among
corporations may be seen as similar to partnerships since the elements
of partnership are present.
Considering that the relationships found between petitioners and MBMI
are considered to be partnerships, then the CA is justified in applying
Sec. 29, Rule 130 of the Rules by stating that "by entering into a joint
venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.
Panel of Arbitrators’ jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction
over the instant case. The POA has jurisdiction to settle disputes over
rights to mining areas which definitely involve the petitions filed by
Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by
filing its petition against petitioners, is asserting the right of Filipinos over
mining areas in the Philippines against alleged foreign-owned mining
corporations. Such claim constitutes a "dispute" found in Sec. 77 of RA
7942:
Within thirty (30) days, after the submission of the case by the parties for
the decision, the panel shall have exclusive and original jurisdiction to
hear and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia
Corp.:53
The phrase "disputes involving rights to mining areas" refers to any
adverse claim, protest, or opposition to an application for mineral
agreement. The POA therefore has the jurisdiction to resolve any adverse
claim, protest, or opposition to a pending application for a mineral
agreement filed with the concerned Regional Office of the MGB. This is
clear from Secs. 38 and 41 of the DENR AO 96-40, which provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of
publication/posting/radio announcements, the authorized officer(s) of the
concerned office(s) shall issue a certification(s) that the
publication/posting/radio announcement have been complied with. Any
adverse claim, protest, opposition shall be filed directly, within thirty (30)
calendar days from the last date of publication/posting/radio
announcement, with the concerned Regional Office or through any
concerned PENRO or CENRO for filing in the concerned Regional Office
for purposes of its resolution by the Panel of Arbitrators pursuant to the
provisions of this Act and these implementing rules and regulations. Upon
final resolution of any adverse claim, protest or opposition, the Panel of
Arbitrators shall likewise issue a certification to that effect within five (5)
working days from the date of finality of resolution thereof. Where there is
no adverse claim, protest or opposition, the Panel of Arbitrators shall
likewise issue a Certification to that effect within five working days
therefrom.
xxxx
No Mineral Agreement shall be approved unless the requirements under
this Section are fully complied with and any adverse
claim/protest/opposition is finally resolved by the Panel of Arbitrators.
Sec. 41.
xxxx
Within fifteen (15) working days form the receipt of the Certification
issued by the Panel of Arbitrators as provided in Section 38 hereof, the
concerned Regional Director shall initially evaluate the Mineral
Agreement applications in areas outside Mineral reservations. He/She
shall thereafter endorse his/her findings to the Bureau for further
evaluation by the Director within fifteen (15) working days from receipt of
forwarded documents. Thereafter, the Director shall endorse the same to
the secretary for consideration/approval within fifteen working days from
receipt of such endorsement.
In case of Mineral Agreement applications in areas with Mineral
Reservations, within fifteen (15) working days from receipt of the
Certification issued by the Panel of Arbitrators as provided for in Section
38 hereof, the same shall be evaluated and endorsed by the Director to
the Secretary for consideration/approval within fifteen days from receipt
of such endorsement. (emphasis supplied)
It has been made clear from the aforecited provisions that the "disputes
involving rights to mining areas" under Sec. 77(a) specifically refer only to
those disputes relative to the applications for a mineral agreement or
conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to
a mining right application is further elucidated by Secs. 219 and 43 of
DENR AO 95-936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.-
Notwithstanding the provisions of Sections 28, 43 and 57 above, any
adverse claim, protest or opposition specified in said sections may also
be filed directly with the Panel of Arbitrators within the concerned periods
for filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-
xxxx
The Regional Director or concerned Regional Director shall also cause
the posting of the application on the bulletin boards of the Bureau,
concerned Regional office(s) and in the concerned province(s) and
municipality(ies), copy furnished the barangays where the proposed
contract area is located once a week for two (2) consecutive weeks in a
language generally understood in the locality. After forty-five (45) days
from the last date of publication/posting has been made and no adverse
claim, protest or opposition was filed within the said forty-five (45) days,
the concerned offices shall issue a certification that publication/posting
has been made and that no adverse claim, protest or opposition of
whatever nature has been filed. On the other hand, if there be any
adverse claim, protest or opposition, the same shall be filed within forty-
five (45) days from the last date of publication/posting, with the Regional
Offices concerned, or through the Department’s Community Environment
and Natural Resources Officers (CENRO) or Provincial Environment and
Natural Resources Officers (PENRO), to be filed at the Regional Office
for resolution of the Panel of Arbitrators. However previously published
valid and subsisting mining claims are exempted from posted/posting
required under this Section.
No mineral agreement shall be approved unless the requirements under
this section are fully complied with and any opposition/adverse claim is
dealt with in writing by the Director and resolved by the Panel of
Arbitrators. (Emphasis supplied.)
It has been made clear from the aforecited provisions that the "disputes
involving rights to mining areas" under Sec. 77(a) specifically refer only to
those disputes relative to the applications for a mineral agreement or
conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to
a mining right application is further elucidated by Secs. 219 and 43 of
DENRO AO 95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.-
Notwithstanding the provisions of Sections 28, 43 and 57 above, any
adverse claim, protest or opposition specified in said sections may also
be filed directly with the Panel of Arbitrators within the concerned periods
for filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.-
xxxx
The Regional Director or concerned Regional Director shall also cause
the posting of the application on the bulletin boards of the Bureau,
concerned Regional office(s) and in the concerned province(s) and
municipality(ies), copy furnished the barangays where the proposed
contract area is located once a week for two (2) consecutive weeks in a
language generally understood in the locality. After forty-five (45) days
from the last date of publication/posting has been made and no adverse
claim, protest or opposition was filed within the said forty-five (45) days,
the concerned offices shall issue a certification that publication/posting
has been made and that no adverse claim, protest or opposition of
whatever nature has been filed. On the other hand, if there be any
adverse claim, protest or opposition, the same shall be filed within forty-
five (45) days from the last date of publication/posting, with the Regional
offices concerned, or through the Department’s Community Environment
and Natural Resources Officers (CENRO) or Provincial Environment and
Natural Resources Officers (PENRO), to be filed at the Regional Office
for resolution of the Panel of Arbitrators. However, previously published
valid and subsisting mining claims are exempted from posted/posting
required under this Section.
No mineral agreement shall be approved unless the requirements under
this section are fully complied with and any opposition/adverse claim is
dealt with in writing by the Director and resolved by the Panel of
Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the POA to
resolve any adverse claim, opposition, or protest relative to mining rights
under Sec. 77(a) of RA 7942 is confined only to adverse claims, conflicts
and oppositions relating to applications for the grant of mineral rights.
POA’s jurisdiction is confined only to resolutions of such adverse claims,
conflicts and oppositions and it has no authority to approve or reject said
applications. Such power is vested in the DENR Secretary upon
recommendation of the MGB Director. Clearly, POA’s jurisdiction over
"disputes involving rights to mining areas" has nothing to do with the
cancellation of existing mineral agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has
jurisdiction to resolve disputes over MPSA applications subject of
Redmont’s petitions. However, said jurisdiction does not include either
the approval or rejection of the MPSA applications, which is vested only
upon the Secretary of the DENR. Thus, the finding of the POA, with
respect to the rejection of petitioners’ MPSA applications being that they
are foreign corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the
regular courts, not the POA, that has jurisdiction over the MPSA
applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in
force at the time of the commencement of the action. 54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise
exclusive original jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of
pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of
RA 7942:
Section 77. Panel of Arbitrators.—
x x x Within thirty (30) days, after the submission of the case by
the parties for the decision, the panel shall have exclusive and
original jurisdiction to hear and decide the following:
(c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over any and all
disputes involving rights to mining areas. One such dispute is an MPSA
application to which an adverse claim, protest or opposition is filed by
another interested applicant. In the case at bar, the dispute arose or
1âwphi1
originated from MPSA applications where petitioners are asserting their
rights to mining areas subject of their respective MPSA applications.
Since respondent filed 3 separate petitions for the denial of said
applications, then a controversy has developed between the parties and it
is POA’s jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while what
petitioners filed with the DENR Regional Office or any concerned DENRE
or CENRO are MPSA applications. Thus POA has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under
the doctrine of primary jurisdiction. Euro-med Laboratories v. Province of
Batangas elucidates:
55
The doctrine of primary jurisdiction holds that if a case is such that its
determination requires the expertise, specialized training and knowledge
of an administrative body, relief must first be obtained in an administrative
proceeding before resort to the courts is had even if the matter may well
be within their proper jurisdiction.
Whatever may be the decision of the POA will eventually reach the court
system via a resort to the CA and to this Court as a last recourse.
Selling of MBMI’s shares to DMCI
As stated before, petitioners’ Manifestation and Submission dated
October 19, 2012 would want us to declare the instant petition moot and
academic due to the transfer and conveyance of all the shareholdings
and interests of MBMI to DMCI, a corporation duly organized and existing
under Philippine laws and is at least 60% Philippine-owned. Petitioners
56
reasoned that they now cannot be considered as foreign-owned; the
transfer of their shares supposedly cured the "defect" of their previous
nationality. They claimed that their current FTAA contract with the State
should stand since "even wholly-owned foreign corporations can enter
into an FTAA with the State." Petitioners stress that there should no
57
longer be any issue left as regards their qualification to enter into FTAA
contracts since they are qualified to engage in mining activities in the
Philippines. Thus, whether the "grandfather rule" or the "control test" is
used, the nationalities of petitioners cannot be doubted since it would
pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing
in the instant case and said fact should be disregarded. The
manifestation can no longer be considered by us since it is being tackled
in G.R. No. 202877 pending before this Court. Thus, the question of
1âwphi1
DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS
MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT
NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES
AND EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF
THE PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-
Intervention.

whether petitioners, allegedly a Philippine-owned corporation due to the

sale of MBMI's shareholdings to DMCI, are allowed to enter into FTAAs
with the State is a non-issue in this case.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
In ending, the "control test" is still the prevailing mode of determining
whether or not a corporation is a Filipino corporation, within the ambit of - -x
Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the
exploration, development and utilization of the natural resources of the
Philippines. When in the mind of the Court there is doubt, based on the
attendant facts and circumstances of the case, in the 60-40 Filipino-
equity ownership in the corporation, then it may apply the "grandfather
rule."
DECISION
WHEREFORE, premises considered, the instant petition is DENIED. The
assailed Court of Appeals Decision dated October 1, 2010 and CARPIO, J.:
Resolution dated February 15, 2011 are hereby AFFIRMED.

SO ORDERED.
The Case

This is an original petition for prohibition, injunction,

G.R. No. 176579 October 9, 2012
HEIRS OF WILSON P. GAMBOA,* Petitioners,
vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE
UNDERSECRETARYJOHN P. SEVILLA, AND COMMISSIONER
RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND
MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION COUNCIL,
CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS
CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS
INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG
declaratory relief and declaration of nullity of the sale of
shares of stock of Philippine Telecommunications Investment
Corporation (PTIC) by the government of the Republic of the
Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an
affiliate of First Pacific Company Limited (First Pacific).
The Antecedents
The facts, according to petitioner Wilson P. Gamboa, a
stockholder of Philippine Long Distance Telephone Company
(PLDT), are as follows:1
On 28 November 1928, the Philippine Legislature enacted Act
No. 3436 which granted PLDT a franchise and the right to
engage in telecommunications business. In 1969, General
Telephone and Electronics Corporation (GTE), an American
company and a major PLDT stockholder, sold 26 percent of
the outstanding common shares of PLDT to PTIC. In 1977,
Prime Holdings, Inc. (PHI) was incorporated by several
persons, including Roland Gapud and Jose Campos, Jr.
Subsequently, PHI became the owner of 111,415 shares of
stock of PTIC by virtue of three Deeds of Assignment
executed by PTIC stockholders Ramon Cojuangco and
Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of
PTIC held by PHI were sequestered by the Presidential
Commission on Good Government (PCGG). The 111,415
PTIC shares, which represent about 46.125 percent of the
outstanding capital stock of PTIC, were later declared by this
Court to be owned by the Republic of the Philippines. 2
In 1999, First Pacific, a Bermuda-registered, Hong Kong-
based investment firm, acquired the remaining 54 percent of
the outstanding capital stock of PTIC. On 20 November 2006,
the Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 PTIC
shares, or 46.125 percent of the outstanding capital stock of
PTIC, through a public bidding to be conducted on 4
December 2006. Subsequently, the public bidding was reset to
8 December 2006, and only two bidders, Parallax Venture
Fund XXVII (Parallax) and Pan-Asia Presidio Capital,
submitted their bids. Parallax won with a bid of P25.6 billion
or US$510 million.
Thereafter, First Pacific announced that it would exercise its
right of first refusal as a PTIC stockholder and buy the 111,415
PTIC shares by matching the bid price of Parallax. However,
First Pacific failed to do so by the 1 February 2007 deadline
set by IPC and instead, yielded its right to PTIC itself which
was then given by IPC until 2 March 2007 to buy the PTIC
shares. On 14 February 2007, First Pacific, through its
subsidiary, MPAH, entered into a Conditional Sale and
Purchase Agreement of the 111,415 PTIC shares, or 46.125
percent of the outstanding capital stock of PTIC, with the
Philippine Government for the price of P25,217,556,000 or
US$510,580,189. The sale was completed on 28 February
2007.
Since PTIC is a stockholder of PLDT, the sale by the
Philippine Government of 46.125 percent of PTIC shares is
actually an indirect sale of 12 million shares or about 6.3
percent of the outstanding common shares of PLDT. With the
sale, First Pacifics common shareholdings in PLDT
increased from 30.7 percent to 37 percent, thereby
increasing the common shareholdings of foreigners in
PLDT to about 81.47 percent. This violates Section 11,
Article XII of the 1987 Philippine Constitution which limits
foreign ownership of the capital of a public utility to not more
than 40 percent.3
On the other hand, public respondents Finance
Secretary Margarito B. Teves, Undersecretary John P. Sevilla,
and PCGG Commissioner Ricardo Abcede allege the
following relevant facts:
On 9 November 1967, PTIC was incorporated and had since
engaged in the business of investment holdings. PTIC held
26,034,263 PLDT common shares, or 13.847 percent of the
total PLDT outstanding common shares. PHI, on the other
hand, was incorporated in 1977, and became the owner of
111,415 PTIC shares or 46.125 percent of the outstanding
capital stock of PTIC by virtue of three Deeds of Assignment
executed by Ramon Cojuangco and Luis Tirso Rivilla. In
1986, the 111,415 PTIC shares held by PHI were sequestered
by the PCGG, and subsequently declared by this Court as part
of the ill-gotten wealth of former President Ferdinand Marcos.
The sequestered PTIC shares were reconveyed to the Republic
of the Philippines in accordance with this Courts
decision4 which became final and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC
shares, which represent 6.4 percent of the outstanding common
shares of stock of PLDT, and designated the Inter-Agency
Privatization Council (IPC), composed of the Department of
Finance and the PCGG, as the disposing entity. An invitation
to bid was published in seven different newspapers from 13 to
24 November 2006. On 20 November 2006, a pre-bid
conference was held, and the original deadline for bidding
scheduled on 4 December 2006 was reset to 8 December 2006.
The extension was published in nine different newspapers.
During the 8 December 2006 bidding, Parallax Capital
Management LP emerged as the highest bidder with a bid
of P25,217,556,000. The government notified First Pacific, the
majority owner of PTIC shares, of the bidding results and gave
First Pacific until 1 February 2007 to exercise its right of first
refusal in accordance with PTICs Articles of Incorporation.
First Pacific announced its intention to match Parallaxs bid.
On 31 January 2007, the House of Representatives (HR)
Committee on Good Government conducted a public hearing
on the particulars of the then impending sale of the 111,415
PTIC shares. Respondents Teves and Sevilla were among those
who attended the public hearing. The HR Committee Report
No. 2270 concluded that: (a) the auction of the governments
111,415 PTIC shares bore due diligence, transparency and
conformity with existing legal procedures; and (b) First
Pacifics intended acquisition of the governments 111,415
PTIC shares resulting in First Pacifics 100% ownership of
PTIC will not violate the 40 percent constitutional limit on
foreign ownership of a public utility since PTIC holds only
13.847 percent of the total outstanding common shares of
PLDT.5 On 28 February 2007, First Pacific completed the
acquisition of the 111,415 shares of stock of PTIC.
Respondent Manuel V. Pangilinan admits the following facts:
(a) the IPC conducted a public bidding for the sale of 111,415
PTIC shares or 46 percent of the outstanding capital stock of
PTIC (the remaining 54 percent of PTIC shares was already
owned by First Pacific and its affiliates); (b) Parallax offered
the highest bid amounting to P25,217,556,000; (c) pursuant to
the right of first refusal in favor of PTIC and its shareholders
granted in PTICs Articles of Incorporation, MPAH, a First
Pacific affiliate, exercised its right of first refusal by matching
the highest bid offered for PTIC shares on 13 February 2007;
and (d) on 28 February 2007, the sale was consummated when
MPAH paid IPC P25,217,556,000 and the government
delivered the certificates for the 111,415 PTIC shares.
Respondent Pangilinan denies the other allegations of facts of
petitioner.
On 28 February 2007, petitioner filed the instant petition for
prohibition, injunction, declaratory relief, and declaration of
nullity of sale of the 111,415 PTIC shares. Petitioner claims,
among others, that the sale of the 111,415 PTIC shares would
result in an increase in First Pacifics common shareholdings in
PLDT from 30.7 percent to 37 percent, and this, combined
with Japanese NTT DoCoMos common shareholdings in
PLDT, would result to a total foreign common shareholdings
in PLDT of 51.56 percent which is over the 40 percent
constitutional limit.6 Petitioner asserts:
If and when the sale is completed, First Pacifics equity
in PLDT will go up from 30.7 percent to 37.0 percent of
its common or voting- stockholdings, x x x. Hence, the
consummation of the sale will put the two largest
foreign investors in PLDT First Pacific and Japans
NTT DoCoMo, which is the worlds largest wireless
telecommunications firm, owning 51.56 percent of
PLDT common equity. x xx With the completion of the
sale, data culled from the official website of the New
York Stock Exchange (www.nyse.com) showed that those
foreign entities, which own at least five percent of
common equity, will collectively own 81.47 percent of
PLDTs common equity. x x x
x x x as the annual disclosure reports, also
referred to as Form 20-K reports
x x x which PLDT submitted to the New
York Stock Exchange for the period 2003-
2005, revealed that First Pacific and
several other foreign entities breached the
constitutional limit of 40 percent
ownership as early as 2003. x x x7
Petitioner raises the following issues: (1) whether the
consummation of the then impending sale of 111,415 PTIC
shares to First Pacific violates the constitutional limit on
foreign ownership of a public utility; (2) whether public
respondents committed grave abuse of discretion in allowing
the sale of the 111,415 PTIC shares to First Pacific; and (3)
whether the sale of common shares to foreigners in excess of
40 percent of the entire subscribed common capital stock
violates the constitutional limit on foreign ownership of a
public utility.8
On 13 August 2007, Pablito V. Sanidad and Arno
V. Sanidad filed a Motion for Leave to Intervene and Admit
Attached Petition-in-Intervention. In the Resolution of 28
August 2007, the Court granted the motion and noted the
Petition-in-Intervention.
Petitioners-in-intervention join petitioner
Wilson Gamboa x x x in seeking, among others, to enjoin
and/or nullify the sale by respondents of the 111,415 PTIC
shares to First Pacific or assignee. Petitioners-in-intervention
claim that, as PLDT subscribers, they have a stake in the
outcome of the controversy x x x where the Philippine
Government is completing the sale of government owned
assets in [PLDT], unquestionably a public utility, in violation
of the nationality restrictions of the Philippine Constitution.
The Issue
This Court is not a trier of facts. Factual questions such as
those raised by petitioner,9 which indisputably demand a
thorough examination of the evidence of the parties, are
generally beyond this Courts jurisdiction. Adhering to this
well-settled principle, the Court shall confine the resolution of
the instant controversy solely on the threshold and purely
legal issue of whether the term capital in Section 11, Article
XII of the Constitution refers to the total common shares only
or to the total outstanding capital stock (combined total of
common and non-voting preferred shares) of PLDT, a public
utility.
The Ruling of the Court
The petition is partly meritorious.
Petition for declaratory relief treated as petition for
mandamus
At the outset, petitioner is faced with a procedural barrier.
Among the remedies petitioner seeks, only the petition for
prohibition is within the original jurisdiction of this court,
which however is not exclusive but is concurrent with the
Regional Trial Court and the Court of Appeals. The actions for
declaratory relief,10 injunction, and annulment of sale are not
embraced within the original jurisdiction of the Supreme
Court. On this ground alone, the petition could have been
dismissed outright.
While direct resort to this Court may be justified in a petition
for prohibition,11 the Court shall nevertheless refrain from
discussing the grounds in support of the petition for prohibition
since on 28 February 2007, the questioned sale was
consummated when MPAH paid IPC P25,217,556,000 and the
government delivered the certificates for the 111,415 PTIC
shares.
However, since the threshold and purely legal issue on the
definition of the term capital in Section 11, Article XII of the
Constitution has far-reaching implications to the
national economy, the Court treats the petition for declaratory
relief as one for mandamus.12
In Salvacion v. Central Bank of the Philippines,13 the Court
treated the petition for declaratory relief as one for mandamus
considering the grave injustice that would result in the
interpretation of a banking law. In that case, which involved
the crime of rape committed by a foreign tourist against a
Filipino minor and the execution of the final judgment in the
civil case for damages on the tourists dollar deposit with a
local bank, the Court declared Section 113 of Central Bank
Circular No. 960, exempting foreign currency deposits from
attachment, garnishment or any other order or process of any
court, inapplicable due to the peculiar circumstances of the
case. The Court held that injustice would result especially to a
citizen aggrieved by a foreign guest like accused x x x that
would negate Article 10 of the Civil Code which provides that
in case of doubt in the interpretation or application of laws, it
is presumed that the lawmaking body intended right and justice
to prevail. The Court therefore required respondents Central
Bank of the Philippines, the local bank, and the accused to
comply with the writ of execution issued in the civil case for
damages and to release the dollar deposit of the accused to
satisfy the judgment.
In Alliance of Government Workers v. Minister of Labor,14 the
Court similarly brushed aside the procedural infirmity of the
petition for declaratory relief and treated the same as one for
mandamus. In Alliance, the issue was whether the government
unlawfully excluded petitioners, who were government
employees, from the enjoyment of rights to which they were
entitled under the law. Specifically, the question was: Are the
branches, agencies, subdivisions, and instrumentalities of the
Government, including government owned or controlled
corporations included among the four employers under
Presidential Decree No. 851 which are required to pay their
employees x x x a thirteenth (13th) month pay x x x ? The
Constitutional principle involved therein affected all
government employees, clearly justifying a relaxation of the
technical rules of procedure, and certainly requiring the
interpretation of the assailed presidential decree.
In short, it is well-settled that this Court may treat a petition for
declaratory relief as one for mandamus if the issue involved
has far-reaching implications. As this Court held in Salvacion:
The Court has no original and exclusive jurisdiction
over a petition for declaratory relief. However,
exceptions to this rule have been recognized. Thus,
where the petition has far-reaching implications and
raises questions that should be resolved, it may be
treated as one for mandamus.15 (Emphasis supplied)
In the present case, petitioner seeks primarily the interpretation
of the term capital in Section 11, Article XII of the
Constitution. He prays that this Court declare that the term
capital refers to common shares only, and that such shares
constitute the sole basis in determining foreign equity in a
public utility. Petitioner further asks this Court to declare any
ruling inconsistent with such interpretation unconstitutional.
The interpretation of the term capital in Section 11, Article XII
of the Constitution has far-reaching implications to the
national economy. In fact, a resolution of this issue will
determine whether Filipinos are masters, or second class
citizens, in their own country. What is at stake here is whether
Filipinos or foreigners will have effective control of the
national economy. Indeed, if ever there is a legal issue that has
far-reaching implications to the entire nation, and to future
generations of Filipinos, it is the threshhold legal issue
presented in this case.
The Court first encountered the issue on the definition of the
term capital in Section 11, Article XII of the Constitution in the
case of Fernandez v. Cojuangco, docketed as G.R. No.
157360.16 That case involved the same public utility (PLDT)
and substantially the same private respondents. Despite the
importance and novelty of the constitutional issue raised
therein and despite the fact that the petition involved a purely
legal question, the Court declined to resolve the case on the
merits, and instead denied the same for disregarding the
hierarchy of courts.17 There, petitioner Fernandez assailed on a
pure question of law the Regional Trial Courts Decision of 21
February 2003 via a petition for review under Rule 45. The
Courts Resolution, denying the petition, became final on 21
December 2004.
The instant petition therefore presents the Court with another
opportunity to finally settle this purely legal issue which is of
transcendental importance to the national economy and a
fundamental requirement to a faithful adherence to our
Constitution. The Court must forthwith seize such opportunity,
not only for the benefit of the litigants, but more significantly
for the benefit of the entire Filipino people, to ensure, in the
words of the Constitution, a self-reliant and independent
national economy effectively controlled by
Filipinos.18 Besides, in the light of vague and confusing
positions taken by government agencies on this purely legal
issue, present and future foreign investors in this country
deserve, as a matter of basic fairness, a categorical ruling from
this Court on the extent of their participation in the capital of
public utilities and other nationalized businesses.
Despite its far-reaching implications to the national economy,
this purely legal issue has remained unresolved for over 75
years since the 1935 Constitution. There is no reason for this
Court to evade this ever recurring fundamental issue and delay
again defining the term capital, which appears not only in
Section 11, Article XII of the Constitution, but also in Section
2, Article XII on co-production and joint venture agreements
for the development of our natural resources, 19 in Section 7,
Article XII on ownership of private lands,20 in Section 10,
Article XII on the reservation of certain investments to Filipino
citizens,21 in Section 4(2), Article XIV on the ownership of
educational institutions,22 and in Section 11(2), Article XVI on
the ownership of advertising companies.23
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of PLDT. As
such, he has the right to question the subject sale, which he
claims to violate the nationality requirement prescribed in
Section 11, Article XII of the Constitution. If the sale indeed
violates the Constitution, then there is a possibility that PLDTs
franchise could be revoked, a dire consequence directly
affecting petitioners interest as a stockholder.
More importantly, there is no question that the instant petition
raises matters of transcendental importance to the public. The
fundamental and threshold legal issue in this case, involving
the national economy and the economic welfare of the Filipino
people, far outweighs any perceived impediment in the legal
personality of the petitioner to bring this action.
In Chavez v. PCGG,24 the Court upheld the right of a citizen to
bring a suit on matters of transcendental importance to the
public, thus:
In Taada v. Tuvera, the Court asserted that when the issue concerns a
public right and the object of mandamus is to obtain the
enforcement of a public duty, the people are regarded as the real
parties in interest; and because it is sufficient that petitioner is a
citizen and as such is interested in the execution of the laws, he
need not show that he has any legal or special interest in the result
of the action. In the aforesaid case, the petitioners sought to enforce
their right to be informed on matters of public concern, a right then
recognized in Section 6, Article IV of the 1973 Constitution, in
connection with the rule that laws in order to be valid and enforceable
must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners legal standing, the Court
declared that the right they sought to be enforced is a public right
recognized by no less than the fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating Taada, further
declared that when a mandamus proceeding involves the assertion
of a public right, the requirement of personal interest is satisfied
by the mere fact that petitioner is a citizen and, therefore, part of
the general public which possesses the right.
Further, in Albano v. Reyes, we said that while expenditure of public
funds may not have been involved under the questioned contract for
the development, management and operation of the Manila
International Container Terminal, public interest [was] definitely
involved considering the important role [of the subject contract] . .
. in the economic development of the country and the magnitude of
the financial consideration involved. We concluded that, as a
consequence, the disclosure provision in the Constitution would
constitute sufficient authority for upholding the petitioners standing.
(Emphasis supplied)
Clearly, since the instant petition, brought by a citizen,
involves matters of transcendental public importance, the
petitioner has the requisite locus standi.
Definition of the Term Capital in
Section 11, Article XII of the 1987 Constitution
Section 11, Article XII (National Economy and Patrimony) of
the 1987 Constitution mandates the Filipinization of public
utilities, to wit:
Section 11. 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 corporations or associations
organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer
period than fifty years. Neither shall any such franchise
or right be granted except under the condition that it
shall be subject to amendment, alteration, or repeal by
the Congress when the common good so requires. The
State shall encourage equity participation in public
utilities by the general public. The participation of
foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate
share in its capital, and all the executive and managing
officers of such corporation or association must be
citizens of the Philippines. (Emphasis supplied)
The above provision substantially reiterates Section 5, Article
XIV of the 1973 Constitution, thus:
Section 5. 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 corporations or associations organized under
the laws of the Philippines at least sixty per centum
of the capital of which is owned by such citizens, nor
shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty
years. Neither shall any such franchise or right be
granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the
National Assembly when the public interest so requires.
The State shall encourage equity participation in public
utilities by the general public. The participation of
foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate
share in the capital thereof. (Emphasis supplied)
The foregoing provision in the 1973 Constitution reproduced
Section 8, Article XIV of the 1935 Constitution, viz:
Section 8. 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 corporations or other entities organized under
the laws of the Philippines sixty per centum of the
capital of which is owned by citizens of the
Philippines, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer
period than fifty years. No franchise or right shall be
granted to any individual, firm, or corporation, except
under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when
the public interest so requires. (Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986
Constitutional Commission, reminds us that the Filipinization
provision in the 1987 Constitution is one of the products of the
spirit of nationalism which gripped the 1935 Constitutional
Convention. The 1987 Constitution provides for the
Filipinization of public utilities by requiring that any form of
authorization for the operation of public utilities should be
granted only to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at
least sixty per centum of whose capital is owned by such
citizens. The provision is [an express] recognition of the
sensitive and vital position of public utilities both in the
national economy and for national security.26 The evident
purpose of the citizenship requirement is to prevent aliens from
assuming control of public utilities, which may be inimical to
the national interest.27 This specific provision explicitly
reserves to Filipino citizens control of public utilities, pursuant
to an overriding economic goal of the 1987 Constitution: to
conserve and develop our patrimony28 and ensure a self-reliant
and independent national economy effectively controlled by
Filipinos.29
Any citizen or juridical entity desiring to operate a public
utility must therefore meet the minimum nationality
requirement prescribed in Section 11, Article XII of the
Constitution. Hence, for a corporation to be granted authority
to operate a public utility, at least 60 percent of its capital must
be owned by Filipino citizens.
The crux of the controversy is the definition of the
term capital. Does the term capital in Section 11, Article XII
of the Constitution refer to common shares or to the total
outstanding capital stock (combined total of common and non-
voting preferred shares)?
Petitioner submits that the 40 percent foreign equity limitation
in domestic public utilities refers only to common shares
because such shares are entitled to vote and it is through voting
that control over a corporation is exercised. Petitioner posits
that the term capital in Section 11, Article XII of the
Constitution refers to the ownership of common capital stock
subscribed and outstanding, which class of shares alone, under
the corporate set-up of PLDT, can vote and elect members of
the board of directors. It is undisputed that PLDTs non-voting
preferred shares are held mostly by Filipino citizens. 30 This
arose from Presidential Decree No. 217,31 issued on 16 June
1973 by then President Ferdinand Marcos, requiring every
applicant of a PLDT telephone line to subscribe to non-voting
preferred shares to pay for the investment cost of installing the
telephone line.32
Petitioners-in-intervention basically reiterate petitioners
arguments and adopt petitioners definition of the term
capital.33 Petitioners-in-intervention allege that the
approximate foreign ownership of common capital stock of
PLDT x x x already amounts to at least 63.54% of the total
outstanding common stock, which means that foreigners
exercise significant control over PLDT, patently violating the
40 percent foreign equity limitation in public utilities
prescribed by the Constitution.
Respondents, on the other hand, do not offer any definition of
the term capital in Section 11, Article XII of the Constitution.
More importantly, private respondents Nazareno and
Pangilinan of PLDT do not dispute that more than 40 percent
of the common shares of PLDT are held by foreigners.
In particular, respondent Nazarenos Memorandum, consisting
of 73 pages, harps mainly on the procedural infirmities of the
petition and the supposed violation of the due process rights of
the affected foreign common shareholders. Respondent
Nazareno does not deny petitioners allegation of foreigners
dominating the common shareholdings of PLDT. Nazareno
stressed mainly that the petition seeks to divest foreign
common shareholders purportedly exceeding 40% of the
total common shareholdings in PLDT of their ownership
over their shares. Thus, the foreign natural and juridical
PLDT shareholders must be impleaded in this suit so that they
can be heard.34 Essentially, Nazareno invokes denial of due
process on behalf of the foreign common shareholders.
While Nazareno does not introduce any definition of the term
capital, he states that among the factual assertions that need
to be established to counter petitioners allegations is the
uniform interpretation by government agencies (such as
the SEC), institutions and corporations (such as the
Philippine National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both preferred
shares and common shares in controlling interest in view of
testing compliance with the 40% constitutional limitation
on foreign ownership in public utilities.35
Similarly, respondent Manuel V. Pangilinan does not define the
term capital in Section 11, Article XII of the Constitution.
Neither does he refute petitioners claim of foreigners holding
more than 40 percent of PLDTs common shares. Instead,
respondent Pangilinan focuses on the procedural flaws of the
petition and the alleged violation of the due process rights of
foreigners. Respondent Pangilinan emphasizes in his
Memorandum (1) the absence of this Courts jurisdiction over
the petition; (2) petitioners lack of standing; (3) mootness of
the petition; (4) non-availability of declaratory relief; and (5)
the denial of due process rights. Moreover,
respondent Pangilinan alleges that the issue should be whether
owners of shares in PLDT as well as owners of shares in
companies holding shares in PLDT may be required to
relinquish their shares in PLDT and in those companies
without any law requiring them to surrender their shares and
also without notice and trial.
Respondent Pangilinan further asserts that Section 11, [Article
XII of the Constitution] imposes no nationality
requirement on the shareholders of the utility company as
a condition for keeping their shares in the utility
company. According to him, Section 11 does not authorize
taking one persons property (the shareholders stock in the
utility company) on the basis of another partys alleged failure
to satisfy a requirement that is a condition only for that other
partys retention of another piece of property (the utility
company being at least 60% Filipino-owned to keep its
franchise).36
The OSG, representing public respondents Secretary Margarito
Teves, Undersecretary John P. Sevilla, Commissioner Ricardo
Abcede, and Chairman Fe Barin, is likewise silent on the
definition of the term capital. In its Memorandum 37 dated 24
September 2007, the OSG also limits its discussion on the
supposed procedural defects of the petition, i.e. lack of
standing, lack of jurisdiction, non-inclusion of interested
parties, and lack of basis for injunction. The OSG does not
present any definition or interpretation of the term capital in
Section 11, Article XII of the Constitution. The OSG contends
that the petition actually partakes of a collateral attack on
PLDTs franchise as a public utility, which in effect requires a
full-blown trial where all the parties in interest are given their
day in court.38
Respondent Francisco Ed Lim, impleaded as President and
Chief Executive Officer of the Philippine Stock Exchange
(PSE), does not also define the term capital and seeks the
dismissal of the petition on the following grounds: (1) failure
to state a cause of action against Lim; (2) the PSE allegedly
implemented its rules and required all listed companies,
including PLDT, to make proper and timely disclosures; and
(3) the reliefs prayed for in the petition would adversely
impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner
Fernandez who claimed to be a stockholder of record
of PLDT, contended that the term capital in the 1987
Constitution refers to shares entitled to vote or the common
shares. Fernandez explained thus:
The forty percent (40%) foreign equity limitation in
public utilities prescribed by the Constitution refers to
ownership of shares of stock entitled to vote, i.e.,
common shares, considering that it is through voting
that control is being exercised. x x x
Obviously, the intent of the framers of the Constitution
in imposing limitations and restrictions on fully
nationalized and partially nationalized activities is for
Filipino nationals to be always in control of the
corporation undertaking said activities. Otherwise, if the
Trial Courts ruling upholding respondents arguments
were to be given credence, it would be possible for the
ownership structure of a public utility corporation to be
divided into one percent (1%) common stocks and
ninety-nine percent (99%) preferred stocks. Following
the Trial Courts ruling adopting respondents arguments,
the common shares can be owned entirely by foreigners
thus creating an absurd situation wherein foreigners,
who are supposed to be minority shareholders, control
the public utility corporation.
xxxx
Thus, the 40% foreign ownership limitation should be
interpreted to apply to both the beneficial ownership and
the controlling interest.
xxxx
Clearly, therefore, the forty percent (40%) foreign
equity limitation in public utilities prescribed by the
Constitution refers to ownership of shares of stock
entitled to vote, i.e., common shares. Furthermore,
ownership of record of shares will not suffice but it
must be shown that the legal and beneficial ownership
rests in the hands of Filipino citizens. Consequently, in
the case of petitioner PLDT, since it is already admitted
that the voting interests of foreigners which would gain
entry to petitioner PLDT by the acquisition of SMART
shares through the Questioned Transactions is
equivalent to 82.99%, and the nominee arrangements
between the foreign principals and the Filipino owners
is likewise admitted, there is, therefore, a violation of
Section 11, Article XII of the Constitution.
Parenthetically, the Opinions dated February 15, 1988
and April 14, 1987 cited by the Trial Court to support
the proposition that the meaning of the word capital as
used in Section 11, Article XII of the Constitution
allegedly refers to the sum total of the shares subscribed
and paid-in by the shareholder and it allegedly is
immaterial how the stock is classified, whether as
common or preferred, cannot stand in the face of a clear
legislative policy as stated in the FIA which took effect
in 1991 or way after said opinions were rendered, and as
clarified by the above-quoted Amendments. In this
regard, suffice it to state that as between the law and an
opinion rendered by an administrative agency, the law
indubitably prevails. Moreover, said Opinions are
merely advisory and cannot prevail over the clear intent
of the framers of the Constitution.
In the same vein, the SECs construction of Section 11,
Article XII of the Constitution is at best merely advisory
for it is the courts that finally determine what a law
means.39
On the other hand, respondents therein, Antonio O. Cojuangco,
Manuel V. Pangilinan, Carlos A. Arellano, Helen Y.
Dee, Magdangal B. Elma, Mariles Cacho-Romulo,
Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon
L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea,
argued that the term capital in Section 11, Article XII of the
Constitution includes preferred shares since the Constitution
does not distinguish among classes of stock, thus:
16. The Constitution applies its foreign ownership
limitation on the corporations capital, without
distinction as to classes of shares. x x
In this connection, the Corporation Code which was
already in force at the time the present (1987)
Constitution was drafted defined outstanding capital
stock as follows:
Section 137. Outstanding capital stock defined. The
term outstanding capital stock, as used in this Code,
means the total shares of stock issued under binding
subscription agreements to subscribers or stockholders,
whether or not fully or partially paid, except treasury
shares.
Section 137 of the Corporation Code also does not
distinguish between common and preferred shares, nor
exclude either class of shares, in determining the
outstanding capital stock (the capital) of a corporation.
Consequently, petitioners suggestion to reckon PLDTs
foreign equity only on the basis of PLDTs outstanding
common shares is without legal basis. The language of
the Constitution should be understood in the sense it has
in common use.
xxxx
17. But even assuming that resort to the proceedings of the
Constitutional Commission is necessary, there is nothing
in the Record of the Constitutional Commission (Vol.
III) which petitioner misleadingly cited in the Petition
x x x which supports petitioners view that only common
shares should form the basis for computing a public
utilitys foreign equity.
xxxx
18. In addition, the SEC the government agency primarily
responsible for implementing the Corporation Code, and
which also has the responsibility of ensuring compliance
with the Constitutions foreign equity restrictions as
regards nationalized activities x x x has categorically
ruled that both common and preferred shares are
properly considered in determining outstanding capital
stock and the nationality composition thereof.40
We agree with petitioner and petitioners-in-intervention. The
term capital in Section 11, Article XII of the Constitution
refers only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common
shares,41 and not to the total outstanding capital stock
comprising both common and non-voting preferred shares.
The Corporation Code of the Philippines42 classifies shares as
common or preferred, thus:
Sec. 6. Classification of shares. - The shares of stock of
stock corporations may be divided into classes or series
of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as
may be stated in the articles of incorporation:
Provided, That no share may be deprived of voting
rights except those classified and issued as preferred
or redeemable shares, unless otherwise provided in
this Code: Provided, further, That there shall always be
a class or series of shares which have complete voting
rights. Any or all of the shares or series of shares may
have a par value or have no par value as may be
provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance
companies, public utilities, and building and loan
associations shall not be permitted to issue no-par value
shares of stock.
Preferred shares of stock issued by any corporation may
be given preference in the distribution of the assets of
the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as
may be stated in the articles of incorporation which are
not violative of the provisions of this Code: Provided,
That preferred shares of stock may be issued only with a
stated par value. The Board of Directors, where
authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any
series thereof: Provided, That such terms and conditions
shall be effective upon the filing of a certificate thereof
with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be
deemed fully paid and non-assessable and the holder of
such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares
without par value may not be issued for a consideration
less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received
by the corporation for its no-par value shares shall be
treated as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its shares for
the purpose of insuring compliance with constitutional
or legal requirements.
Except as otherwise provided in the articles of
incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-
voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to
vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or
other disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation
with another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this
Code; and
 8. Dissolution of the corporation.
Except as provided in the immediately preceding
paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.
Indisputably, one of the rights of a stockholder is the right to
participate in the control or management of the
corporation.43 This is exercised through his vote in the election
of directors because it is the board of directors that controls or
manages the corporation.44 In the absence of provisions in the
articles of incorporation denying voting rights to preferred
shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often
excluded from any control, that is, deprived of the right to vote
in the election of directors and on other matters, on the theory
that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders. In
fact, under the Corporation Code only preferred or redeemable
shares can be deprived of the right to vote. Common shares
cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation
restricting the right of common shareholders to vote is
invalid.47
Considering that common shares have voting rights which
translate to control, as opposed to preferred shares which
usually have no voting rights, the term capital in Section 11,
Article XII of the Constitution refers only to common shares.
However, if the preferred shares also have the right to vote in
the election of directors, then the term capital shall include
such preferred shares because the right to participate in the
control or management of the corporation is exercised through
the right to vote in the election of directors. In short, the term
capital in Section 11, Article XII of the Constitution refers
only to shares of stock that can vote in the election of
directors.
This interpretation is consistent with the intent of the framers
of the Constitution to place in the hands of Filipino citizens the
control and management of public utilities. As revealed in the
deliberations of the Constitutional Commission, capital refers
to the voting stock or controlling interest of a corporation, to
wit:
MR. NOLLEDO. In Sections 3, 9 and 15, the
Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9
and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced
with this question: Where do we base the equity
requirement, is it on the authorized capital stock, on the
subscribed capital stock, or on the paid-up capital stock
of a corporation? Will the Committee please enlighten
me on this?
MR. VILLEGAS. We have just had a long discussion
with the members of the team from the UP Law Center
who provided us a draft. The phrase that is contained
here which we adopted from the UP draft is 60
percent of voting stock.
MR. NOLLEDO. That must be based on the subscribed
capital stock, because unless declared delinquent,
unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in
another corporation, say, a corporation with 60-40
percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee
adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the
Committee.
MR. NOLLEDO. Therefore, we need additional Filipino
capital?
MR. VILLEGAS. Yes.48
xxxx
MR. AZCUNA. May I be clarified as to that portion that
was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the
Committee is the deletion of the phrase voting stock or
controlling interest.
MR. AZCUNA. Hence, without the Davide amendment,
the committee report would read: corporations or
associations at least sixty percent of whose CAPITAL is
owned by such citizens.
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we
are stuck with 60 percent of the capital to be owned by
citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the
foreigners even if they are the minority. Let us say 40
percent of the capital is owned by them, but it is the
voting capital, whereas, the Filipinos own the
nonvoting shares. So we can have a situation where
the corporation is controlled by foreigners despite
being the minority because they have the voting
capital. That is the anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the
word stock as stated in the 1973 and 1935
Constitutions is that according to Commissioner
Rodrigo, there are associations that do not have
stocks. That is why we say CAPITAL.
MR. AZCUNA. We should not eliminate the phrase
controlling interest.
MR. BENGZON. In the case of stock corporations,
it is assumed.49 (Emphasis supplied)
Thus, 60 percent of the capital assumes, or should result
in, controlling interest in the corporation. Reinforcing this
interpretation of the term capital, as referring to controlling
interest or shares entitled to vote, is the definition of a
Philippine national in the Foreign Investments Act of 1991, 50 to
wit:
SEC. 3. Definitions. - As used in this Act:
 a. The term Philippine national shall mean a citizen of
the Philippines; or a domestic partnership or association
wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of
the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a
corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code
of which one hundred percent (100%) of the capital
stock outstanding and entitled to vote is wholly owned
by Filipinos or a trustee of funds for pension or other
employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent
(60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation
and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital
stock outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the
members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order
that the corporation, shall be considered a Philippine
national. (Emphasis supplied)
In explaining the definition of a Philippine national, the
Implementing Rules and Regulations of the Foreign
Investments Act of 1991 provide:
b. Philippine national shall mean a citizen of the
Philippines or a domestic partnership or association
wholly owned by the citizens of the Philippines; or a
corporation organized under the laws of the
Philippines of which at least sixty percent [60%] of
the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a
trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent [60%] of
the fund will accrue to the benefit of the Philippine
nationals; Provided,that where a corporation its non-
Filipino stockholders own stocks in a Securities and
Exchange Commission [SEC] registered enterprise, at
least sixty percent [60%] of the capital stock
outstanding and entitled to vote of both corporations
must be owned and held by citizens of the Philippines
and at least sixty percent [60%] of the members of the
Board of Directors of each of both corporation must be
citizens of the Philippines, in order that the corporation
shall be considered a Philippine national. The control
test shall be applied for this purpose.
Compliance with the required Filipino ownership of
a corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not,
but only such stocks which are generally entitled to
vote are considered.
For stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino
equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential.
Thus, stocks, the voting rights of which have been
assigned or transferred to aliens cannot be
 considered held by Philippine citizens or Philippine
nationals.
Individuals or juridical entities not meeting the
aforementioned qualifications are considered as non-
Philippine nationals. (Emphasis supplied)
Mere legal title is insufficient to meet the 60 percent Filipino-
owned capital required in the Constitution. Full beneficial
ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The
legal and beneficial ownership of 60 percent of the outstanding
capital stock must rest in the hands of Filipino nationals in
accordance with the constitutional mandate. Otherwise, the
corporation is considered as non-Philippine national[s].
Under Section 10, Article XII of the Constitution, Congress
may reserve to citizens of the Philippines or to corporations or
associations at least sixty per centum of whose capital is
owned by such citizens, or such higher percentage as Congress
may prescribe, certain areas of investments. Thus, in numerous
laws Congress has reserved certain areas of investments to
Filipino citizens or to corporations at least sixty percent of
the capital of which is owned by Filipino citizens. Some of
these laws are: (1) Regulation of Award of Government
Contracts or R.A. No. 5183; (2) Philippine Inventors
Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro,
Small and Medium Enterprises or R.A. No. 6977; (4)
Philippine Overseas Shipping Development Act or R.A. No.
7471; (5) Domestic Shipping Development Act of 2004 or
R.A. No. 9295; (6) Philippine Technology Transfer Act of
2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or
P.D. No. 1521. Hence, the term capital in Section 11, Article
XII of the Constitution is also used in the same context in
numerous lawsreserving certain areas of investments to
Filipino citizens.
To construe broadly the term capital as the total outstanding
capital stock, including both common and non-voting preferred
shares, grossly contravenes the intent and letter of the
Constitution that the State shall develop a self-reliant and
independent national economy effectively controlled by
Filipinos. A broad definition unjustifiably disregards who owns
the all-important voting stock, which necessarily equates to
control of the public utility.
We shall illustrate the glaring anomaly in giving a broad
definition to the term capital. Let us assume that a corporation
has 100 common shares owned by foreigners and 1,000,000
non-voting preferred shares owned by Filipinos, with both
classes of share having a par value of one peso (P1.00) per
share. Under the broad definition of the term capital, such
corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since
the overwhelming majority, or more than 99.999 percent, of
the total outstanding capital stock is Filipino owned. This is
obviously absurd.
In the example given, only the foreigners holding the common
shares have voting rights in the election of directors, even if
they hold only 100 shares. The foreigners, with a minuscule
equity of less than 0.001 percent, exercise control over the
public utility. On the other hand, the Filipinos, holding more
than 99.999 percent of the equity, cannot vote in the election of
directors and hence, have no control over the public utility.
This starkly circumvents the intent of the framers of the
Constitution, as well as the clear language of the Constitution,
to place the control of public utilities in the hands of Filipinos.
It also renders illusory the State policy of an independent
national economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the
real world, and in fact exists in the present case.
Holders of PLDT preferred shares are explicitly denied of the
right to vote in the election of directors. PLDTs Articles of
Incorporation expressly state that the holders of Serial
Preferred Stock shall not be entitled to vote at any meeting
of the stockholders for the election of directors or for any
other purpose or otherwise participate in any action taken by
the corporation or its stockholders, or to receive notice of any
meeting of stockholders.51
On the other hand, holders of common shares are granted the
exclusive right to vote in the election of directors. PLDTs
Articles of Incorporation52 state that each holder of Common
Capital Stock shall have one vote in respect of each share of
such stock held by him on all matters voted upon by the
stockholders, and the holders of Common Capital Stock
shall have the exclusive right to vote for the election of
directors and for all other purposes.53
In short, only holders of common shares can vote in the
election of directors, meaning only common shareholders
exercise control over PLDT. Conversely, holders of preferred
shares, who have no voting rights in the election of directors,
do not have any control over PLDT. In fact, under PLDTs
Articles of Incorporation, holders of common shares have
voting rights for all purposes, while holders of preferred shares
have no voting right for any purpose whatsoever.
It must be stressed, and respondents do not dispute, that
foreigners hold a majority of the common shares of PLDT. In
fact, based on PLDTs 2010 General Information Sheet
(GIS),54which is a document required to be submitted annually
to the Securities and Exchange Commission,55 foreigners hold
120,046,690 common shares of PLDT whereas Filipinos hold
only 66,750,622 common shares.56 In other words, foreigners
hold 64.27% of the total number of PLDTs common shares,
while Filipinos hold only 35.73%. Since holding a majority of
the common shares equates to control, it is clear that foreigners
exercise control over PLDT. Such amount of control
unmistakably exceeds the allowable 40 percent limit on
foreign ownership of public utilities expressly mandated in
Section 11, Article XII of the Constitution.
Moreover, the Dividend Declarations of PLDT for 2009,57 as
submitted to the SEC, shows that per share the SIP 58 preferred
shares earn a pittance in dividends compared to the common
shares. PLDT declared dividends for the common shares
at P70.00 per share, while the declared dividends for the
preferred shares amounted to a measly P1.00 per share.59 So
the preferred shares not only cannot vote in the election of
directors, they also have very little and obviously negligible
dividend earning capacity compared to common shares.
As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the
par value of PLDT common shares is P5.00 per share, whereas
the par value of preferred shares is P10.00 per share. In other
words, preferred shares have twice the par value of common
shares but cannot elect directors and have only 1/70 of the
dividends of common shares. Moreover, 99.44% of the
preferred shares are owned by Filipinos while foreigners own
only a minuscule 0.56% of the preferred shares. 61 Worse,
preferred shares constitute 77.85% of the authorized capital
stock of PLDT while common shares constitute only
22.15%.62 This undeniably shows that beneficial interest in
PLDT is not with the non-voting preferred shares but with the
common shares, blatantly violating the constitutional
requirement of 60 percent Filipino control and Filipino
beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipinos in
accordance with the constitutional mandate. Full beneficial
ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is constitutionally
required for the States grant of authority to operate a public
utility. The undisputed fact that the PLDT preferred shares,
99.44% owned by Filipinos, are non-voting and earn only 1/70
of the dividends that PLDT common shares earn, grossly
violates the constitutional requirement of 60 percent Filipino
control and Filipino beneficial ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting
stock, and earn less than 60 percent of the dividends, of
PLDT. This directly contravenes the express command in
Section 11, Article XII of the Constitution that [n]o franchise,
certificate, or any other form of authorization for the operation
of a public utility shall be granted except to x x xcorporations
x x x organized under the laws of the Philippines, at least sixty
per centum of whose capital is owned by such citizens x x x.
To repeat, (1) foreigners own 64.27% of the common shares of
PLDT, which class of shares exercises the sole right to vote in
the election of directors, and thus exercise control over PLDT;
(2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus do not
exercise control over PLDT; (3) preferred shares, 99.44%
owned by Filipinos, have no voting rights; (4) preferred shares
earn only 1/70 of the dividends that common shares earn; 63 (5)
preferred shares have twice the par value of common shares;
and (6) preferred shares constitute 77.85% of the authorized
capital stock of PLDT and common shares only 22.15%. This
kind of ownership and control of a public utility is a mockery
of the Constitution.
Incidentally, the fact that PLDT common shares with a par
value of P5.00 have a current stock market value of P2,328.00
per share,64 while PLDT preferred shares with a par value
of P10.00 per share have a current stock market value ranging
from only P10.92 to P11.06 per share,65 is a glaring
confirmation by the market that control and beneficial
ownership of PLDT rest with the common shares, not with the
preferred shares.
Indisputably, construing the term capital in Section 11, Article
XII of the Constitution to include both voting and non-voting
shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a
clear abdication of the States constitutional duty to limit
control of public utilities to Filipino citizens. Such an
interpretation certainly runs counter to the constitutional
provision reserving certain areas of investment to Filipino
citizens, such as the exploitation of natural resources as well as
the ownership of land, educational institutions and advertising
businesses. The Court should never open to foreign control
what the Constitution has expressly reserved to Filipinos for
that would be a betrayal of the Constitution and of the national
interest. The Court must perform its solemn duty to defend and
uphold the intent and letter of the Constitution to ensure, in the
words of the Constitution, a self-reliant and independent
national economy effectively controlled by Filipinos.
Section 11, Article XII of the Constitution, like other
provisions of the Constitution expressly reserving to
Filipinos specific areas of investment, such as the development
of natural resources and ownership of land, educational
institutions and advertising business, is self-executing. There
is no need for legislation to implement these self-executing
provisions of the Constitution. The rationale why these
constitutional provisions are self-executing was explained
in Manila Prince Hotel v. GSIS,66 thus:
x x x Hence, unless it is expressly provided that a
legislative act is necessary to enforce a constitutional
mandate, the presumption now is that all provisions of
the constitution are self-executing. If the constitutional
provisions are treated as requiring legislation instead of
self-executing, the legislature would have the power to
ignore and practically nullify the mandate of the
fundamental law. This can be cataclysmic. That is why
the prevailing view is, as it has always been, that
. . . in case of doubt, the Constitution should be
considered self-executing rather than non-self-
executing. . . . Unless the contrary is clearly
intended, the provisions of the Constitution should
be considered self-executing, as a contrary rule
would give the legislature discretion to determine
when, or whether, they shall be effective. These
provisions would be subordinated to the will of the
lawmaking body, which could make them entirely
meaningless by simply refusing to pass the needed
implementing statute. (Emphasis supplied)
In Manila Prince Hotel, even the Dissenting Opinion of then
Associate Justice Reynato S. Puno, later Chief Justice, agreed
that constitutional provisions are presumed to be self-
executing. Justice Puno stated:
Courts as a rule consider the provisions of the
Constitution as self-executing, rather than as requiring
future legislation for their enforcement. The reason is
not difficult to discern. For if they are not treated as
self-executing, the mandate of the fundamental law
ratified by the sovereign people can be easily ignored
and nullified by Congress. Suffused with wisdom of
the ages is the unyielding rule that legislative actions
may give breath to constitutional rights but
congressional inaction should not suffocate them.
Thus, we have treated as self-executing the provisions in
the Bill of Rights on arrests, searches and seizures, the
rights of a person under custodial investigation, the
rights of an accused, and the privilege against self-
incrimination. It is recognized that legislation is
unnecessary to enable courts to effectuate constitutional
provisions guaranteeing the fundamental rights of life,
liberty and the protection of property. The same
treatment is accorded to constitutional provisions
forbidding the taking or damaging of property for public
use without just compensation. (Emphasis supplied)
Thus, in numerous cases,67 this Court, even in the absence of
implementing legislation, applied directly the provisions of the
1935, 1973 and 1987 Constitutions limiting land ownership to
Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:
x x x As the Constitution is silent as to the effects or
consequences of a sale by a citizen of his land to an
alien, and as both the citizen and the alien have violated
the law, none of them should have a recourse against the
other, and it should only be the State that should be
allowed to intervene and determine what is to be done
with the property subject of the violation. We have said
 that what the State should do or could do in such matters
is a matter of public policy, entirely beyond the scope of
judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et
al., 6 G. R. No. L-5996, June 27, 1956.) While the
legislature has not definitely decided what policy
should be followed in cases of violations against the
constitutional prohibition, courts of justice cannot go
beyond by declaring the disposition to be null and
void as violative of the Constitution. x x x (Emphasis
supplied)
To treat Section 11, Article XII of the Constitution as not self-
executing would mean that since the 1935 Constitution, or
over the last 75 years, not one of the constitutional provisions
expressly reserving specific areas of investments to
corporations, at least 60 percent of the capital of which is
owned by Filipinos, was enforceable. In short, the framers of
the 1935, 1973 and 1987 Constitutions miserably failed to
effectively reserve to Filipinos specific areas of investment,
like the operation by corporations of public utilities, the
exploitation by corporations of mineral resources, the
ownership by corporations of real estate, and the ownership of
educational institutions. All the legislatures that convened
since 1935 also miserably failed to enact legislations to
implement these vital constitutional provisions that determine
who will effectively control the national economy, Filipinos or
foreigners. This Court cannot allow such an absurd
interpretation of the Constitution.
This Court has held that the SEC has both regulatory and
adjudicative functions.69 Under its regulatory functions, the
SEC can be compelled by mandamus to perform its statutory
duty when it unlawfully neglects to perform the same. Under
its adjudicative or quasi-judicial functions, the SEC can be also
be compelled by mandamus to hear and decide a possible
violation of any law it administers or enforces when it is
mandated by law to investigate such violation.
Under Section 17(4)70 of the Corporation Code, the SEC has
the regulatory function to reject or disapprove the Articles of
Incorporation of any corporation where the required
percentage of ownership of the capital stock to be owned
by citizens of the Philippines has not been complied with as
required by existing laws or the Constitution. Thus, the SEC
is the government agency tasked with the statutory duty to
enforce the nationality requirement prescribed in Section 11,
Article XII of the Constitution on the ownership of public
utilities. This Court, in a petition for declaratory relief that is
treated as a petition for mandamus as in the present case, can
direct the SEC to perform its statutory duty under the law, a
duty that the SEC has apparently unlawfully neglected to
do based on the 2010 GIS that respondent PLDT submitted to
the SEC.
Under Section 5(m) of the Securities Regulation Code, 71 the
SEC is vested with the power and function 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. The
SEC is mandated under Section 5(d) of the same Code with the
power and function to investigate x x x the activities of
persons to ensure compliance with the laws and regulations
that SEC administers or enforces. The GIS that all corporations
are required to submit to SEC annually should put the SEC on
guard against violations of the nationality requirement
prescribed in the Constitution and existing laws. This Court
can compel the SEC, in a petition for declaratory relief that is
treated as a petition for mandamus as in the present case, to
hear and decide a possible violation of Section 11, Article XII
of the Constitution in view of the ownership structure of
PLDTs voting shares, as admitted by respondents and as stated
in PLDTs 2010 GIS that PLDT submitted to SEC.
WHEREFORE, we PARTLY GRANT the petition and rule
that the term capital in Section 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to vote in
the election of directors, and thus in the present case only to
common shares, and not to the total outstanding capital stock
(common and non-voting preferred shares). Respondent
Chairperson of the Securities and Exchange Commission
is DIRECTED to apply this definition of the term capital in
determining the extent of allowable foreign ownership in
respondent Philippine Long Distance Telephone Company, and
if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the
law.
SO ORDERED.
G.R. No. 207246
JOSE M. ROY III, Petitioner
vs.
CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND
EXCHANGE COMMISSION, and PHILIPPINE LONG DISTANCE
TELEPHONE COMP ANY,, Respondents
x-----------------------x
WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN
P. GABINETE, ANTONIO V. PESINA, JR., MODESTO MARTINY.
MAMON III, and GERARDO C. EREBAREN, Petitioners-in-Intervention,
x-----------------------x
PHILIPPINE STOCK EXCHANGE, INC. Respondent-in-Intervention,
x-----------------------x
SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES,
INC., Respondent-in-Intervention.
RESOLUTION
CAGUIOA, J.:
Before the Court is the Motion for Reconsideration dated January 19,
2017 (the Motion) filed by petitioner Jose M. Roy III (movant) seeking the
1
reversal and setting aside of the Decision dated November 22, 2016 (the
2
Decision) which denied the movant's petition, and declared that the
Securities and Exchange Commission (SEC) did not commit grave abuse
of discretion in issuing Memorandum Circular No. 8, Series of 2013
(SEC-MC No. 8) as the same was in compliance with, and in fealty to, the
decision of the Court in Gamboa v. Finance Secretary
Teves, (Gamboa Decision) and the resolution denying the Motion for
3 4
Reconsideration therein (Gamboa Resolution).
The Motion presents no compelling and new arguments to justify the
reconsideration of the Decision.
The grounds raised by movant are: (1) He has the requisite standing
because this case is one of transcendental importance; (2) The Court has
the constitutional duty to exercise judicial review over any grave abuse of
discretion by any instrumentality of government; (3) He did not rely on
an obiter dictum; and (4) The Court should have treated the petition as
the appropriate device to explain the Gamboa Decision.
The Decision has already exhaustively discussed and directly passed
upon these grounds. Movant's petition was dismissed based on both
procedural and substantive grounds.
Regarding the procedural grounds, the Court ruled that petitioners
(movant and petitioners-in-intervention) failed to sufficiently allege and
establish the existence of a case or controversy and locus standi on their
part to warrant the Court's exercise of judicial review; the rule on the
hierarchy of courts was violated; and petitioners failed to implead
indispensable parties such as the Philippine Stock Exchange, Inc. and
Shareholders' Association of the Philippines, Inc. 5
In connection with the failure to implead indispensable parties, the
Court's Decision held:
Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a
party-in-interest without whom there can be no final determination of an
action. Indispensable parties are those with such a material and direct
interest in the controversy that a final decree would necessarily affect
their rights, so that the court cannot proceed without their presence. The
interests of such indispensable parties in the subject matter of the suit
and the relief are so bound with those of the other parties that their legal
presence as parties to the proceeding is an absolute necessity and a
complete and efficient determination of the equities and rights of the
parties is not possible if they are not joined.
Other than PLDT, the petitions failed to join or implead other public utility
corporations subject to the same restriction imposed by Section 11,
Article XII of the Constitution. These corporations are in danger of losing
their franchise and property if they are found not compliant with the
restrictive interpretation of the constitutional provision under review which
is being espoused by petitioners. They should be afforded due notice and
opportunity to be heard, lest they be deprived of their property without
due process.
Not only are public utility corporations other than PLDT directly and
materially affected by the outcome of the petitions, their shareholders
also stand to suffer in case they will be forced to divest their
shareholdings to ensure compliance with the said restrictive interpretation
of the term "capital". As explained by SHAREPHIL, in five corporations
alone, more than Php158 Billion worth of shares must be divested by
foreign shareholders and absorbed by Filipino investors if petitioners'
position is upheld.
Petitioners' disregard of the rights of these other corporations and
numerous shareholders constitutes another fatal procedural flaw,
justifying the dismissal of their petitions. Without giving all of them their
day in court, they will definitely be deprived of their property without
due process of law. 6
This is highlighted to clear any misimpression that the Gamboa Decision
and Gamboa Resolution made a categorical ruling on the meaning of the
word "capital" under Section 11, Article XII of the Constitution only in
respect of, or only confined to, respondent Philippine Long Distance
Telephone Company (PLDT). Nothing is further from the truth. Indeed, a
fair reading of the Gamboa Decision and Gamboa Resolution shows that
the Court's pronouncements therein would affect all public utilities, and
not just respondent PLDT.
On the substantive grounds, the Court disposed of the issue on whether
the SEC gravely abused its discretion in ruling that respondent PLDT is
compliant with the limitation on foreign ownership under the Constitution
and other relevant laws as without merit. The Court reasoned that "in the
absence of a definitive ruling by the SEC on PLDT's compliance with the
capital requirement pursuant to the Gamboa Decision and Resolution,
any question relative to the inexistent ruling is premature."7
In resolving the other substantive issue raised by petitioners, the Court
held that:
[E]ven if the resolution of the procedural issues were conceded in favor of
petitioners, the petitions, being anchored on Rule 65, must nonetheless
fail because the SEC did not commit grave abuse of discretion
amounting to lack or excess of jurisdiction when it issued SEC-MC No.
8. To the contrary, the Court finds SEC-MC No. 8 to have been issued in
fealty to the Gamboa Decision and Resolution. 8
To belabor the point, movant's petition is not a continuation of
the Gamboa case as the Gamboa Decision attained finality on October
18, 2012, and thereafter Entry of Judgment was issued on December 11,
2012.9
As regards movant's repeated invocation of the transcendental
importance of the Gamboa case, this does not ipso facto accord locus
standi to movant. Being a new petition, movant had the burden to justify
his locus standi in his own petition. The Court, however, was not
persuaded by his justification.
Pursuant to the Court's constitutional duty to exercise judicial review, the
Court has conclusively found no grave abuse of discretion on the part of
SEC in issuing SEC-MC No. 8.
The Decision has painstakingly explained why it considered as obiter
dictum that pronouncement in the Gamboa Resolution that the
constitutional requirement on Filipino ownership should "apply uniformly
and across the board to all classes of shares, regardless of nomenclature
and category, comprising the capital of a corporation."[[9-a]] The Court
stated that:
[T]he fallo or decretal/dispositive portions of both the Gamboa Decision
and Resolution are definite, clear and unequivocal. While there is a
passage in the body of the Gamboa Resolution that might have appeared
contrary to the fallo of the Gamboa Decision x x x the definiteness and
clarity of the fallo of the Gamboa Decision must control over the obiter
dictum in the Gamboa Resolution regarding the application of the 60-40
Filipino-foreign ownership requirement to "each class of shares,
regardless of differences in voting rights, privileges and restrictions." 10
To the Court's mind and, as exhaustively demonstrated in the Decision,
the dispositive portion of the Gamboa Decision was in no way modified
by the Gamboa Resolution.
The heart of the controversy is the interpretation of Section 11, Article XII
of the Constitution, which provides: "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 corporations or associations
organized under the laws of the Philippines at least sixty per centum of
whose capital is owned by such citizens x x x."
The Gamboa Decision already held, in no uncertain terms, that what the
Constitution requires is "[fJull [and legal] beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the
voting rights x x x must rest in the hands of Filipino nationals x x
x." And, precisely that is what SEC-MC No. 8 provides, viz.: "x x x
11
For purposes of determining compliance [with the constitutional or
statutory ownership], the required percentage of Filipino ownership shall
be applied to BOTH (a) the total number of outstanding shares of stock
entitled to vote in the election of directors; AND (b) the total number of
outstanding shares of stock, whether or not entitled to vote x x x." 12
In construing "full beneficial ownership," the Implementing Rules and
Regulations of the Foreign Investments Act of 1991 (FIA-IRR) provides:
For stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals. 13
In turn, "beneficial owner" or "beneficial ownership" is defined in the
Implementing Rules and Regulations of the Securities Regulation Code
(SRC-IRR) as:
[A]ny person who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, has or shares
voting power (which includes the power to vote or direct the voting of
such security) and/or investment returns or power (which includes the
power to dispose of, or direct the disposition of such security) x x x. 14
Thus, the definition of "beneficial owner or beneficial ownership" in the
SRC-IRR, which is in consonance with the concept of "full beneficial
ownership" in the FIA-IRR, is, as stressed in the Decision, relevant in
resolving only the question of who is the beneficial owner or has
beneficial ownership of each "specific stock" of the public utility company
whose stocks are under review. If the Filipino has the voting power of
the "specific stock", i.e., he can vote the stock or direct another to vote
for him, or the Filipino has the investment power over the "specific
stock", i.e., he can dispose of the stock or direct another to dispose of it
for him, or both, i.e., he can vote and dispose of that "specific stock" or
direct another to vote or dispose it for him, then such Filipino is the
"beneficial owner" of that "specific stock." Being considered Filipino, that
"specific stock" is then to be counted as part of the 60% Filipino
ownership requirement under the Constitution. The right to the
dividends, jus fruendi - a right emanating from ownership of that "specific
stock" necessarily accrues to its Filipino "beneficial owner."
Once more, this is emphasized anew to disabuse any notion that the
dividends accruing to any particular stock are determinative of that
stock's "beneficial ownership." Dividend declaration is dictated by the
corporation's unrestricted retained earnings. On the other hand, the
corporation's need of capital for expansion programs and special reserve
for probable contingencies may limit retained earnings available for
dividend declaration. It bears repeating here that the Court in
15
the Gamboa Decision adopted the foregoing definition of the term
"capital" in Section 11, Article XII of the 1987 Constitution in express
recognition of the sensitive and vital position of public utilities both in the
national economy and for national security, so that the evident purpose of
the citizenship requirement is to prevent aliens from assuming control of
public utilities, which may be inimical to the national interest. This
16
purpose prescinds from the "benefits"/dividends that are derived from or
accorded to the particular stocks held by Filipinos vis-a-vis the stocks
held by aliens. So long as Filipinos have controlling interest of a public
utility corporation, their decision to declare more dividends for a particular
stock over other kinds of stock is their sole prerogative - an act of
ownership that would presumably be for the benefit of the public utility
corporation itself. Thus, as explained in the Decision:
In this regard, it would be apropos to state that since Filipinos own at
least 60% of the outstanding shares of stock entitled to vote directors,
which is what the Constitution precisely requires, then the Filipino
stockholders control the corporation, i.e., they dictate corporate actions
and decisions, and they have all the rights of ownership including, but not
limited to, offering certain preferred shares that may have greater
economic interest to foreign investors - as the need for capital for
corporate pursuits (such as expansion), may be good for the corporation
that they own. Surely, these "true owners" will not allow any dilution of
their ownership and control if such move will not be beneficial to them. 17
Finally, as to how the SEC will classify or treat certain stocks with voting
rights held by a trust fund that is created by the public entity whose
compliance with the limitation on foreign ownership under the
Constitution is under scrutiny, and how the SEC will determine if such
public utility does, in fact, control how the said stocks will be voted, and
whether, resultantly, the trust fund would be considered as Philippine
national or not - lengthily discussed in the dissenting opinion of Justice
Carpio - is speculative at this juncture. The Court cannot engage in
guesswork. Thus, there is need of an actual case or controversy before
the Court may exercise its power of judicial review. The movant's petition
is not that actual case or controversy.
Thus, the discussion of Justice Carpio' s dissenting opinion as to the
voting preferred shares created by respondent PLDT, their acquisition by
BTF Holdings, Inc., which appears to be a wholly-owned company of the
PLDT Beneficial Trust Fund (BTF), and whether or not it is respondent
PLDT's management that controls BTF and BTF Holdings, Inc. - all these
are factual matters that are outside the ambit of this Court's review which,
as stated in the beginning, is confined to determining whether or not the
SEC committed grave abuse of discretion in issuing SEC-MC No. 8; that
is, whether or not SEC-MC No. 8 violated the ruling of the Court
in Gamboa v. Finance Secretary Teves, and the resolution in Heirs of
18
Wilson P. Gamboa v. Finance Sec. Teves denying the Motion for
19
Reconsideration therein as to the proper understanding of "capital".
To be sure, it would be more prudent and advisable for the Court to await
the SEC's prior determination of the citizenship of specific shares of stock
held in trust - based on proven facts - before the Court proceeds to
pass upon the legality of such determination.
As to whether respondent PLDT is currently in compliance with the
Constitutional provision regarding public utility entities, the Court must
likewise await the SEC's determination thereof applying SEC-MC No. 8.
After all, as stated in the Decision, it is the SEC which is the government
agency with the competent expertise and the mandate of law to make
such determination.
In conclusion, the basic issues raised in the Motion having been duly
considered and passed upon by the Court in the Decision and no
substantial argument having been adduced to warrant the
reconsideration sought, the Court resolves to DENY the Motion
with FINALITY.
WHEREFORE, the subject Motion for Reconsideration is hereby DENIED
WITH FINALITY. No further pleadings or motions shall be entertained in
this case. Let entry of final judgment be issued immediately.
SO ORDERED.
G.R. No. 129459 September 29, 1998
SAN JUAN STRUCTURAL AND STEEL FABRICATORS,
INC., petitioner,
vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA
LEE GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY
AND DEVELOPMENT CORP., respondents.
PANGANIBAN, J.:
May corporate treasurer, by herself and without any authorization from he
board of directors, validly sell a parcel of land owned by the corporation?.
May the veil of corporate fiction be pierced on the mere ground that
almost all of the shares of stock of the corporation are owned by said
treasurer and her husband?
 The Case
These questions are answered in the negative by this Court in resolving
the Petition for Review on Certiorari before us, assailing the March 18,
1997 Decision of the Court of Appeals in CA GR CV No. 46801 which,
1 2
in turn, modified the July 18, 1994 Decision of the Regional Trial Court of
Makati, Metro Manila, Branch 63 in Civil Case No. 89-3511. The RTC
3 meet in the office of plaintiff-appellant but defendant-
dismissed both the Complaint and the Counterclaim filed by the parties.
On the other hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the appealed
decision is AFFIRMED WITH MODIFICATION ordering
defendant-appellee Nenita Lee Gruenberg to REFUND or
return to plaintiff-appellant the downpayment of
P100,000.00 which she received from plaintiff-appellant.
There is no pronouncement as to costs. 4 is still in the name of said defendant; while defendant
The petition also challenges the June 10, 1997 CA Resolution denying
reconsideration. 5
The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel
Fabricators, Inc.'s amended complaint alleged that on 14
February 1989, plaintiff-appellant entered into an
agreement with defendant-appellee Motorich Sales
Corporation for the transfer to it of a parcel of land
identified as Lot 30, Block 1 of the Acropolis Greens
Subdivision located in the District of Murphy, Quezon City.
Metro Manila, containing an area of Four Hundred
Fourteen (414) square meters, covered by TCT No.
(362909) 2876: that as stipulated in the Agreement of 14
February 1989, plaintiff-appellant paid the downpayment
in the sum of One Hundred Thousand (P100,000.00)
Pesos, the balance to be paid on or before March 2,
1989; that on March 1, 1989. Mr. Andres T. Co, president
of plaintiff-appellant corporation, wrote a letter to
defendant-appellee Motorich Sales Corporation
requesting for a computation of the balance to be paid:
that said letter was coursed through defendant-appellee's
broker. Linda Aduca, who wrote the computation of the
balance: that on March 2, 1989, plaintiff-appellant was
ready with the amount corresponding to the balance,
covered by Metrobank Cashier's Check No. 004223,
payable to defendant-appellee Motorich Sales
Corporation; that plaintiff-appellant and defendant-
appellee Motorich Sales Corporation were supposed to
appellee's treasurer, Nenita Lee Gruenberg, did not
appear; that defendant-appellee Motorich Sales
Corporation despite repeated demands and in utter
disregard of its commitments had refused to execute the
Transfer of Rights/Deed of Assignment which is
necessary to transfer the certificate of title; that defendant
ACL Development Corp. is impleaded as a necessary
party since Transfer Certificate of Title No. (362909) 2876
JNM Realty & Development Corp. is likewise impleaded
as a necessary party in view of the fact that it is the
transferor of right in favor of defendant-appellee Motorich
Sales Corporation: that on April 6, 1989, defendant ACL
Development Corporation and Motorich Sales Corporation
entered into a Deed of Absolute Sale whereby the former
transferred to the latter the subject property; that by
reason of said transfer, the Registry of Deeds of Quezon
City issued a new title in the name of Motorich Sales
Corporation, represented by defendant-appellee Nenita
Lee Gruenberg and Reynaldo L. Gruenberg, under
Transfer Certificate of Title No. 3571; that as a result of
defendants-appellees Nenita Lee Gruenberg and
Motorich Sales Corporation's bad faith in refusing to
execute a formal Transfer of Rights/Deed of Assignment,
plaintiff-appellant suffered moral and nominal damages
which may be assessed against defendants-appellees in
the sum of Five Hundred Thousand (500,000.00) Pesos;
that as a result of defendants-appellees Nenita Lee
Gruenberg and Motorich Sales Corporation's unjustified
and unwarranted failure to execute the required Transfer
of Rights/Deed of Assignment or formal deed of sale in
favor of plaintiff-appellant, defendants-appellees should
be assessed exemplary damages in the sum of One
Hundred Thousand (P100,000.00) Pesos; that by reason
of defendants-appellees' bad faith in refusing to execute a
Transfer of Rights/Deed of Assignment in favor of plaintiff-
appellant, the latter lost the opportunity to construct a
residential building in the sum of One Hundred Thousand to execute a deed of absolute sale in
(P100,000.00) Pesos; and that as a consequence of accordance with the agreement of
defendants-appellees Nenita Lee Gruenberg and February 14, 1989: and if so, whether
Motorich Sales Corporation's bad faith in refusing to plaintiff is entitled to damage.
execute a deed of sale in favor of plaintiff-appellant, it has
been constrained to obtain the services of counsel at an As to the first question, there is no
agreed fee of One Hundred Thousand (P100,000.00) evidence to show that defendant Nenita
Pesos plus appearance fee for every appearance in court Lee Gruenberg was indeed authorized by
hearings. defendant corporation. Motorich Sales, to
dispose of that property covered by T.C.T.
In its answer, defendants-appellees Motorich Sales No. (362909) 2876. Since the property is
Corporation and Nenita Lee Gruenberg interposed as clearly owned by the corporation. Motorich
affirmative defense that the President and Chairman of Sales, then its disposition should be
Motorich did not sign the agreement adverted to in par. 3 governed by the requirement laid down in
of the amended complaint; that Mrs. Gruenberg's Sec. 40. of the Corporation Code of the
signature on the agreement (ref: par. 3 of Amended Philippines, to wit:
Complaint) is inadequate to bind Motorich. The other
signature, that of Mr. Reynaldo Gruenberg, President and Sec. 40, Sale or other
Chairman of Motorich, is required: that plaintiff knew this disposition of assets.
from the very beginning as it was presented a copy of the Subject to the provisions of
Transfer of Rights (Annex B of amended complaint) at the existing laws on illegal
time the Agreement (Annex B of amended complaint) was combination and
signed; that plaintiff-appellant itself drafted the Agreement monopolies, a corporation
and insisted that Mrs. Gruenberg accept the P100,000.00 may by a majority vote of
as earnest money; that granting, without admitting, the its board of directors . . .
enforceability of the agreement, plaintiff-appellant sell, lease, exchange,
nonetheless failed to pay in legal tender within the mortgage, pledge or
stipulated period (up to March 2, 1989); that it was the otherwise dispose of all or
understanding between Mrs. Gruenberg and plaintiff- substantially all of its
appellant that the Transfer of Rights/Deed of Assignment property and assets
will be signed only upon receipt of cash payment; thus including its goodwill . . .
they agreed that if the payment be in check, they will meet when authorized by the
at a bank designated by plaintiff-appellant where they will vote of the stockholders
encash the check and sign the Transfer of Rights/Deed. representing at least two
However, plaintiff-appellant informed Mrs. Gruenberg of third (2/3) of the
the alleged availability of the check, by phone, only after outstanding capital
banking hours. stock . . .

On the basis of the evidence, the court a quo rendered
the judgment appealed from[,] dismissing plaintiff-
appellant's complaint, ruling that:
The issue to be resolved is: whether
plaintiff had the right to compel defendants
No such vote was obtained by defendant
Nenita Lee Gruenberg for that proposed
sale[;] neither was there evidence to show
that the supposed transaction was ratified
by the corporation. Plaintiff should have
been on the look out under these
 circumstances. More so, plaintiff himself
[owns] several corporations (tsn dated
August 16, 1993, p. 3) which makes him
knowledgeable on corporation matters.
Regarding the question of damages, the
Court likewise, does not find substantial
evidence to hold defendant Nenita Lee
Gruenberg liable considering that she did
not in anyway misrepresent herself to be
authorized by the corporation to sell the
property to plaintiff (tsn dated September
27, 1991, p. 8).
In the light of the foregoing, the Court
hereby renders judgment DISMISSING
the complaint at instance for lack of merit.
"Defendants" counterclaim is also
DISMISSED for lack of basis. (Decision,
pp. 7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced
hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and between:
MOTORICH SALES CORPORATION, a
corporation duly organized and existing
under and by virtue of Philippine Laws,
with principal office address at 5510 South
Super Hi-way cor. Balderama St., Pio del
Pilar. Makati, Metro Manila, represented
herein by its Treasurer, NENITA LEE
GRUENBERG, hereinafter referred to as
the TRANSFEROR;
— and —
SAN JUAN STRUCTURAL & STEEL
FABRICATORS, a corporation duly
organized and existing under and by virtue
of the laws of the Philippines, with
principal office address at Sumulong
Highway, Barrio Mambungan, Antipolo,
Rizal, represented herein by its President,
ANDRES T. CO, hereinafter referred to as
the TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel
of land identified as Lot 30 Block 1 of the ACROPOLIS
GREENS SUBDIVISION located at the District of Murphy,
Quezon City, Metro Manila, containing an area of FOUR
HUNDRED FOURTEEN (414) SQUARE METERS,
covered by a TRANSFER OF RIGHTS between JNM
Realty & Dev. Corp. as the Transferor and Motorich Sales
Corp. as the Transferee;
NOW, THEREFORE, for and in consideration of the
foregoing premises, the parties have agreed as follows:
1. That the purchase price shall be at
FIVE THOUSAND TWO HUNDRED
PESOS (P5,200.00) per square meter;
subject to the following terms:
a. Earnest money
amounting to ONE
HUNDRED THOUSAND
PESOS (P100,000.00), will
be paid upon the execution
of this agreement and shall
form part of the total
purchase price;
b. Balance shall be
payable on or before
March 2, 1989;
 2. That the monthly amortization for the
month of February 1989 shall be for the
account of the Transferor; and that the
monthly amortization starting March 21,
1989 shall be for the account of the
Transferee;
The transferor warrants that he [sic] is the lawful owner of
the above-described property and that there [are] no
existing liens and/or encumbrances of whatsoever nature;
In case of failure by the Transferee to pay the balance on
the date specified on 1, (b), the earnest money shall be
forfeited in favor of the Transferor.
That upon full payment of the balance, the
TRANSFEROR agrees to execute a TRANSFER OF
RIGHTS/DEED OF ASSIGNMENT in favor of the
TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set
their hands this 14th day of February, 1989 at Greenhills,
San Juan, Metro Manila, Philippines.
MOTORICH SALES CORPORATION SAN JUAN
STRUCTURAL & STEEL FABRICATORS
TRANSFEROR TRANSFEREE
[SGD.] [SGD.]
By. NENITA LEE GRUENBERG By: ANDRES T. CO
Treasurer President
Signed In the presence of:
[SGD.] [SGD.]
————————————— ——————————— 6
In its recourse before the Court of Appeals, petitioner insisted:
1. Appellant is entitled to compel the
appellees to execute a Deed of Absolute
Sale in accordance with the Agreement of
February 14, 1989,
2. Plaintiff is entitled to damages. 7
As stated earlier, the Court of Appeals debunked petitioner's arguments
and affirmed the Decision of the RTC with the modification that
Respondent Nenita Lee Gruenberg was ordered to refund P100,000 to
petitioner, the amount remitted as "downpayment" or "earnest money."
Hence, this petition before us.8
The Issues
Before this Court, petitioner raises the following issues:
I. Whether or not the doctrine of piercing
the veil of corporate fiction is applicable in
the instant case
II. Whether or not the appellate court may
consider matters which the parties failed
to raise in the lower court
III. Whether or not there is a valid and
enforceable contract between the
petitioner and the respondent corporation
IV. Whether or not the Court of Appeals
erred in holding that there is a valid
correction/substitution of answer in the
transcript of stenographic note[s].
V. Whether or not respondents are liable
for damages and attorney's fees 9
The Court synthesized the foregoing and will thus discuss
them seriatim as follows:
1. Was there a valid contract of sale
between petitioner and Motorich?
 2. May the doctrine of piercing the veil of
corporate fiction be applied to Motorich?
3. Is the alleged alteration of Gruenberg's
testimony as recorded in the transcript of
stenographic notes material to the
disposition of this case?
4. Are respondents liable for damages and
attorney's fees?
The Court's Ruling
The petition is devoid of merit.
First Issue: Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on
February 14, 1989, it entered through its president, Andres Co, into the
disputed Agreement with Respondent Motorich Sales Corporation, which
was in turn allegedly represented by its treasurer, Nenita Lee Gruenberg.
Petitioner insists that "[w]hen Gruenberg and Co affixed their signatures
on the contract they both consented to be bound by the terms thereof."
Ergo, petitioner contends that the contract is binding on the two
corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the Agreement,
according to which a lot owned by Motorich Sales Corporation was
purportedly sold. Such contract, however, cannot bind Motorich, because
it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its
stockholders or members. Accordingly, the property of the corporation is
not the property of its stockholders or members and may not be sold by
the stockholders or members without express authorization from the
corporation's board of directors. Section 23 of BP 68, otherwise known
10
as the Corporation Code of the Philippines, provides;
Sec. 23. The Board of Directors or Trustees. — Unless
otherwise provided in this Code, the corporate powers of
all corporations formed under this Code shall be
exercised, all business conducted and all property of such
corporations controlled and held by the board of directors
or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one
(1) year and until their successors are elected and
qualified.
Indubitably, a corporation may act only through its board of directors or,
when authorized either by its bylaws or by its board resolution, through its
officers or agents in the normal course of business. The general
principles of agency govern the relation between the corporation and its
officers or agents, subject to the articles of incorporation, bylaws, or
relevant provisions of law. Thus, this Court has held that "a corporate
11
officer or agent may represent and bind the corporation in transactions
with third persons to the extent that the authority to do so has been
conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course of
the particular business, are incidental to, or may be implied from, the
powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent
powers as the corporation has caused persons dealing with the officer or
agent to believe that it has conferred." 12
Furthermore, the Court has also recognized the rule that "persons
dealing with an assumed agent, whether the assumed agency be a
general or special one bound at their peril, if they would hold the principal
liable, to ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden of proof
is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil.
19)." Unless duly authorized, a treasurer, whose powers are limited,
13
cannot bind the corporation in a sale of its assets. 14
In the case at bar, Respondent Motorich categorically denies that it ever
authorized Nenita Gruenberg, its treasurer, to sell the subject parcel of
land. Consequently, petitioner had the burden of proving that Nenita
15
Gruenberg was in fact authorized to represent and bind Motorich in the
transaction. Petitioner failed to discharge this burden. Its offer of evidence
before the trial court contained no proof of such authority. It has not
16
shown any provision of said respondent's articles of incorporation, bylaws
or board resolution to prove that Nenita Gruenberg possessed such
power.
That Nenita Gruenberg is the treasurer of Motorich does not free
petitioner from the responsibility of ascertaining the extent of her authority
to represent the corporation. Petitioner cannot assume that she, by virtue
of her position, was authorized to sell the property of the corporation.
Selling is obviously foreign to a corporate treasurer's function, which
generally has been described as "to receive and keep the funds of the
corporation, and to disburse them in accordance with the authority given
him by the board or the properly authorized officers." 17
Neither was such real estate sale shown to be a normal business activity
of Motorich. The primary purpose of Motorich is marketing, distribution,
export and import in relation to a general merchandising
business. Unmistakably, its treasurer is not cloaked with actual or
18
apparent authority to buy or sell real property, an activity which falls way
beyond the scope of her general authority.
Art. 1874 and 1878 of the Civil Code of the Philippines provides:
Art. 1874. When a sale of a piece of land or any interest
therein is through an agent, the authority of the latter shall
be in writing: otherwise, the sale shall be void.
Art. 1878. Special powers of attorney are necessary in the
following case:
xxx xxx xxx
(5) To enter any contract by which the ownership of an
immovable is transmitted or acquired either gratuitously or
for a valuable consideration;
xxx xxx xxx.
Petitioner further contends that Respondent Motorich has ratified said
contract of sale because of its "acceptance of benefits," as evidenced by
the receipt issued by Respondent Gruenberg. Petitioner is clutching at
19
straws.
As a general rule, the acts of corporate officers within the scope of their
authority are binding on the corporation. But when these officers exceed
their authority, their actions "cannot bind the corporation, unless it has
ratified such acts or is estopped from disclaiming them." 20
In this case, there is a clear absence of proof that Motorich ever
authorized Nenita Gruenberg, or made it appear to any third person that
she had the authority, to sell its land or to receive the earnest money.
Neither was there any proof that Motorich ratified, expressly or impliedly,
the contract. Petitioner rests its argument on the receipt which, however,
does not prove the fact of ratification. The document is a hand-written
one, not a corporate receipt, and it bears only Nenita Gruenberg's
signature. Certainly, this document alone does not prove that her acts
were authorized or ratified by Motorich.
Art. 1318 of the Civil Code lists the requisites of a valid and perfected
contract: "(1) consent of the contracting parties; (2) object certain which is
the subject matter of the contract; (3) cause of the obligation which is
established." As found by the trial court and affirmed by the Court of
21
Appeals, there is no evidence that Gruenberg was authorized to enter
22
into the contract of sale, or that the said contract was ratified by Motorich.
This factual finding of the two courts is binding on this Court. As the
23
consent of the seller was not obtained, no contract to bind the obligor was
perfected. Therefore, there can be no valid contract of sale between
petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent
Gruenberg to sell its parcel of land, we hold that the February 14, 1989
Agreement entered into by the latter with petitioner is void under Article
1874 of the Civil Code. Being inexistent and void from the beginning, said
contract cannot be ratified. 24
Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich should
be pierced, because the latter is a close corporation. Since "Spouses
Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or almost all
or 99.866% to be accurate, of the subscribed capital stock" of Motorich,
25
petitioner argues that Gruenberg needed no authorization from the board
to enter into the subject contract. It adds that, being solely owned by the
26
Spouses Gruenberg, the company can treated as a close corporation
which can be bound by the acts of its principal stockholder who needs no
specific authority. The Court is not persuaded.
First, petitioner itself concedes having raised the issue belatedly, not 27
having done so during the trial, but only when it filed its sur-rejoinder
before the Court of Appeals. Thus, this Court cannot entertain said
28
issue at this late stage of the proceedings. It is well-settled the points of
law, theories and arguments not brought to the attention of the trial court
need not be, and ordinarily will not be, considered by a reviewing court,
as they cannot be raised for the first time on appeal. Allowing petitioner
29
to change horses in midstream, as it were, is to run roughshod over the
basic principles of fair play, justice and due process.
Second, even if the above mentioned argument were to be addressed at
this time, the Court still finds no reason to uphold it. True, one of the
advantages of a corporate form of business organization is the limitation
of an investor's liability to the amount of the investment. This feature
30
flows from the legal theory that a corporate entity is separate and distinct
from its stockholders. However, the statutorily granted privilege of a
corporate veil may be used only for legitimate purposes. On equitable
31
considerations, the veil can be disregarded when it is utilized as a shield
to commit fraud, illegality or inequity; defeat public convenience; confuse
legitimate issues; or serve as a mere alter ego or business conduit of a
person or an instrumentality, agency or adjunct of another corporation. 32
Thus, the Court has consistently ruled that "[w]hen the fiction is used as a
means of perpetrating a fraud or an illegal act or as vehicle for the
evasion of an existing obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally the perpetration of
knavery or crime, the veil with which the law covers and isolates the
corporation from the members or stockholders who compose it will be
lifted to allow for its consideration merely as an aggregation of
individuals."33
We stress that the corporate fiction should be set aside when it becomes
a shield against liability for fraud, illegality or inequity committed on third
persons. The question of piercing the veil of corporate fiction is
essentially, then, a matter of proof. In the present case, however, the
Court finds no reason to pierce the corporate veil of Respondent
Motorich. Petitioner utterly failed to establish that said corporation was
formed, or that it is operated, for the purpose of shielding any alleged
fraudulent or illegal activities of its officers or stockholders; or that the
said veil was used to conceal fraud, illegality or inequity at the expense of
third persons like petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it is
not. Section 96 of the Corporation Code defines a close corporation as
follows:
Sec. 96. Definition and Applicability of Title. — A close
corporation, within the meaning of this Code, is one
whose articles of incorporation provide that: (1) All of the
corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than
a specified number of persons, not exceeding twenty (20);
(2) All of the issued stock of all classes shall be subject to
one or more specified restrictions on transfer permitted by
this Title; and (3) The corporation shall not list in any stock
exchange or make any public offering of any of its stock of
any class. Notwithstanding the foregoing, a corporation
shall be deemed not a close corporation when at least
two-thirds (2/3) of its voting stock or voting rights is owned
or controlled by another corporation which is not a close
corporation within the meaning of this Code. . . . .
The articles of incorporation of Motorich Sales Corporation does not
34
contain any provision stating that (1) the number of stockholders shall not
exceed 20, or (2) a preemption of shares is restricted in favor of any
stockholder or of the corporation, or (3) listing its stocks in any stock
exchange or making a public offering of such stocks is prohibited. From
its articles, it is clear that Respondent Motorich is not a close
corporation. Motorich does not become one either, just because
35
Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its
subscribed capital stock. The "[m]ere ownership by a single stockholder
or by another corporation of all or capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate
personalities." So, too, a narrow distribution of ownership does not, by
36
itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of
Appeals wherein the Court ruled that ". . . petitioner corporation is
37
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." But the factual
38
milieu in Dulay is not on all fours with the present case. In Dulay, the sale
of real property was contracted by the president of a close corporation
with the knowledge and acquiescence of its board of directors. In the 39
present case, Motorich is not a close corporation, as previously
discussed, and the agreement was entered into by the corporate
treasurer without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where "an
action by a director, who singly is the controlling stockholder, may be
considered as a binding corporate act and a board action as nothing
more than a mere formality." The present case, however, is not one of
40
them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own Q So, you signed in your capacity as the
"almost 99.866%" of Respondent Motorich. Since Nenita is not the sole
41
treasurer?
controlling stockholder of Motorich, the aforementioned exception does
not apply. Granting arguendo that the corporate veil of Motorich is to be [A] Yes, sir.
disregarded, the subject parcel of land would then be treated as conjugal
property of Spouses Gruenberg, because the same was acquired during Q Even then you kn[e]w all along that you
their marriage. There being no indication that said spouses, who appear [were] not authorized?
to have been married before the effectivity of the Family Code, have
agreed to a different property regime, their property relations would be
A Yes, sir.
governed by conjugal partnership of gains. As a consequence, Nenita
42

Gruenberg could not have effected a sale of the subject lot because
"[t]here is no co-ownership between the spouses in the properties of the Q You stated on direct examination that
conjugal partnership of gains. Hence, neither spouse can alienate in favor you did not represent that you were
of another his or interest in the partnership or in any property belonging to authorized to sell the property?
it; neither spouse can ask for a partition of the properties before the
partnership has been legally dissolved." 43 A Yes, sir.

Assuming further, for the sake of argument, that the spouses' property Q But you also did not say that you were
regime is the absolute community of property, the sale would still be not authorized to sell the property, you did
invalid. Under this regime, "alienation of community property must have not tell that to Mr. Co, is that correct?
the written consent of the other spouse or he authority of the court
without which the disposition or encumbrance is void." Both 44 A That was not asked of me.
requirements are manifestly absent in the instant case.
Q Yes, just answer it.
Third Issue: Challenged Portion of TSN Immaterial
A I just told them that I was the treasurer
Petitioner calls our attention to the following excerpt of the transcript of of the corporation and it [was] also the
stenographic notes (TSN): president who [was] also authorized to
sign on behalf of the corporation.
Q Did you ever represent to Mr. Co that
you were authorized by the corporation to Q You did not say that you were not
sell the property? authorized nor did you say that you were
authorized?
A Yes, sir. 45

A Mr. Co was very interested to purchase

Petitioner claims that the answer "Yes" was crossed out, and, in its place
was written a "No" with an initial scribbled above it. This, however, is
46
insufficient to prove that Nenita Gruenberg was authorized to represent
Respondent Motorich in the sale of its immovable property. Said excerpt
be understood in the context of her whole testimony. During her cross-
examination. Respondent Gruenberg testified:
the property and he offered to put up a
P100,000.00 earnest money at that time.
That was our first meeting. 47
Clearly then, Nenita Gruenberg did not testify that Motorich had
authorized her to sell its property. On the other hand, her testimony
demonstrates that the president of Petitioner Corporation, in his great
desire to buy the property, threw caution to the wind by offering and
paying the earnest money without first verifying Gruenberg's authority to
sell the lot.
Fourth Issue:
Damages and Attorney's Fees
Finally, petitioner prays for damages and attorney's fees, alleging that
"[i]n an utter display of malice and bad faith, respondents attempted and
succeeded in impressing on the trial court and [the] Court of Appeals that
Gruenberg did not represent herself as authorized by Respondent
Motorich despite the receipt issued by the former specifically indicating
that she was signing on behalf of Motorich Sales Corporation.
Respondent Motorich likewise acted in bad faith when it claimed it did not
authorize Respondent Gruenberg and that the contract [was] not binding,
[insofar] as it [was] concerned, despite receipt and enjoyment of the
proceeds of Gruenberg's act." Assuming that Respondent Motorich was
48
not a party to the alleged fraud, petitioner maintains that Respondent
Gruenberg should be held liable because she "acted fraudulently and in
bad faith [in] representing herself as duly authorized by [R]espondent
[C]orporation." 49
As already stated, we sustain the findings of both the trial and the
appellate courts that the foregoing allegations lack factual bases. Hence,
an award of damages or attorney's fees cannot be justified. The amount
paid as "earnest money" was not proven to have redounded to the benefit
of Respondent Motorich. Petitioner claims that said amount was
deposited to the account of Respondent Motorich, because "it was
deposited with the account of Aren Commercial c/o Motorich Sales
Corporation." Respondent Gruenberg, however, disputes the allegations
50
of petitioner. She testified as follows:
Q You voluntarily accepted the
P100,000.00, as a matter of fact, that was
encashed, the check was encashed.
A Yes. sir, the check was paid in my name
and I deposit[ed] it.
Q In your account?
A Yes, sir. 51
In any event, Gruenberg offered to return the amount to petitioner
". . . since the sale did not push through."52
Moreover, we note that Andres Co is not a neophyte in the world of
corporate business. He has been the president of Petitioner Corporation
for more than ten years and has also served as chief executive of two
other corporate entities. Co cannot feign ignorance of the scope of the
53
authority of a corporate treasurer such as Gruenberg. Neither can he be
oblivious to his duty to ascertain the scope of Gruenberg's authorization
to enter into a contract to sell a parcel of land belonging to Motorich.
Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and
fails to persuade the Court. Indubitably, petitioner appears to be the
victim of its own officer's negligence in entering into a contract with and
paying an unauthorized officer of another corporation.
As correctly ruled by the Court of Appeals, however, Nenita Gruenberg
should be ordered to return to petitioner the amount she received as
earnest money, as "no one shall enrich himself at the expense of
another." a principle embodied in Article 2154 of Civil Code. Although
54 55
there was no binding relation between them, petitioner paid Gruenberg
on the mistaken belief that she had the authority to sell the property of
Motorich. Article 2155 of Civil Code provides that "[p]ayment by reason
56
of a mistake in the contruction or application of a difficult question of law
may come within the scope of the preceding article."
WHEREFORE, the petition is hereby DENIED and the assailed Decision
is AFFIRMED.
SO ORDERED.
[G.R. No. 131680. September 14, 2000]
SUBIC BAY METROPOLITAN AUTHORITY,
RICHARD J. GORDON, FERDINAND M.
ARISTORENAS, MANUEL W. QUIJANO and
RAYMOND P. VENTURA, petitioners,
vs. UNIVERSAL INTERNATIONAL GROUP OF
 TAIWAN, UIG INTERNATIONAL
DEVELOPMENT CORPORATION and SUBIC
BAY GOLF AND COUNTRY CLUB,
Inc., respondents.
DECISION
PANGANIBAN, J.:
A stipulation authorizing a party to extrajudicially
rescind a contract and to recover possession of the
property in case of contractual breach is lawful. But when
a valid objection is raised, a judicial determination of the
issue is still necessary before a takeover may be
allowed. In the present case, however, respondents do
not deny that there was such a breach of the Agreement;
they merely argue that the stipulation allowing a
rescission and a recovery of possession is void. Hence,
the other party may validly enforce such stipulation.
The Case
Before us is a Petition under Rule 45 of the Rules of
[1]
Court assailing the December 3, 1997 Decision[2]of the
Court of Appeals (CA) in CA-GR SP No. 45501. The
decretal portion of the CA Decision reads as follows:
WHEREFORE, premises considered, the Petition is, as it is 
hereby, DISMISSED for lack of merit, and  The Motion to Dismiss filed by Richard J. Gordon is [g]ranted
certiorari DENIED. The Orders of the respondent court both  insofar as the suit against him is concerned in his private or
dated 03 October 1997 hereby STAND.[3]
The first Order[4] of the Regional Trial Court (RTC) of
Olongapo City (Branch 73),[5] which was affirmed by the
appellate court, granted herein respondents application
for a writ of preliminary mandatory and prohibitory
injunction in this wise:[6]
WHEREFORE, premises considered, the defendants, their 
agents, officers and employees, and all persons acting in their 
behalf are directed to restore peacefully to the plaintiffs all 
possession of the golf course, clubhouse, offices and other 
appurtenances subject of the Lease and Development 
Agreement between UIG Taiwan and the SBMA; and the said 
defendants, and their agents, officers [and] employees to 
refrain [from] obstructing or meddling in the operation and 
management thereof or x x x otherwise committing acts 
inimical to the interest of plaintiffs in the management or 
operation of the same, until the parties may be heard on the 
merits of the case.
The Injunction bond is fixed at One Million Pesos 
(P1,000,000.00) in cash or surety bond provided by a surety 
company of reputable solvency.
The second RTC Order, also dated October 3, 1997,
disposed of petitioners Motion to Dismiss as follows:[7]
WHEREFORE, and the foregoing p[re]mises considered, 
Defendants Amended and Consolidated Motion To Dismiss is 
hereby DENIED for lack of merit.
 
 
personal capacity. He shall, however, remain as defendant in 
his official capacity.
 The Facts (b) If an event of default shall have occurred and be 
continuing, Landlord may, in its sole discretion;
The undisputed facts are summarized by the Court of
Appeals as follows:[8] (i) Terminate this Lease thirty (30) days after the expiration of 
any period granted hereunder to cure any Event of Default and 
On 25 May 1995, a Lease and Development Agreement was  retain all rent and other amounts previously paid by tenant and 
executed by respondent UIG and petitioner SBMA under  its Subsidiaries.Thereafter, Landlord may immediately reenter,
which respondent UIG shall lease from petitioner SBMA the  renovate or relet all or part of the Property to others, and 
Binictican Golf Course and appurtenant facilities thereto to be  cancel all rights and privileges granted to Tenant and its 
transformed into a world class 18­hole golf course, golf  Subsidiaries without any restriction on recovery by Landlord 
club/resort, commercial tourism and residential center. The  for rents, fees and damages owned by Tenant and its 
contract in pertinent part contains pre­termination clauses,  Subsidiaries.
which provide:
On 4 February 1997, Petitioner SBMA sent a letter to private 
 Section 22.   Default respondent UIG calling its attention to its alleged several 
contractual violations in view of private respondent UIGs 
(a) The following acts and omissions shall constitute default  failure to deliver its various contractual obligations, primarily 
by Tenant (each an Event of Default): its failure to complete the rehabilitation of the Golf Course in 
time for the APEC Leaders Summit, and to pay accumulated 
xxxxxxxxx lease rentals and utilities, and to post the required performance 
bond. Respondent UIG, in its letter of 7 February 1997, 
(ii) Tenant or any of its Subsidiaries shall commit a material  interposed as an excuse the alleged default of its main 
breach or violation of any of the conditions, covenants or  contractor FF Cruz, resulting in their filing of suit against the 
agreements herein made by Tenant or such Subsidiary (other  latter, and committed itself to comply with its obligations 
than those described in Sections 22.2 [a] [l] and such violation  within a few days. Private respondent UIG, however, failed to 
or failure shall continue for thirty (30) days after notice from  comply with its undertakings. On 7 March 1997, petitioner 
the Landlord, or, at Landlords sole discretion, sixty (60) days if SBMA sent a letter to private respondent UIG declaring the 
such violations or failure is reasonably susceptible of cure  latter in default of its contractual obligations to SBMA under 
during such 60 day period and Tenant or such Subsidiary  Section 22.1 of the Lease and Development Agreement and 
begins and diligently pursues to completion such cure within  required it to show cause why petitioner SBMA should not 
thirty (30) days of the initial notice from Landlord; pre­terminate the agreement. Private respondents paid the 
rental arrearages but the other obligations remained 
xxxxxxxxx unsatisfied.
On 8 September 1997, a letter of pre­termination was served  While it conceded that the law allowed extrajudicial
by petitioner SBMA requiring private respondent UIG to  rescission of a contract, it ruled that no rationalization
vacate the premises. On 12 September 1997, petitioner served  was possible for the extrajudicial taking of possession. It
the formal notice of closure of Subic Bay Golf Course and  reasoned that no one may take the law into his own
took over possession of the subject premises. On even date,  hands. To hold otherwise would be productive of nothing
private respondent filed a complaint against petitioner SBMA  but mischief and chaos.
for Injunction and Damages with prayer for a writ of  It also rejected petitioners reliance on Consing v.
temporary restraining order and writ of preliminary  Jamandre,[11] in which the Supreme Court allowed a contractual
injunction. On 3 October 1997, respondent court issued the  stipulation giving the lessor the right to take possession of the leased
property without need of court order. It explained that Consing was a judicial
two assailed orders subject of the petition. aberration, not common but not unknown in the body of our jurisprudence,
which lays down a ruling contrary to the teaching of the greater mass of
cases.[12]
Ruling of the Court of Appeals Furthermore, it held that the issuance of the Writ of
Preliminary Injunction did not dispose of the main
The Court of Appeals upheld the capacity to sue of issue. Concluding, it observed that we cannot and should
Respondent Universal International Group of Taiwan not send the message to foreigners who do business
(UIG) because petitioners, having entered into a Lease here that we are a group of jingoists who cannot look
Development Agreement (LDA) with it, were estopped beyond our narrow interests and must look at every
from questioning its standing. It also held that stranger with a wary eye and treat them with uneven
Respondents UIG International Development hands.
Corporation (UIGDC) and Subic Bay Golf and Country Disagreeing with the above judgment, petitioners
Club, Inc., (SBGCCI) were real parties in interest elevated the matter to this Court.[13]
because they had made substantial investments in the
venture and had been in possession of the property
when Subic Bay Metropolitan Authority (SBMA) The Issues
rescinded the LDA.
Likewise, it debunked petitioners submission that In its Memorandum, Petitioner SBMA submits the
Section 21 of RA 7227[9] was a blanket proscription following issues for our consideration:[14]
against the issuance of any and all injunctive relief[s] I.
against SBMA. It said that those actions which are
removed from the stated objectives of the corporate Whether or not the respondent court committed a 
entity x x x cannot be placed beyond the pale of reversible error in ruling that petitioners action of extra­
prohibitory writs.[10] judicially recovering the possession of the subject 
 premises is supposedly illegal [as it] runs counter to the  Whether or not respondent court committed a reversible 
established law and [the] applicable decisions of the  error in departing from the accepted and usual course of 
Supreme Court on the matter. judicial proceedings by sanctioning the illegal procedure 
of taking possession of the subject premises from 
II.
petitioner SBMA and transferring it into the hands of the 
private respondents, although the rights of the latter ha[d] 
Whether or not the respondent court committed a reversible 
not yet been clearly established.
error in ruling that:
VI.
(a) The trial court ha[d] jurisdiction over the nature and 
subject matter of the case despite the fact that the suit filed by  Whether or not respondent court committed a reversible 
private respondents is essentially an ejectment case, and error by departing from the accepted and usual course of 
judicial proceedings by sustaining the grant of injunctive 
(b) The trial court ha[d] authority to issue the  relief which effectively prejudged the merits of the main 
questioned injunctive relief despite the express prohibition  case.
under Section 21 of R.A. 7227
VII.
III.
Whether or not respondent court committed a reversible 
Whether or not respondent court committed a reversible  error by departing from the accepted and usual course of 
error in ruling that private respondents ha[d]  judicial proceedings by sustaining the grant of injunctive 
the capacity to sue and possess material interest to  relief in favor of the private respondents although the latter
institute an action against petitioners. [we]re clearly not entitled thereto as they came before the 
IV.
courts with unclean hands.

VIII.
Whether or not the respondent court committed a 
reversible error by sanctioning departure by the trial court  Whether or not in the event of a no reversible error 
from the accepted and usual course of judicial proceedings judgment on the questioned decision of the respondent 
by failing to make any ruling on the essential elements of  court, this Honorable Division of the Supreme Court 
injunctive relief consisting of: (1) a  might modify or even reverse the doctrines and principles 
clear and unmistakable right and (2) irreparable  of law laid down by the Supreme Court in several leading 
damage on the part of the private respondents. cases, in violation of Section 4, Article VIII of the 1987 
V.
Philippine Constitution.
 IX. The Petition is partly meritorious. The CA correctly
affirmed the denial of the Motion to Dismiss, but erred in
Whether or not in the event of a no reversible error  sustaining the Writ of Preliminary Mandatory and
judgment, this Honorable Division of the Supreme Court  Prohibitory Injunction.
might unwittingly cause great loss or irreparable damage 
to the government because such a ruling tend[ed] to send a
wrong signal that Philippine Courts [would] reward rather First Issue:
than punish foreign investors who miserably failed to 
comply with their contractual commitments to develop 
vital government assets. Denial of the Motion to Dismiss

Distilling the above-quoted assignment of errors, we
find two main issues before us: (a) whether the denial of
petitioners Motion to Dismiss was correct, and (b)
whether the issuance of the Writ of Preliminary
Mandatory and Prohibitory Injunction was proper.
Under the first issue, the Court shall resolve (1)
whether Respondent UIG has the capacity to sue, (2)
whether Respondents UIGDC and SBGCCI are real
parties in interest, and (3) whether the RTC has
jurisdiction over the suit.
Under the second issue, the Court shall determine
these questions: (1) whether the Writ of Injunction
against SBMA issued by the trial court contravenes
Section 21 of RA 7227; (2)whether respondents have
established their entitlement to the Writ; and (3) whether
SBMAs rescission of the LDA and takeover of the
property are allowed by law.
The Courts Ruling
In its amended Motion to Dismiss filed before the
RTC, petitioners contended that UIG had no capacity to
sue, and that UIGDC and SBGCCI had no material
interest in the present case. Both the appellate and the
trial courts rejected these contentions. Reiterating the
arguments before us, petitioners add that the RTC had
no jurisdiction over the nature of the case.
(a) Respondents Capacity to Sue
Petitioners contend that UIG does not have the
capacity to sue because it is a foreign non-resident
corporation not licensed by the Securities and Exchange
Commission to do business in the Philippines. They
contend that the capacity to sue is conferred by law and
not by the parties.
As a general rule, unlicensed foreign non-resident
corporations cannot file suits in the Philippines. Section
133 of the Corporation Code specifically provides:
Sec. 133. No foreign corporation transacting business in the  existence and capacity. The principle will be applied to prevent
Philippines without a license, or its successors or assigns, shall a person contracting with a foreign corporation from later 
be permitted to maintain or intervene in any action, suit or  taking advantage of its noncompliance with the statutes, 
proceeding in any court or administrative agency of the  chiefly in cases where such person has received the benefits of 
Philippines, but such corporation may be sued or proceeded  the contract x x x.
against before Philippine courts or administrative tribunals on 
any valid cause of action recognized under Philippine laws. This doctrine was initiated as early as 1924 in Asia
Banking Corporation v. Standard Products[18] and
A corporation has legal status only within the state or reiterated in Georg Grotjahn GMBH v.
territory in which it was organized. For this reason, a Isnani and Communication Materials and Design v. CA.
[19]

corporation organized in another country has no [20]

personality to file suits in the Philippines. In order to
subject a foreign corporation doing business in the
country to the jurisdiction of our courts, it must acquire a
license from the SEC and appoint an agent for service of
process.[15] Without such license, it cannot institute a suit
in the Philippines.
It should be stressed, however, that the licensing
requirement was never intended to favor domestic
corporations who enter into solitary transactions with
unwary foreign firms and then repudiate their obligations
simply because the latter are not licensed to do business
in this country.[16] After contracting with a foreign
corporation, a domestic firm is estopped from denying
the formers capacity to sue. Hence, in Merril Lynch
Futures v. CA,[17] the Court ruled:
In Antam Consolidated v. CA,[21] the Court also rejected
a similar argument and noted that it is a common ploy of
defaulting local companies which are sued by unlicensed
foreign companies not engaged in business in the
Philippines to invoke lack of capacity to sue.
In this case, SBMA is estopped from questioning the
capacity to sue of UIG. In entering into the LDA with UIG,
SBMA effectively recognized its personality and capacity
to institute the suit before the trial court.
(b) Material Interest of
SBGCCI and UIGDC
Section 2, Rule 3 of the 1997 Rules of Court, defines
a real party in interest in this manner:

The rule is that a party is estopped to challenge the personality  Sec. 2. Parties in Interest. ­ A real party in interest is the party 
of a corporation after having acknowledged the same by  who stands to be benefited or injured by the judgment of the 
entering into a contract with it. And the doctrine of estoppel to  suit, or the party entitled to the avails of the suit. Unless 
deny corporate existence applies to foreign as well as to  otherwise authorized by law or these Rules, every action must 
domestic corporations; one who has dealt with a corporation of be prosecuted or defended in the name of the real party in 
foreign origin as a corporate entity is estopped to deny its  interest.[22]
 SBMA contends that UIGDC is not a real party in
interest because it was not privy to the LDA between UIG
and SBMA. It further alleges that it did not approve the
assignment to UIGDC of UIGs rights thereunder. In like
manner, SBGCCI had no interest in the LDA because it
only derived its rights from the Development Agreement
it had entered into with UIGDC.
We are not persuaded. The CA made a factual
finding that UIGDC and SBGCCI were in possession of
the property when SBMA took over. Moreover, it also
found that they had already made substantial
investments in the project. We find no reason at this time
to justify a different conclusion. In view of these
circumstances, we agree with the CA that UIGDC and
SBGCCI stand to be benefitted or injured by the present
suit and should be deemed real parties in interest.[23]
SBMAs contention -- that it had not approved UIGs
assignment of rights to UIGDC -- is not necessarily bereft
of merit, however. SBMA should raise this issue, not now
but in appropriate proceedings before the trial court.
(c) Jurisdiction Over the Subject Matter
Petitioners also argue that the RTC had no
jurisdiction over the case, which was allegedly an
ejectment suit cognizable by municipal trial courts. They
add that the Complaint demanded that respondents be
restored to the possession of the subject leased
premises.
We disagree. A close scrutiny of the amended
Complaint reveals that it sought to enjoin petitioners from
rescinding the contract and taking over the
property. While possession was a necessary
consequence of the suit, it was merely incidental. The
main issue was whether SBMA could rescind the
Agreement. Because it was a dispute that was incapable
of pecuniary estimation, it was within the jurisdiction of
the RTC.[24]
Second Issue:
Issuance of the Writ of Injunction
(a) Present Writ of Injunction Not Barred by RA 7227
Petitioners contend that the RTC was barred from
issuing a writ of injunction in this case, pursuant to
Section 21 of RA 7227 which provides as follows:
Sec. 21. Injunction and Restraining Order. ­­ The 
implementation of the projects for the conversion into 
alternative productive uses of the military reservations is 
urgent and necessary and shall not be restrained or enjoined 
except by an order issued by the Supreme Court of the 
Philippines.[25]
We are not persuaded. We agree with the CA that the
present provision is not a blanket prohibition of the
issuance of an injunctive relief against any SBMA
action. Section 21 of RA 7227 prohibits only such court
orders which restrain the implementation of the projects
for the conversion into alternative productive uses of the
military reservations.
 The Writ issued in this case did not restrain or enjoin
the implementation of any of SBMAs conversion
projects. In fact, it allowed UIG to proceed with the
development of the golf course pursuant to the LDA. It
merely restrained SBMA from taking over the golf
course. Clearly, the assailed RTC Order did not seek to
delay or hamper the conversion of the former naval base
into civilian uses.
Moreover, the assailed Writ of Preliminary Injunction
was issued in connection with a dispute pertaining to
the correct interpretation of the LDA. To divest the trial
court of that authority is to give SBMA unhampered
discretion to disregard its contractual obligations under
the guise of implementing its projects. Indeed, Section 21
of RA 7227 should not bar judicial scrutiny of
irregularities allegedly committed by SBMA.[26]
(b) Right of Respondents to Injunctive Relief
A writ of mandatory injunction requires the
performance of a particular act[27] and is granted only
upon a showing of the following requisites:
1. The invasion of the right is material and substantial;
2. The right of a complainant is clear and unmistakable.
3. There is an urgent and permanent necessity for the writ to 
prevent serious damage.[28]
Because it commands the performance of an act, a
mandatory injunction does not preserve the status
quo[29] and is thus more cautiously regarded than a mere
prohibitive injunction.Accordingly, the issuance of the
former is justified only in a clear case, free from doubt
and dispute. Necessarily, the applicant has the burden of
showing that it is entitled to the writ.
In this case, the first assailed RTC Order dated
October 3, 1997 was effectively a preliminary mandatory
injunction because it directed [herein petitioners] to
restore peacefully to the [herein respondents] possession
of the golf course, clubhouse, offices and other
appurtenances subject of the Lease and Development
Agreement between UIG Taiwan and the SBMA. In
addition, it was also a prohibitive injunction because it
restrained petitioners from obstructing or meddling in the
operation and management of the disputed property.
The records, however, do not show that herein
respondents were indubitably entitled to a mandatory
writ. Under the LDA, we find no proof of a clear and
unmistakable right on their part to continue the operation
and the development of the golf course. Indeed, the RTC
based its assailed Order mainly on the ground that
SBMAs takeover was not legally justifiable. Thus, it ruled
in this wise:[30]
From all the foregoing, the Court is of the considered view that
the forcible take over [by] the [petitioners] of the golf course 
and its appurtenances is not legally justifiable. Based on the 
evidence adduced during the hearing, the [respondents] have 
established a clear right to continue the operation and 
management of the golf course, and x x x continued 
withholding of the premises by the [petitioners] will result to 
irreparable damages to [respondents].
 Furthermore, the CA did not make any categorical
ruling that respondents established a clear and
unmistakable right to the Writ. Like the RTC, it
emphasized that there was no rationalization for SBMAs
extrajudicial takeover of the disputed property. In other
words, both the CA and the trial court effectively ruled
that respondents are entitled to the Writ of Mandatory
Injunction because SBMAs action was not in accordance
with law.
On this point, we disagree with the trial and the
appellate courts. As we will now show, there is legal
basis for petitioners rescission of the contract and
takeover of the property without any court order.
(c) Legality of SBMAs Rescission of the LDA and
Takeover of the Property
Because of UIGs failure to comply with several of its
contractual undertakings, SBMA rescinded the LDA and
took over the possession, the operation and the
management of the property without any judicial
imprimatur. In doing so, it relied on the provisions of the
LDA, which we quoted earlier.
The Court of Appeals held that the extrajudicial
rescission of the LDA was lawful, but that the
extrajudicial takeover of the property was not. It relied
on Nera v. Vacante,[31] in which the Supreme Court held:
x x x. A stipulation entitling one party to take possession of the
land and building if the other party violates the contract does  the CA erred in holding that Zulueta, being a later case,
not ex proprio vigore confer upon the former the right to take  overturned Consing. The CA logic is flawed, because
possession thereof if objected to without judicial intervention 
and determination.
It also cited Zulueta v. Mariano,[32] which reiterated the
above-quoted ruling. That case was purportedly
applicable because it involved a similar contractual
stipulation, which reads as follows:
12. That upon failure of the BUYER to fulfill any of the 
conditions herein stipulated, BUYER automatically and 
irrevocably authorizes OWNER to recover extra­judicially, 
physical possession of the land, building and other 
improvements which are subject of this contract, and to take 
possession also extra­judicially whatever personal properties 
may be found within the aforesaid premises from the date of 
said failure to answer for whatever unfulfilled monetary 
obligations BUYER may have with OWNER; and this contract
shall be considered as without force and effect also from said 
date; x x x.
Because Zulueta was a subsequent Decision, it
supposedly overturned the diametrically opposed earlier
ruling in Consing v. Jamandre,[33] in which the Supreme
Court upheld a contractual stipulation authorizing the
sub-lessor to take possession of the leased premises in
case of contractual breach. As earlier noted, the CA also
ruled that Consing was a judicial aberration.
We disagree. At the outset, it should be underscored
that these cases are not diametrically opposed to each
other. In fact, they coexist. It should be noted also that
after the promulgation of Zulueta, Consing was reiterated was not correct in law. But the law definitely does not require 
in 1991 in Viray v. IAC.[34] that the contracting party who believes itself injured must first 
Moreover, Zulueta and Nera recognized the validity file suit and wait for a judgment before taking extrajudicial 
and the effectivity of a contractual provision authorizing steps to protect its interest. Otherwise, the party injured by the 
the extrajudicial rescission of a contract and the others breach will have to passively sit and watch its damages 
concomitant recovery of accumulateduring the pendency of the suit until the final 
possession. Like Nera, Zulueta merely added the judgment of rescission is rendered when the law itself requires 
qualification that the stipulation has legal effect x x x that he should exercise due diligence to minimize its own 
where the other party does not oppose it. Where it is damages. (Emphasis supplied.)
objected to, a judicial determination of the issues is still
necessary. Significantly, they did not categorically rule The Court also noted that the rescission was
that such stipulation was void. provisional and subject to scrutiny and review by the
proper court. It further noted that if the other party denies
In fact, the stipulation is lawful. In Consing, the Court that rescission is justified, it is free to resort to judicial
held that this kind of contractual stipulation is not illegal, action in its own behalf, and bring the matter to court. It
there being nothing in the law proscribing such kind of observed that the practical effect of the stipulation [was]
agreement.[35]Affirming this ruling, the Court in Viray v. to transfer to the defaulter the initiative of instituting suit,
IAC[36] reiterated that the stipulation was in the nature of a instead of the rescinder.
resolutory condition, for upon the exercise by the sub-
lessor of his right to take possession of the leased In the present case, it is clear that the subject
property, the contract is deemed terminated. stipulation is allowed by law. Moreover, a party is free to
enforce it by rescinding the contract and recovering
UP v. De los Angeles[37] is instructive on this point. Pursuant to a possession of the property even without court
stipulation similar to that in the present case, the University of the Philippines
(UP) rescinded its Logging Agreement with ALUMCO and subsequently intervention. Where it is objected to, however, a judicial
appointed another concessionaire to take over the logging operation. Hence, determination of the issue is still necessary.[38] Force or
the issue was whether [P]etitioner UP can treat its contract with ALUMCO
rescinded, and may disregard the same before any judicial pronouncement to
bloodshed cannot be justified in the enforcement of the
that effect. Ruling in favor of UP, the Court held that a party could enforce stipulation. Where the lessees offer physical resistance,
such stipulation: the lessors may apply for a writ of preliminary mandatory
injunction, to which they have a clear and unmistakable
[T]he party who deems the contract violated may consider it  right. Indeed, courts are the final arbiters.
resolved or rescinded, and act accordingly, without previous 
court action, but it proceeds at its own risk. For it is only the  Thus, contrary to the ruling of the CA and the RTC,
final judgment of the corresponding court that will  there is a rationalization and a legal justification for the
conclusively and finally settle whether the action taken was or  stipulation authorizing SBMA to rescind the contract and
to take over the property.
No Valid Objection on the Part of Respondents
As earlier observed, there were several violations[39] of
the LDA, which were duly reported by SBMA to
UIG. Respondents, however, did not deny or controvert
them. Effectively, therefore, they offered no valid or
sufficient objection to SBMAs exercise of its stipulated
right to extrajudicially rescind the LDA and take over the
property in case of material breach.
First, the Amended Complaint merely argued that the
takeover was grounded upon a void provision of the
agreement.[40] It did not controvert the grounds for SBMAs
exercise of its rights under the subject
stipulation. Indeed, glaring was respondents failure to
deny the alleged violations of the LDA.
Second, Respondent UIG was given several
opportunities by SBMA to explain the alleged
violations. Instead of controverting them, UIG instead
indicated its willingness to comply with all its
undertakings. Hence, in its February 4, 1997 letter,
[41]
SBMA called its attention to several instances showing
contractual breach. In response, UIGs counsel did not
deny the violations and instead apologized for the delay.
[42]
Finding the response and the explanation
unsatisfactory, SBMA, in a letter dated March 7, 1997,
declared UIG in default and required it to explain why the
LDA should not be terminated. UIG did not submit any
written explanation. Instead, its counsel called the SBMA
chief operating officer[43] to inform him of its commitment
to undertake anew the remedial measures regarding the
matter.[44]
In its letter dated September 8, 1997, SBMA directed
UIG to vacate the premises and to settle its outstanding
accounts. Finally, on September 12, 1997, SBMA served
UIG a Notice of Closure.[45] It should be underscored that
during all these exchanges, UIG did not controvert its
alleged noncompliance with the LDA.
Third, in the hearing for the application for a writ of
mandatory injunction, respondents presented two
witnesses: Orlando de la Masa, operations manager of
SBGCCI; and Danilo Alabado, comptroller of UIGDC. De
la Masa testified on the alleged forcible takeover by
SBMA, while Alabado testified that respondents had
invested $12 million in the rehabilitation of the golf
course. Respondents, however, did not deny the
violations of their undertaking, which were explained by
Atty. Raymond P. Ventura.[46]
Most significant, neither the CA nor the RTC made
any finding that there was no breach on the part of
UIG. Likewise, they did not even make any observation
that respondents had controverted SBMAs claim.
Clearly, respondents stand was not a valid or
sufficient objection to SBMAs exercise of its
right. Indeed, sustaining their claim would unduly
diminish the force of such lawful stipulation and allow
parties to disregard it at will without any valid reason. In
this case, respondents miserably failed to give any
semblance of objection to the merits of SBMAs
allegations. Moreover, we find no adequate showing of
resistance to SBMAs implementation of the subject
stipulation.
Under the circumstances, SBMA showed that it had a
right not only to rescind the contract, but also to take
over the property. On the other hand, respondents have
not shown any clear and unmistakable right to restrain
SBMA from enforcing the contractual stipulation. Indeed,
they have offered no objection to SBMAs allegations of
contractual breach. Without prejudging their right to offer
controverting evidence during the trial on the merits, the
Court holds that they failed to do so in their application
for a writ of preliminary injunction.
Epilogue
The Court of Appeals expressed its apprehension
that a ruling against UIG would send a message to
foreign investors that we are a group of jingoists. We do
not share that view.Jingoism is not an issue here. Far
from it. In partially reversing the CA, this Court is merely
performing its mandate to do justice and to apply the law
to the facts of the case. It is merely affirming the
message that in this country, the rule of law prevails; and
contracts freely entered into, whether by foreign or by
local investors, must be complied with. Indeed, rule of
law and faithfulness in the performance of contracts are
cherished values everywhere.
WHEREFORE, the Petition is
partially GRANTED, and the assailed Decision of the
Court of Appeals REVERSED and SET ASIDE insofar as
it affirmed the Writ of Preliminary Injunction issued by the
trial court. The said Writ is hereby LIFTED and the
case REMANDED to the RTC for trial on the merits. In
the meantime, respondents shall, upon finality of this
Decision, yield the possession, the operation and the
management of the subject property to SBMA. No costs.
SO ORDERED.
G.R. No. 142616 July 31, 2001
PHILIPPINE NATIONAL BANK, petitioner,
vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and
DADASAN GENERAL MERCHANDISE,respondents.
KAPUNAN, J.:
In a petition for review on certiorari under Rule 45 of the Revised Rules of
Court, petitioner seeks to annul and set aside the Court of Appeals'
decision in C.A. CV G.R. S.P. No. 55374 dated March 27, 2000, affirming
the Order issuing a writ of preliminary injunction of the Regional Trial
Court of Makati, Branch 147 dated June 30, 1999, and its Order dated
October 4, 1999, which denied petitioner's motion to dismiss.
The antecedents of this case are as follows:
Petitioner Philippine National Bank is a domestic corporation organized
and existing under Philippine law. Meanwhile, respondents Ritratto
Group, Inc., Riatto International, Inc. and Dadasan General Merchandise
are domestic corporations, likewise, organized and existing under
Philippine law.
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary
company of PNB, organized and doing business in Hong Kong, extended
a letter of credit in favor of the respondents in the amount of
US$300,000.00 secured by real estate mortgages constituted over four
(4) parcels of land in Makati City. This credit facility was later increased
successively to US$1,140,000.00 in September 1996; to
US$1,290,000.00 in November 1996; to US$1,425,000.00 in February
1997; and decreased to US$1,421,316.18 in April 1998. Respondents
made repayments of the loan incurred by remitting those amounts to their
loan account with PNB-IFL in Hong Kong.
However, as of April 30, 1998, their outstanding obligations stood at
US$1,497,274.70. Pursuant to the terms of the real estate mortgages,
PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the
foreclosure of all the real estate mortgages and that the properties
subject thereof were to be sold at a public auction on May 27, 1999 at the
Makati City Hall.
On May 25, 1999, respondents filed a complaint for injunction with prayer
for the issuance of a writ of preliminary injunction and/or temporary
restraining order before the Regional Trial Court of Makati. The Executive
Judge of the Regional Trial Court of Makati issued a 72-hour temporary
restraining order. On May 28, 1999, the case was raffled to Branch 147 of
the Regional Trial Court of Makati. The trial judge then set a hearing on
June 8, 1999. At the hearing of the application for preliminary injunction,
petitioner was given a period of seven days to file its written opposition to
the application. On June 15, 1999, petitioner filed an opposition to the
application for a writ of preliminary injunction to which the respondents
filed a reply. On June 25, 1999, petitioner filed a motion to dismiss on the
grounds of failure to state a cause of action and the absence of any
privity between the petitioner and respondents. On June 30, 1999, the
trial court judge issued an Order for the issuance of a writ of preliminary
injunction, which writ was correspondingly issued on July 14, 1999. On
October 4, 1999, the motion to dismiss was denied by the trial court judge
for lack of merit.
Petitioner, thereafter, in a petition for certiorari and prohibition assailed
the issuance of the writ of preliminary injunction before the Court of
Appeals. In the impugned decision,1 the appellate court dismissed the
petition. Petitioner thus seeks recourse to this Court and raises the
following errors:
1.
THE COURT OF APPEALS PALPABLY ERRED IN NOT
DISMISSING THE COMPLAINT A QUO, CONSIDERING THAT
BY THE ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF
ACTION EXISTS AGAINST PETITIONER, WHICH IS NOT A
REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-
FACT AUTHORIZED TO ENFORCE AN ANCILLARY
CONTRACT.
2.
THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING
THE TRIAL COURT TO ISSUE IN EXCESS OR LACK OF
JURISDICTION A WRIT OF PRELIMINARY INJUNCTION OVER
AND BEYOND WHAT WAS PRAYED FOR IN THE COMPLAINT
A QUO CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ
JR., 101 SCRA 827.2
Petitioner prays, inter alia, that the Court of Appeals' Decision dated
March 27, 2000 and the trial court's Orders dated June 30, 1999 and
October 4, 1999 be set aside and the dismissal of the complaint in the
instant case.3
In their Comment, respondents argue that even assuming arguendo that
petitioner and PNB-IFL are two separate entities, petitioner is still the
party-in-interest in the application for preliminary injunction because it is
tasked to commit acts of foreclosing respondents'
properties.4 Respondents maintain that the entire credit facility is void as
it contains stipulations in violation of the principle of mutuality of
contracts.5 In addition, respondents justified the act of the court a quo in
applying the doctrine of "Piercing the Veil of Corporate Identity" by stating
that petitioner is merely an alter ego or a business conduit of PNB-IFL.6
The petition is impressed with merit.
Respondents, in their complaint, anchor their prayer for injunction on
alleged invalid provisions of the contract:
GROUNDS
I
THE DETERMINATION OF THE INTEREST RATES BEING
LEFT TO THE SOLE DISCRETION OF THE DEFENDANT PNB
CONTRAVENES THE PRINCIPAL OF MUTUALITY OF
CONTRACTS.
II
THERE BEING A STIPULATION IN THE LOAN AGREEMENT
THAT THE RATE OF INTEREST AGREED UPON MAY BE
UNILATERALLY MODIFIED BY DEFENDANT, THERE WAS NO
STIPULATION THAT THE RATE OF INTEREST SHALL BE
REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM
RATE OF INTEREST IS REDUCED BY LAW OR BY THE
MONETARY BOARD.7
Based on the aforementioned grounds, respondents sought to enjoin and
restrain PNB from the foreclosure and eventual sale of the property in
order to protect their rights to said property by reason of void credit
facilities as bases for the real estate mortgage over the said property. 8
The contract questioned is one entered into between respondent and
PNB-IFL, not PNB. In their complaint, respondents admit that petitioner is
a mere attorney-in-fact for the PNB-IFL with full power and authority
to, inter alia, foreclose on the properties mortgaged to secure their loan
obligations with PNB-IFL. In other words, herein petitioner is an agent
with limited authority and specific duties under a special power of
attorney incorporated in the real estate mortgage. It is not privy to the
loan contracts entered into by respondents and PNB-IFL.
The issue of the validity of the loan contracts is a matter between PNB-
IFL, the petitioner's principal and the party to the loan contracts, and the
respondents. Yet, despite the recognition that petitioner is a mere agent,
the respondents in their complaint prayed that the petitioner PNB be
ordered to re-compute the rescheduling of the interest to be paid by them
in accordance with the terms and conditions in the documents evidencing
the credit facilities, and crediting the amount previously paid to PNB by
herein respondents.9
Clearly, petitioner not being a part to the contract has no power to re-
compute the interest rates set forth in the contract. Respondents,
therefore, do not have any cause of action against petitioner.
The trial court, however, in its Order dated October 4, 1994, ruled that
since PNB-IFL, is a wholly owned subsidiary of defendant Philippine
National Bank, the suit against the defendant PNB is a suit against PNB-
IFL.10 In justifying its ruling, the trial court, citing the case of Koppel Phil.
Inc. vs. Yatco,11 reasoned that the corporate entity may be disregarded
where a corporation is the mere alter ego, or business conduit of a
person or where the corporation is so organized and controlled and its
affairs are so conducted, as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation.12
We disagree.
The general rule is that as a legal entity, a corporation has a personality
distinct and separate from its individual stockholders or members, and is
not affected by the personal rights, obligations and transactions of the
latter.13 The mere fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being treated as
one entity. If used to perform legitimate functions, a subsidiary's separate
existence may be respected, and the liability of the parent corporation as
well as the subsidiary will be confined to those arising in their respective
business. The courts may in the exercise of judicial discretion step in to
prevent the abuses of separate entity privilege and pierce the veil of
corporate entity.
We find, however, that the ruling in Koppel finds no application in the
case at bar. In said case, this Court disregarded the separate existence
of the parent and the subsidiary on the ground that the latter was formed
merely for the purpose of evading the payment of higher taxes. In the
case at bar, respondents fail to show any cogent reason why the
separate entities of the PNB and PNB-IFL should be disregarded.
While there exists no definite test of general application in determining
when a subsidiary may be treated as a mere instrumentality of the parent
corporation, some factors have been identified that will justify the
application of the treatment of the doctrine of the piercing of the corporate
veil. The case of Garrett vs. Southern Railway Co.14 is enlightening. The
case involved a suit against the Southern Railway Company. Plaintiff was
employed by Lenoir Car Works and alleged that he sustained injuries
while working for Lenoir. He, however, filed a suit against Southern
Railway Company on the ground that Southern had acquired the entire
capital stock of Lenoir Car Works, hence, the latter corporation was but a
mere instrumentality of the former. The Tennessee Supreme Court stated
that as a general rule the stock ownership alone by one corporation of the
stock of another does not thereby render the dominant corporation liable
for the torts of the subsidiary unless the separate corporate existence of
the subsidiary is a mere sham, or unless the control of the subsidiary is
such that it is but an instrumentality or adjunct of the dominant
corporation. Said Court then outlined the circumstances which may
be useful in the determination of whether the subsidiary is but a
mere instrumentality of the parent-corporation:
The Circumstance rendering the subsidiary an instrumentality. It
is manifestly impossible to catalogue the infinite variations of fact
that can arise but there are certain common circumstances which
are important and which, if present in the proper combination, are
controlling.
These are as follows:
 (a) The parent corporation owns all or most of the capital stock of
the subsidiary.
(b) The parent and subsidiary corporations have common
directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of
the subsidiary or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses
or losses of the subsidiary.
(g) The subsidiary has substantially no business except with the
parent corporation or no assets except those conveyed to or by
the parent corporation.
(h) In the papers of the parent corporation or in the statements of
its officers, the subsidiary is described as a department or division
of the parent corporation, or its business or financial responsibility
is referred to as the parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as
its own.
(j) The directors or executives of the subsidiary do not act
independently in the interest of the subsidiary but take their
orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not
observed.
The Tennessee Supreme Court thus ruled:
In the case at bar only two of the eleven listed indicia occur,
namely, the ownership of most of the capital stock of Lenoir by
Southern, and possibly subscription to the capital stock of
Lenoir. . . The complaint must be dismissed.
Similarly, in this jurisdiction, we have held that the doctrine of piercing the
corporate veil is an equitable doctrine developed to address situations
where the separate corporate personality of a corporation is abused or
used for wrongful purposes. The doctrine applies when the corporate
fiction is used to defeat public convenience, justify wrong, protect fraud or
defend crime, or when it is made as a shield to confuse the legitimate
issues, or where a corporation is the mere alter ego or business conduit
of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.15
In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining
the applicability of the doctrine of piercing the veil of corporate fiction, to
wit:
1. Control, not mere majority or complete control, but complete
domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate
mind, will or existence of its own.
2. Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and, unjust act in contravention of
plaintiffs legal rights; and,
3. The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the
corporate veil." In applying the "instrumentality" or "alter ego"
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's
relationship to the operation. 17
Aside from the fact that PNB-IFL is a wholly owned subsidiary of
petitioner PNB, there is no showing of the indicative factors that the
former corporation is a mere instrumentality of the latter are present.
Neither is there a demonstration that any of the evils sought to be
prevented by the doctrine of piercing the corporate veil exists.
Inescapably, therefore, the doctrine of piercing the corporate veil based
on the alter ego or instrumentality doctrine finds no application in the
case at bar.
In any case, the parent-subsidiary relationship between PNB and PNB-
IFL is not the significant legal relationship involved in this case since the
petitioner was not sued because it is the parent company of PNB-IFL.
Rather, the petitioner was sued because it acted as an attorney-in-fact of
PNB-IFL in initiating the foreclosure proceedings. A suit against an agent
cannot without compelling reasons be considered a suit against the
principal. Under the Rules of Court, every action must be prosecuted or
defended in the name of the real party-in-interest, unless otherwise
authorized by law or these Rules.18 In mandatory terms, the Rules require
that "parties-in-interest without whom no final determination can be had,
an action shall be joined either as plaintiffs or defendants." 19 In the case
at bar, the injunction suit is directed only against the agent, not the
principal.
Anent the issuance of the preliminary injunction, the same must be lifted
as it is a mere provisional remedy but adjunct to the main suit. 20 A writ of
preliminary injunction is an ancillary or preventive remedy that may only
be resorted to by a litigant to protect or preserve his rights or interests
and for no other purpose during the pendency of the principal action. The
dismissal of the principal action thus results in the denial of the prayer for
the issuance of the writ. Further, there is no showing that respondents are
entitled to the issuance of the writ. Section 3, Rule 58, of the 1997 Rules
of Civil Procedure provides:
SECTION 3. Grounds for issuance of preliminary injunction. — A
preliminary injunction may be granted when it is established:
(a) That the applicant is entitled to the relief demanded, and the
whole or part of such relief consists in restraining the commission
or continuance of the act or acts complained of, or in requiring the
performance of an act or acts, either for a limited period or
perpetually,
(b) That the commission, continuance or non-performance of the
acts or acts complained of during the litigation would probably
work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening,
or is attempting to do, or is procuring or suffering to be done,
some act or acts probably in violation of the rights of the applicant
respecting the subject of the action or proceeding, and tending to
render the judgment ineffectual.
Thus, an injunctive remedy may only be resorted to when there is a
pressing necessity to avoid injurious consequences which cannot be
remedied under any standard compensation. 21 Respondents do not deny
their indebtedness. Their properties are by their own choice encumbered
by real estate mortgages. Upon the non-payment of the loans, which
were secured by the mortgages sought to be foreclosed, the mortgaged
properties are properly subject to a foreclosure sale. Moreover,
respondents questioned the alleged void stipulations in the contract only
when petitioner initiated the foreclosure proceedings. Clearly,
respondents have failed to prove that they have a right protected and that
the acts against which the writ is to be directed are violative of said
right.22 The Court is not unmindful of the findings of both the trial court
and the appellate court that there may be serious grounds to nullify the
provisions of the loan agreement. However, as earlier discussed,
respondents committed the mistake of filing the case against the wrong
party, thus, they must suffer the consequences of their error.
All told, respondents do not have a cause of action against the petitioner
as the latter is not privy to the contract the provisions of which
respondents seek to declare void. Accordingly, the case before the
Regional Trial Court must be dismissed and the preliminary injunction
issued in connection therewith, must be lifted.
IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The
assailed decision of the Court of Appeals is hereby REVERSED. The
Orders dated June 30, 1999 and October 4, 1999 of the Regional Trial
Court of Makati, Branch 147 in Civil Case No. 99-1037 are hereby
ANNULLED and SET ASIDE and the complaint in said case DISMISSED.
SO ORDERED.
RYUICHI YAMAMOTO, G.R. No. 150283
Petitioner,
Present:
QUISUMBING,* J., Chairpers
CARPIO MORALES,**
- versus - TINGA,
VELASCO, JR., and
 BRION, JJ.
NISHINO LEATHER
INDUSTRIES, INC. and IKUO Promulgated:
NISHINO, April 16, 2008
Respondents.
x-----------------------------------------
--------x
DECISION
CARPIO MORALES, J.:
In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a
Japanese national, organized under Philippine laws Wako
Enterprises Manila, Incorporated (WAKO), a corporation
engaged principally in leather tanning, now known as
Nishino Leather Industries, Inc. (NLII), one of herein
respondents.
In 1987, Yamamoto and the other respondent, Ikuo
Nishino (Nishino), also a Japanese national, forged a
Memorandum of Agreement under which they agreed to
enter into a joint venture wherein Nishino would acquire
such number of shares of stock equivalent to 70% of the
authorized capital stock of WAKO.
Eventually, Nishino and his
brother[1] Yoshinobu Nishino (Yoshinobu) acquired more
than 70% of the authorized capital stock of WAKO,
reducing Yamamotos investment therein to, by his claim,
10%,[2] less than 10% according to Nishino.[3]
The corporate name of WAKO was later changed to,
as reflected earlier, its current name NLII.
Negotiations subsequently ensued in light of a
planned takeover of NLII by Nishino who would buy-out
the shares of stock of Yamamoto. In the course of the
negotiations, Yoshinobu and Nishinos counsel Atty.
Emmanuel G. Doce (Atty. Doce) advised Yamamoto by
letter dated October 30, 1991, the pertinent portions of
which follow:
Hereunder is a simple memorandum of the
subject matters discussed with me by Mr.
Yoshinobu Nishino yesterday, October 29 th, based
on the letter of Mr. Ikuo Nishino from Japan, and
which I am now transmitting to you.[4]
xxxx
12. Machinery and Equipment:
The following machinery/equipment have
been contributed by you to the company:
Splitting machine - 1 unit
Samming machine - 1 unit
Forklift - 1 unit
Drums - 4 units
Toggling machine - 2 units

Regarding the above machines, you may take
them out with you (for your own use and sale)
if you want, provided, the value of such
machines is deducted from your and Wakos
capital contributions, which will be paid to
you.
Kindly let me know of your comments
on all the above, soonest.
x x x x[5] (Emphasis and underscoring
supplied)
On the basis of such letter, Yamamoto attempted to
recover the machineries and equipment which were, by
Yamamotos admission, part of his investment in the
corporation,[6] but he was frustrated by respondents, drawing
Yamamoto to file on January 15, 1992 before the Regional
Trial Court (RTC) of Makati a complaint[7] against them for
replevin.
Branch 45 of the Makati RTC issued a writ
of replevin after Yamamoto filed a bond. [8]
In their Answer with Counterclaim,[9] respondents
claimed that the machineries and equipment subject
of replevin form part of Yamamotos capital contributions in
consideration of his equity in NLII and should thus be
treated as corporate property; and that the above-said letter
of Atty. Doce to Yamamoto was merely a
proposal, conditioned on [Yamamotos] sell-out to . . .
Nishino of his entire equity,[10] which proposal was yet to be
authorized by the stockholders and Board of Directors of
NLII.
By way of Counterclaim, respondents, alleging that
they suffered damage due to the seizure via the
implementation of the writ of replevin over the machineries
and equipment, prayed for the award to them of moral and
exemplary damages, attorneys fees and litigation expenses,
and costs of suit.
The trial court, by Decision of June 9, 1995, decided
the case in favor of Yamamoto,[11] disposing thus:
WHEREFORE, judgment is hereby
rendered: (1) declaring plaintiff as the rightful
owner and possessor of the machineries in
question, and making the writ of seizure
permanent; (2) ordering defendants to pay
plaintiff attorneys fees and expenses of litigation
in the amount of Fifty Thousand Pesos
(P50,000.00), Philippine Currency; (3)
dismissing defendants counterclaims for lack of
merit; and (4) ordering defendants to pay the
costs of suit.
SO ORDERED.[12] (Underscoring
supplied)
 On appeal,[13] the Court of Appeals held in favor of
herein respondents and accordingly reversed the RTC x x x IN HOLDING THAT RESPONDENTS
ARE NOT LIABLE FOR ATTORNEYS FEES.[22]
decision and dismissed the complaint.[14] In so holding, the
appellate court found that the machineries and equipment
claimed by Yamamoto are corporate property of NLII and
The resolution of the petition hinges, in the main, on
may not thus be retrieved without the authority of the NLII
whether the advice in the letter of Atty. Doce that Yamamoto
Board of Directors;[15] and that petitioners argument that
may retrieve the machineries and equipment, which
Nishino and Yamamoto cannot hide behind the shield of
admittedly were part of his investment, bound the
corporate fiction does not lie,[16] nor does petitioners
corporation. The Court holds in the negative.
invocation of the doctrine of promissory estoppel.[17] At the
same time, the Court of Appeals found no ground to support
Indeed, without a Board Resolution authorizing
respondents Counterclaim.[18]
respondent Nishino to act for and in behalf of the
corporation, he cannot bind the latter. Under the Corporation
The Court of Appeals having denied[19] his Motion for
Law, unless otherwise provided, corporate powers are
Reconsideration,[20] Yamamoto filed the present petition,
[21]
exercised by the Board of Directors.[23]
faulting the Court of Appeals
Urging this Court to pierce the veil of corporate
fiction, Yamamoto argues, viz:
A.

x x x IN HOLDING THAT THE VEIL OF During the negotiations, the issue as to the
CORPORATE FICTION SHOULD NOT BE ownership of the Machiner[ies] never came
PIERCED IN THE CASE AT BAR. up. Neither did the issue on the proper procedure
to be taken to execute the complete take-over of
B. the Company come up since Ikuo, Yoshinobu,
and Yamamoto were the owners thereof, the
x x x IN HOLDING THAT THE DOCTRINE OF presence of other stockholders being only for the
PROMISSORY ESTOPPEL DOES NOT APPLY purpose of complying with the minimum
TO THE CASE AT BAR. requirements of the law.

C. What course of action the Company

decides to do or not to do depends not on the
 other members of the Board of
Directors. It depends on what Ikuo and
Yoshinobu decide. The Company is but a mere
instrumentality of Ikuo [and] Yoshinobu.[24]
xxxx
x x x The Company hardly holds board
meetings. It has an inactive board, the directors
are directors in name only and are there to do the
bidding of the Nish[i]nos, nothing more. Its
minutes are paper minutes. x x x [25]
xxxx
The fact that the parties started at a 70-30
ratio and Yamamotos percentage declined to 10%
does not mean the 20% went to others. x x x The
20% went to no one else but Ikuo himself. x x
x Yoshinobu is the younger brother of Ikuo
and has no say at all in the business. Only Ikuo
makes the decisions. There were, therefore, no
other members of the Board who have not
given their approval.[26] (Emphasis and
underscoring supplied)
While the veil of separate corporate personality may
be pierced when the corporation is merely an adjunct, a
business conduit, or alter ego of a person, [27] the mere
ownership by a single stockholder of even all or nearly all of
the capital stocks of a corporation is not by itself a sufficient
ground to disregard the separate corporate personality.[28]
The elements determinative of the applicability of the
doctrine of piercing the veil of corporate fiction follow:
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 the plaintiffs legal rights; and
3. The aforesaid control and breach of
duty must proximately cause the injury or unjust
loss complained of.
The absence of any one of these elements
prevents piercing the corporate veil. In applying
the instrumentality or alter ego doctrine, the
courts are concerned with reality and not form,
with how the corporation operated and the
individual defendants relationship to that
operation.[29] (Italics in the original; emphasis and
underscoring supplied)
In relation to the second element, to disregard the separate
juridical personality of a corporation, the wrongdoing or
unjust act in contravention of a plaintiffs legal rights must be
clearly and convincingly established; it cannot be presumed.
[30]
Without a demonstration that any of the evils sought to be
prevented by the doctrine is present, it does not apply.[31]
In the case at bar, there is no showing that Nishino
used the separate personality of NLII to unjustly act or do
wrong to Yamamoto in contravention of his legal rights.
Yamamoto argues, in another vein,
that promissory estoppel lies against respondents, thus:
Under the doctrine of promissory estoppel,
x x x estoppel may arise from the making of a
promise, even though without consideration, if it
was intended that the promise should be relied
upon and in fact it was relied upon, and if a
refusal to enforce it would be virtually to sanction
the perpetration of fraud or would result in other
injustice.
x x x Ikuo and Yoshinobu wanted
Yamamoto out of the Company. For this purpose
negotiations were had between the
parties. Having expressly given Yamamoto,
through the Letter and through a subsequent
meeting at the Manila Peninsula where Ikuo
himself confirmed that Yamamoto may take out
the Machinery from the Company anytime,
respondents should not be allowed to turn around
and do the exact opposite of what they have
represented they will do.
In paragraph twelve (12) of the Letter,
Yamamoto was expressly advised that he could
take out the Machinery if he wanted to so,
provided that the value of said machines would
be deducted from his capital contribution x x x.
xxxx
Respondents cannot now argue that they
did not intend for Yamamoto to rely upon the
Letter. That was the purpose of the Letter to
begin with. Petitioner[s] in fact, relied upon said
Letter and such reliance was further strengthened
during their meeting at the Manila Peninsula.
To sanction respondents attempt to evade
their obligation would be to sanction the
perpetration of fraud and injustice against
petitioner.[32] (Underscoring supplied)
It bears noting, however, that the aforementioned
paragraph 12 of the letter is followed by a request for
Yamamoto to give his comments on all the above, soonest.[33]
What was thus proffered to Yamamoto was not a
promise, but a mere offer, subject to his acceptance. Without
acceptance, a mere offer produces no obligation.[34]
Thus, under Article 1181 of the Civil Code, [i]n
conditional obligations, the acquisition of rights, as well as
the extinguishment or loss of those already acquired, shall
depend upon the happening of the event which constitutes
the condition. In the case at bar, there is no showing of
compliance with the condition for allowing Yamamoto to
take the machineries and equipment, namely, his agreement
to the deduction of their value from his capital contribution
due him in the buy-out of his interests in NLII. Yamamotos
allegation that he agreed to the condition[35] remained just
that, no proof thereof having been presented.
The machineries and equipment, which comprised
Yamamotos investment in NLII,[36] thus remained part of the
capital property of the corporation.[37]
It is settled that the property of a corporation is not the
property of its stockholders or members.[38] Under the trust
fund doctrine, the capital stock, property, and other assets of
a corporation are regarded as equity in trust for the payment
of corporate creditors which are preferred over the
stockholders in the distribution of corporate assets. [39]The
distribution of corporate assets and property cannot be made
to depend on the whims and caprices of the stockholders,
officers, or directors of the corporation unless the
indispensable conditions and procedures for the protection
of corporate creditors are followed.[40]
WHEREFORE, the petition is DENIED.
Costs against petitioner.
SO ORDERED.
G.R. No. 177493
ERIC GODFREY STANLEY LIVESEY, Petitioner,
vs.
BINSWANGER PHILIPPINES, INC. and KEITH ELLIOT, Respondent.
DECISION
BRION, J.:
We resolve this petition for review on certiorari assailing the
1
decision dated August 18, 2006 and the resolution dated March 29, 2007
2 3
of the Court of Appeals (CA) in CA-G.R. SP No. 94461.
The Antecedents
In December 2001, petitioner Eric Godfrey Stanley Livesey filed a
complaint for illegal dismissal with money claims against CBB Philippines
4
Strategic Property Services, Inc. (CBB) and Paul Dwyer. CBB was a
domestic corporation engaged in real estate brokerage and Dwyer was
its President.
Designated as Acting Member in lieu of Associate Justice Estela M.
Perlas-Bernabe, per Special Order No. 1650 dated March 13, 2014.
Livesey alleged that on April 12, 2001, CBB hired him as Director and
Head of Business Space Development, with a monthly salary of
US$5,000.00; shareholdings in CBB’s offshore parent company; and
other benefits. In August 2001, he was appointed as Managing Director
and his salary was increased to US$16,000.00 a month. Allegedly,
despite the several deals for CBB he drew up, CBB failed to pay him a
significant portion of his salary. For this reason, he was compelled to
resign on December 18, 2001. He claimed CBB owed him US$23,000.00
in unpaid salaries.
CBB denied liability. It alleged that it engaged Livesey as a corporate
officer in April 2001: he was elected Vice-President (with a salary of
P75,000.00/month), and thereafter, he became President (at
P1,200,000.00/year). It claimed that Livesey was later designated as
Managing Director when it became an extension office of its principal in
Hongkong. 5
On December 17, 2001, Livesey demanded that CBB pay him
US$25,000.00 in unpaid salaries and, at the same time, tendered his
resignation. CBB posited that the labor arbiter (LA) had no jurisdiction as
the complaint involved an intra-corporate dispute.
In his decision dated September 20, 2002, LA Jaime M. Reyno found
6
that Livesey had been illegally dismissed. LA Reyno ordered CBB to
reinstate Livesey to his former position as Managing Director and to pay
him US$23,000.00 in accrued salaries (from July to December 2001),
and US$5,000.00 a month in back salaries from January 2002 until
reinstatement; and 10% of the total award as attorney’s fees.
Thereafter, the parties entered into a compromise agreement which LA
7 Corporate Counsels Philippines, Law Offices. The NLRC denied the
Reyno approved in an order dated November 6, 2002. Under the 8
agreement, Livesey was to receive US$31,000.00 in full satisfaction of LA
Reyno’s decision, broken down into US$13,000.00 to be paid by CBB to
Livesey or his authorized representative upon the signing of the
agreement; US$9,000.00 on or before June 30, 2003; and US$9,000.00
on or before September 30, 2003. Further, the agreement provided that
unless and until the agreement is fully satisfied, CBB shall not: (1) sell,
alienate, or otherwise dispose of all or substantially all of its assets or
business; (2) suspend, discontinue, or cease its entire, or a substantial
portion of its business operations; (3) substantially change the nature of
its business; and (4) declare bankruptcy or insolvency.
CBB paid Livesey the initial amount of US$13,000.00, but not the next
two installments as the company ceased operations. In reaction, Livesey
moved for the issuance of a writ of execution. LA Eduardo G. Magno
granted the writ, but it was not enforced. Livesey then filed a motion for
9
the issuance of an alias writ of execution, alleging that in the process of
10
serving respondents the writ, he learned "that respondents, in a clear and
willful attempt to avoid their liabilities to complainant x x x have organized
another corporation, [Binswanger] Philippines, Inc." He claimed that
11
there was evidence showing that CBB and Binswanger Philippines, Inc.
(Binswanger) are one and the same corporation, pointing out that CBB
stands for Chesterton Blumenauer Binswanger. Invoking the doctrine of
12
piercing the veil of corporate fiction, Livesey prayed that an alias writ of
execution be issued against respondents Binswanger and Keith Elliot,
CBB’s former President, and now Binswanger’s President and Chief
Executive Officer (CEO).
The Compulsory Arbitration Rulings
In an order dated March 22, 2004, LA Catalino R. Laderas denied
13
Livesey’s motion for an alias writ of execution, holding that the doctrine of
piercing the corporate veil was inapplicable in the case. He explained that
the stockholders of the two corporations were not the same. Further, LA
Laderas stressed that LA Reyno’s decision had already become final and
could no longer be altered or modified to include additional respondents.
Livesey filed an appeal which the National Labor Relations Commission
(NLRC) granted in its decision dated September 7, 2005. It reversed LA
14
Laderas’ March 22, 2004 order and declared the respondents jointly and
severally liable with CBB for LA Reyno’s decision of September 20, 2002
15
in favor of Livesey. The respondents moved for reconsideration, filed by
an Atty. Genaro S. Jacosalem, not by their counsel of record at the time,
16
motion in its resolution of January 6, 2006. The respondents then sought
17
relief from the CA through a petition for certiorari under Rule 65 of the
Rules of Court.
The respondents charged the NLRC with grave abuse of discretion for
holding them liable to Livesey and in exercising jurisdiction over an intra-
corporate dispute. They maintained that Binswanger is a separate and
distinct corporation from CBB and that Elliot signed the compromise
agreement in CBB’s behalf, not in his personal capacity. It was error for
the NLRC, they argued, when it applied the doctrine of piercing the veil of
corporate fiction to the case, despite the absence of clear evidence in
that respect.
For his part, Livesey contended that the petition should be dismissed
outright for being filed out of time. He claimed that the respondents’
counsel of record received a copy of the NLRC resolution denying their
motion for reconsideration as early as January 19, 2006, yet the petition
was filed only on May 15, 2006. He insisted that in any event, there was
ample evidence supporting the application of the doctrine of piercing the
veil of corporate fiction to the case.
The CA Decision
The CA granted the petition, reversed the NLRC decision of September
18 19
7, 2005 and reinstated LA Laderas’ order of March 22, 2004. The CA
20
found untenable Livesey’s contention that the petition for certiorari was
filed out of time, stressing that while there was no valid substitution or
withdrawal of the respondents’ former counsel, the NLRC impliedly
recognized Atty. Jacosalem as their new counsel when it resolved the
motion for reconsideration which he filed.
On the merits of the case, the CA disagreed with the NLRC finding that
the respondents are jointly and severally liable with CBB in the case. It
emphasized that the mere fact that Binswanger and CBB have the same
President is not in itself sufficient to pierce the veil of corporate fiction of
the two entities, and that although Elliot was formerly CBB’s President,
this circumstance alone does not make him answerable for CBB’s
liabilities, there being no proof that he was motivated by malice or bad
faith when he signed the compromise agreement in CBB’s behalf; neither
was there proof that Binswanger was formed, or that it was operated, for
the purpose of shielding fraudulent or illegal activities of its officers or
stockholders or that the corporate veil was used to conceal fraud,
illegality or inequity at the expense of third persons like Livesey.
Livesey moved for reconsideration, but the CA denied the motion in its
resolution dated March 29, 2007. Hence, the present petition.
21
The Petition
Livesey prays for a reversal of the CA rulings on the basis of the following
arguments:
1. The CA erred in not denying the respondents’ petition for certiorari
dated May 12, 2006 for being filed out of time.
Livesey assails the CA’s reliance on the Court’s pronouncement in
Rinconada Telephone Co., Inc. v. Hon. Buenviaje to justify its ruling that
22
the receipt on March 17, 2006 by Atty. Jacosalem of the NLRC’s denial of
the respondents’ motion for reconsideration was the reckoning date for
the filing of the petition for certiorari, not the receipt of a copy of the same
resolution on January 19, 2006 by the respondents’ counsel of record,
the Corporate Counsels Philippines, Law Offices. The cited Court’s
pronouncement reads:
In view of respondent judge’s recognition of Atty. Santos as new counsel
for petitioner without even a valid substitution or withdrawal of petitioner’s
former counsel, said new counsel logically awaited for service to him of
any action taken on his motion for reconsideration. Respondent judge’s
sudden change of posture in insisting that Atty. Maggay is the counsel of
record is, therefore, a whimsical and capricious exercise of discretion that
prevented petitioner and Atty. Santos from taking a timely appeal[.] 23
With the above citation, Livesey points out, the CA opined that a copy of
the NLRC resolution denying the respondents’ motion for reconsideration
should have been served on Atty. Jacosalem and no longer on the
counsel of record, so that the sixty (60)-day period for the filing of the
petition should be reckoned from March 17, 2006 when Atty. Jacosalem
secured a copy of the resolution from the NLRC (the petition was filed by
a Jeffrey Jacosalem on May 15, 2006). Livesey submits that the CA’s
24
reliance on Rinconada was misplaced. He argues that notwithstanding
the signing by Atty. Jacosalem of the motion for reconsideration, it was
only proper that the NLRC served a copy of the resolution on the
Corporate Counsels Philippines, Law Offices as it was still the
respondents’ counsel at the time. He adds that Atty. Jacosalem never
25
participated in the NLRC proceedings because he did not enter his
appearance as the respondents’ counsel before the labor agency; further,
he did not even indicate his office address on the motion for
reconsideration he signed.
2. The CA erred in not applying the doctrine of piercing the veil of
corporate fiction to the case.
Livesey bewails the CA’s refusal to pierce Binswanger’s corporate veil in
his bid to make the company and Elliot liable, together with CBB, for the
judgment award to him. He insists that CBB and Binswanger are one and
the same corporation as shown by the "overwhelming evidence" he
presented to the LA, the NLRC and the CA, as follows:
a.CBB stands for "Chesterton Blumenauer Binswanger." 26
b.After executing the compromise agreement with him, through
Elliot, CBB ceased operations following a transaction where a
substantial amount of CBB shares changed hands. Almost
simultaneously with CBB’s closing (in July 2003), Binswanger
was established with its headquarters set up beside CBB’s office
at Unit 501, 5/F Peninsula Court Building in Makati City. 27
c.Key CBB officers and employees moved to Binswanger led by
Elliot, former CBB President who became Binswanger’s President
and CEO; Ferdie Catral, former CBB Director and Head of
Operations; Evangeline Agcaoili and Janet Pei.
 d.Summons served on Binswanger in an earlier labor case was
received by Binswanger using CBB’s receiving stamp. 28
e.A Leslie Young received on August 23, 2003 an online query on
whether CBB was the same as Blumaneuver Binswanger (BB).
Signing as Web Editor, Binswanger/CBB, Young replied via e-
mail:29
We are known as either CBB (Chesterton Blumenauer Binswanger) or as
Chesterton Petty Ltd. in the Philippines. Contact info for our office in
Manila is as follows:
Manila Philippines
CBB Philippines Unit 509, 5th Floor
Peninsula Court, Paseo de Roxas corner Makati Avenue
1226 Makati City Philippines Contact: Keith Elliot
f. In a letter dated August 21, 2003, Elliot noted a Binswanger bid
30
solicitation for a project with the Philippine National Bank (PNB) which
was actually a CBB project as shown by a CBB draft proposal to PNB
dated January 24, 2003. 31
g. The affidavit dated October 1, 2003 of Hazel de Guzman, another
32
former CBB employee who also filed an illegal dismissal case against the
company, attested to the existence of Livesey’s documentary evidence in
his own case and who deposed that at one time, Elliot told her of CBB’s
plan to close the corporation and to organize another for the purpose of
evading CBB’s liabilities.
h.The findings of facts of LA Veneranda C. Guerrero who ruled in De
33
Guzman’s favor that bolstered his own evidence in the present case.
3. The CA erred in not holding Elliot liable for the judgment award.
Livesey questions the CA’s reliance on Laperal Development Corporation
v. Court of Appeals, Sunio, et al. v. NLRC, et al., and Palay, Inc., et al. v.
34 35
Clave, etc., et al., in support of its ruling that Elliot is not liable to him for
36
the LA’s award. He argues that in these cases, the Court upheld the
separate personalities of the corporations and their officers/employees
because there was no evidence that the individuals sought to be held
liable were in bad faith or that there were badges of fraud in their actions
against the aggrieved party or parties in said cases. He reiterates his
submission to the CA that the circumstances of the present case are
different from those of the cited cases. He posits that the closure of CBB
and its immediate replacement by Binswanger could not have been
possible without Elliot’s guiding hand, such that when CBB ceased
operations, Elliot (CBB’s President and CEO) moved to Binswanger in
the same position. More importantly, Livesey points out, as signatory for
CBB in the compromise agreement between him (Livesey) and CBB,
Elliot knew that it had not been and would never be fully satisfied.
Livesey thus laments Elliot’s devious scheme of leaving him an
unsatisfied award, stressing that Elliot was the chief orchestrator of CBB
and Binswanger’s fraudulent act of evading the full satisfaction of the
compromise agreement. In this light, he submits that the Court’s ruling in
A.C. Ransom Labor Union-CCLU v. NLRC, which deals with the issue of
37
who is liable for the worker’s backwages when a corporation ceases
operations, should apply to his situation.
The Respondents’Position
Through their comment and memorandum, the respondents pray that
38 39
the petition be denied for the following reasons:
1. The NLRC had no jurisdiction over the dispute between Livesey and
CBB/Dwyer as it involved an intra-corporate controversy; under Republic
Act No. 8799, the Regional Trial Court exercises jurisdiction over the
case.
As shown by the records, Livesey was appointed as CBB’s Managing
Director during the relevant period and was also a shareholder, making
him a corporate officer.
2.There was no employer-employee relationship between Livesey and
Binswanger. Under Article 217 of the Labor Code, the labor arbiters and
the NLRC have jurisdiction only over disputes where there is an
employer- employee relationship between the parties.
3.The NLRC erred in applying the doctrine of piercing the veil of
corporate fiction to the case based only on mere assumptions. Point by
point, they take exception to Livesey’s submissions as follows:
a.The e-mail statement in reply to an online query of Young
(CBB’s Web Editor) that CBB is known as Chesterton
Blumenauer Binswanger or Chesterton Petty. Ltd. to establish a
 connection between CBB and Binswanger is inconclusive as
there was no mention in the statement of Binswanger Philippines,
Inc.
b.The affidavit of De Guzman, former CBB Associate Director,
who also resigned from the company like Livesey, has no
probative value as it was self-serving and contained only
misrepresentation of facts, conjectures and surmises.
c.When Binswanger was organized and incorporated, CBB had
already been abandoned by its Board of Directors and no longer
subsidized by CBB-Hongkong; it had no business operations to
work with.
d.The mere transfer of Elliot and Catral from CBB to Binswanger
is not a ground to pierce the corporate veil in the present case
absent a clear evidence supporting the application of the doctrine.
The NLRC applied the doctrine on the basis only of LA Guerrero’s
decision in the De Guzman case.
e.The respondents’ petition for certiorari was filed on time. Atty.
Jacosalem, who was presumed to have been engaged as the
respondents’ counsel, was deemed to have received a copy of
the NLRC resolution (denying the motion for reconsideration) on
March 17, 2006 when he requested and secured a copy from the
NLRC. The petition was filed on May 15, 2006 or fifty-nine
(59)days from March 17, 2006. Atty. Jacosalem may have failed
to indicate his address on the motion for reconsideration he filed
but that is not a reason for him to be deprived of the notices and
processes of the case.
The Court’s Ruling
The procedural question
The respondents’ petition for certiorari before the CA was filed out of time.
The sixty (60)-day filing period under Rule 65 of the Rules of Court
should have been counted from January 19, 2006, the date of receipt of a
copy of the NLRC resolution denying the respondents’ motion for
reconsideration by the Corporate Counsels Philippines, Law Offices
which was the respondents’ counsel of record at the time. The
respondents cannot insist that Atty. Jacosalem’s receipt of a copy of the
resolution on March 17, 2006 as the reckoning date for the filing of the
petition as we shall discuss below.
The CA chided the NLRC for serving a copy of the resolution on the
Corporate Counsels Philippines, Law Offices, instead of on Atty.
Jacosalem as it believed that the labor tribunal impliedly recognized Atty.
Jacosalem as the respondents’ counsel when it acted on the motion for
reconsideration that he signed. As we see it, the fault was not on the
NLRC but on Atty. Jacosalem himself as he left no forwarding address
with the NLRC, a serious lapse that even he admitted. This is a matter
40
that cannot just be taken for granted as it betrays a careless legal
representation that can cause adverse consequences to the other party.
To our mind, Atty. Jacosalem’s non-observance of a simple, but basic
requirement in the practice of law lends credence to Livesey’s claim that
the lawyer did not formally enter his appearance before the NLRC as the
respondents’ new counsel; if it had been otherwise, he would have
supplied his office address to the NLRC. Also, had he exercised due
diligence in the performance of his duty as counsel, he could have
inquired earlier with the NLRC and should not have waited as late as
March 17, 2006 about the outcome of the respondents’ motion for
reconsideration which was filed as early as October 28, 2005.
To reiterate, the filing of the respondents’ petition for certiorari should
have been reckoned from January 19, 2006 when a copy of the subject
NLRC resolution was received by the Corporate Counsels Philippines,
Law Offices, which, as of that date, had not been discharged or had
withdrawn and therefore remained to be the respondents’ counsel of
record. Clearly, the petition for certiorari was filed out of time. Section
6(a), Rule III of the NLRC Revised Rules of Procedure provides that "[f]or
purposes of appeal, the period shall be counted from receipt of such
decisions, resolutions, or orders by the counsel or representative of
record."
We now come to the issue of whether the NLRC had jurisdiction over the
controversy between Livesey and CBB/Dwyer on the ground that it
involved an intra-corporate dispute.
Based on the facts of the case, we find this issue to have been rendered
academic by the compromise agreement between Livesey and CBB and
approved by LA Reyno. That CBB reneged in the fulfillment of its
41
obligation under the agreement is no reason to revive the issue and
further frustrate the full settlement of the obligation as agreed upon.
The substantive aspect of the case
Even if we rule that the respondents’ appeal before the CA had been filed
on time, we believe and so hold that the appellate court committed a
reversible error of judgment in its challenged decision.
The NLRC committed no grave abuse of discretion in reversing LA
Laderas’ ruling as there is substantial evidence in the records that
Livesey was prevented from fully receiving his monetary entitlements
under the compromise agreement between him and CBB, with Elliot
signing for CBB as its President and CEO. Substantial evidence is more
than a scintilla; it means such relevant evidence as a reasonable mind
might accept as adequate to support a conclusion. 42
Shortly after Elliot forged the compromise agreement with Livesey, CBB
ceased operations, a corporate event that was not disputed by the
respondents. Then Binswanger suddenly appeared. It was established
almost simultaneously with CBB’s closure, with no less than Elliot as its
President and CEO. Through the confluence of events surrounding CBB’s
closure and Binswanger’s sudden emergence, a reasonable mind would
arrive at the conclusion that Binswanger is CBB’s alter ego or that CBB
and Binswanger are one and the same corporation. There are also
indications of badges of fraud in Binswanger’s incorporation. It was a
business strategy to evade CBB’s financial liabilities, including its
outstanding obligation to Livesey.
The respondents impugned the probative value of Livesey’s documentary
evidence and insist that the NLRC erred in applying the doctrine of
piercing the veil of corporate fiction in the case to avoid liability. They
consider the NLRC conclusions as mere assumptions.
We disagree.
It has long been settled that the law vests a corporation with a personality
distinct and separate from its stockholders or members. In the same vein,
a corporation, by legal fiction and convenience, is an entity shielded by a
protective mantle and imbued by law with a character alien to the persons
comprising it. Nonetheless, the shield is not at all times impenetrable
43
and cannot be extended to a point beyond its reason and policy.
Circumstances might deny a claim for corporate personality, under the
"doctrine of piercing the veil of corporate fiction."
Piercing the veil of corporate fiction is an equitable doctrine developed to
address situations where the separate corporate personality of a
corporation is abused or used for wrongful purposes. Under the doctrine,
44
the corporate existence may be disregarded where the entity is formed or
used for non-legitimate purposes, such as to evade a just and due
obligation, or to justify a wrong, to shield or perpetrate fraud or to carry
out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the
45
individuals composing it and the two corporations will be treated as
identical.
46
In the present case, we see an indubitable link between CBB’s closure
and Binswanger’s incorporation. CBB ceased to exist only in name; it re-
emerged in the person of Binswanger for an urgent purpose
— to avoid payment by CBB of the last two installments of its monetary
obligation to Livesey, as well as its other financial liabilities. Freed of
CBB’s liabilities, especially that owing to Livesey, Binswanger can
continue, as it did continue, CBB’s real estate brokerage business.
Livesey’s evidence, whose existence the respondents never denied,
converged to show this continuity of business operations from CBB to
Binswanger. It was not just coincidence that Binswanger is engaged in
1âwphi1
the same line of business CBB embarked on: (1) it even holds office in
the very same building and on the very same floor where CBB once
stood; (2) CBB’s key officers, Elliot, no less, and Catral moved over to
Binswanger, performing the tasks they were doing at CBB; (3)
notwithstanding CBB’s closure, Binswanger’s Web Editor (Young), in an
e-mail correspondence, supplied the information that Binswanger is "now
known" as either CBB (Chesterton Blumenauer Binswanger or as
Chesterton Petty, Ltd., in the Philippines; (4) the use of Binswanger of
CBB’s paraphernalia (receiving stamp) in connection with a labor case
where Binswanger was summoned by the authorities, although Elliot
claimed that he bought the item with his own money; and (5)
Binswanger’s takeover of CBB’s project with the PNB.
While the ostensible reason for Binswanger’s establishment is to continue
CBB’s business operations in the Philippines, which by itself is not illegal,
the close proximity between CBB’s disestablishment and Binswanger’s
coming into existence points to an unstated but urgent consideration
which, as we earlier noted, was to evade CBB’s unfulfilled financial
obligation to Livesey under the compromise agreement. 47
This underhanded objective, it must be stressed, can only be attributed to Costs against the respondents.
Elliot as it was apparent that Binswanger’s stockholders had nothing to
do with Binswanger’s operations as noted by the NLRC and which the SO ORDERED.
respondents did not deny. Elliot was well aware of the compromise
48

agreement between Livesey and CBB, as he "agreed and accepted" the G.R. No. 161759 July 2, 2014
terms of the agreement for CBB. He was also well aware that the last
49

two installments of CBB’s obligation to Livesey were due on June 30,

COMMISSIONER OF CUSTOMS, Petitioner,
2003 and September 30, 2003. These installments were not met and the
vs.
reason is that after the alleged sale of the majority of CBB’s shares of
OILINK INTERNATIONAL CORPORATION, Respondent.
stock, it closed down.
DECISION
With CBB’s closure, Livesey asked why people would buy into a
corporation and simply close it down immediately thereafter? The 50

answer BERSAMIN, J.:

— to pave the way for CBB’s reappearance as Binswanger. Elliot’s This appeal is brought by the Commissioner of Customs to seek the
"guiding hand," as Livesey puts it, is very much evident in CBB’s demise review and reversal of the decision promulgated on September 29,
and Binswanger’s creation. Elliot knew that CBB had not fully complied 2003, whereby the Court of Appeals (CA) affirmed the adverse ruling of
1

with its financial obligation under the compromise agreement. He made the Court of Tax Appeals (CTA) declaring the assessment for deficiency
sure that it would not be fulfilled when he allowed CBB's closure, despite taxes and duties against Oilink International Corporation (Oilink) null and
the condition in the agreement that "unless and until the Compromise void.
Amount has been fully settled and paid by the Company in favor of Mr.
Livesey, the Company shall not x x x suspend, discontinue, or cease its Antecedents
entire or a substantial portion of its business operations[.]"
51

The antecedents are summarized in the assailed decision. 2

What happened to CBB, we believe, supports Livesey's assertion that De

Guzman, CBB's former Associate Director, informed him that at one time
Elliot told her of CBB 's plan to close the corporation and organize
another for the purpose of evading CBB 's liabilities to Livesey and its
other financial liabilities. This wrongful intent we cannot and must not
52
condone, for it will give a premium to an iniquitous business strategy
where a corporation is formed or used for a non-legitimate purpose, such
as to evade a just and due obligation. We, therefore, find Elliot as liable
53
as Binswanger for CBB 's unfulfilled obligation to Livesey.
WHEREFORE, premises considered, we hereby GRANT the petition.
The decision dated August 18, 2006 and the Resolution dated March 29,
2007 of the Court of Appeals are SET ASIDE. Binswanger Philippines,
Inc. and Keith Elliot (its President and CEO) are declared jointly and
severally liable for the second and third installments of CBB 's liability to
Eric Godfrey Stanley Livesey under the compromise agreement dated
October 14, 2002. Let the case record be remanded to the National Labor
Relations Commission for execution of this Decision.
On September 15, 1966, Union Refinery Corporation (URC) was
established under the Corporation Code of the Philippines. In the course
of its business undertakings, particularly in the period from 1991 to 1994,
URC imported oil products into the country.
On January 11, 1996, Oilink was incorporated for the primary purpose of
manufacturing, importing, exporting, buying, selling or dealing in oil and
gas, and their refinements and by-products at wholesale and retail of
petroleum. URC and Oilink had interlocking directors when Oilink started
its business.
In applying for and in expediting the transfer of the operator’s name for
the Customs Bonded Warehouse then operated by URC, Esther Magleo,
the Vice-President and General Manager of URC, sent a letter dated
January 15, 1996 to manifest that URC and Oilink had the same Board of
Directors and that Oilink was 100% owned by URC.
On March 4, 1998, Oscar Brillo, the District Collector of the Port of
Manila, formally demanded that URC pay the taxes and duties on its oil
imports that had arrived between January 6, 1991 and November 7, 1995
at the Port of Lucanin in Mariveles, Bataan.
On April 16, 1998, Brillo made another demand letter to URC for the
payment of the reduced sum of ₱289,287,486.60 for the Value-Added
Taxes (VAT), special duties and excisetaxes for the years 1991-1995.
On April 23, 1998, URC, through its counsel, responded to the demands
by seeking the landed computations of the assessments, and challenged
the inconsistencies of the demands.
On November 25, 1998, then Customs Commissioner Pedro C. Mendoza
formally directed that URC pay the amount of ₱119,223,541.71
representing URC’s special duties, VAT,and Excise Taxes that it had
failed to pay at the time of the release of its 17 oil shipments that had
arrived in the Sub-port of Mariveles from January 1, 1991 to September
7, 1995.
On December 21, 1998, Commissioner Mendoza wrote again to require
URC to pay deficiency taxes but in the reduced sum of ₱99,216,580.10.
On December 23, 1998, upon his assumption of office, Customs
Commissioner Nelson Tan transmitted another demand letter to URC
affirming the assessment of ₱99,216,580.10 by Commissioner Mendoza.
On January 18, 1999, Magleo, in behalf of URC, replied by letter to
Commissioner Tan’s affirmance by denying liability, insisting instead that
only ₱28,933,079.20 should be paid by way of compromise.
On March 26, 1999, Commissioner Tan responded by rejecting Magleo’s
proposal, and directed URC to pay ₱99,216,580.10.
On May 24, 1999, Manuel Co, URC’s President, conveyed to
Commissioner Tan URC’s willingness to pay only ₱94,216,580.10, of
which the initial amount of ₱28,264,974.00 would be taken from the
collectibles of Oilink from the National Power Corporation, and the
balance to be paid in monthly installments over a period of three years to
be secured with corresponding post-dated checks and its future available
tax credits.
On July 2, 1999, Commissioner Tan made a final demand for the total
liability of ₱138,060,200.49 upon URC and Oilink.
On July 8, 1999, Co requested from Commissioner Tan a complete
finding of the facts and law in support of the assessment made in the
latter’s July 2, 1999 final demand.
Also on July 8, 1999, Oilink formally protested the assessment on the
ground that it was not the party liable for the assessed deficiency taxes.
On July 12, 1999, after receiving the July 8, 1999 letter from Co,
Commissioner Tan communicated in writing the detailed computation of
the tax liability, stressing that the Bureau of Customs (BoC) would not
issue any clearance to Oilink unless the amount of ₱138,060,200.49
demanded as Oilink’s tax liability be first paid, and a performance bond
be posted by URC/Oilink to secure the payment of any adjustments that
would result from the BIR’s review of the liabilities for VAT, excise tax,
special duties, penalties, etc.
Thus, on July 30, 1999, Oilink appealed to the CTA, seeking the
nullification of the assessment for having been issued without authority
and with grave abuse of discretion tantamount to lack of jurisdiction
because the Government was thereby shifting the imposition from URC
to Oilink.
Decision of the CTA
On July 9, 2001, the CTA rendered its decision declaring as null and void
the assessment of the Commissioner of Customs, to wit:
IN THE LIGHT OF ALL THE FOREGOING, the petition is hereby
GRANTED. The assailed assessment issued by Respondent against
herein Petitioner OILINK INTERNATIONAL CORPORATION is hereby
declared NULL and VOID.
SO ORDERED. 3
The Commissioner of Customs seasonably filed a motion for
reconsideration, but the CTA denied the motion for lack of merit.
4 5
Judgment of the CA
Aggrieved, the Commissioner of Customs brought a petition for review in Court will not hesitate to pierce the veil of corporate fiction by URC and
the CA upon the following issues, namely: (a) the CTA gravely erred in OILINK. 7

holding that it had jurisdiction over the subject matter; (b) the CTA gravely
erred in holding that Oilink had a cause of action; and (c) the CTA gravely Issues
erred in holding that the Commissioner of Customs could not pierce the
veil of corporate fiction. Hence, this appeal, whereby the Commissioner of Customs reiterates the
issues raised in the CA.
On the issue of the jurisdiction of the CTA, the CA held:
Ruling of the Court
x x x the case at bar is very much within the purview of the jurisdiction of
the Court of Tax Appeals since it is undisputed that what is involved We affirm the judgment of the CA.
herein is the respondent’s liability for payment of money to the
Government as evidenced by the demand letters sent by the petitioner.
1.
Hence, the Court of Tax Appeals did not err in taking cognizance of the
petition for review filed by the respondent.
The CTA had jurisdiction over the controversy
xxxx
There is no question that the CTA had the jurisdiction over the case.
Republic Act No. 1125, the law creating the CTA, defined the appellate
We find the petitioner’s submission untenable. The principle of non-
jurisdiction of the CTA as follows:
exhaustion of administrative remedy is not an iron-clad rule for there are
instances that immediate resort to judicial action may be proper. Verily, a
cursory examination of the factual milieu of the instant case indeed Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise
reveals that exhaustion of administrative remedy would be unavailing exclusive appellate jurisdiction to review by appeal, as herein provided:
because it was the Commissioner of Customs himself who was
demanding from the respondent payment of tax liability. In addition, it xxxx
may be recalled that a crucial issue in the petition for review filed by the
respondent before the CTA is whether or not the doctrine of piercing the 2. Decisions of the Commissioner of Customs in cases involving liability
veil of corporate fiction validly applies. Indubitably, this is purely a for Customs duties, fees or other money charges; seizure, detention or
question of law where judicial recourse may certainly be resorted to. 6 release of property affected; fines, forfeitures or other penalties imposed
in relation thereto; or other matters arising under the Customs Law or
As to whether or not the Commissioner of Customs could lawfully pierce other law or part of law administered by the Bureau of Customs;
the veil of corporate fiction in order to treat Oilink as the mere alter ego of
URC, the CA concurred with the CTA, quoting the latter’s following xxxx
findings:
Nonetheless, the Commissioner of Customs contends that the CTA
In the case at bar, the said wrongdoing was not clearly and convincingly should not take cognizance of the case because of the lapse of the 30-
established by Respondent. He did not submit any evidence to support day period within which to appeal, arguing that on November 25, 1998
his allegations but merely submitted the case for decision based on the URC had already received the BoC’s final assessment demanding
pleadings and evidence presented by petitioner. Stated otherwise, should payment of the amount due within 10 days, but filed the petition only on
the Respondent sufficiently provethat OILINK was merely set up in order July 30, 1999.8

to avoid the payment of taxes or for some other purpose which will defeat
public convenience, justify wrong, protect fraud or defend crime, this We rule against the Commissioner of Customs. The CTA correctly ruled
that the reckoning date for Oilink’s appeal was July 12, 1999, not July 2,
1999, because it was on the former date that the Commissioner of
Customs denied the protest of Oilink.Clearly, the filing of the petition on
July 30, 1999 by Oilink was well within its reglementary period to appeal.
The insistence by the Commissioner of Customs on reckoning the
reglementary period to appeal from November 25, 1998, the date when
URC received the final demand letter, is unwarranted. We note that the
November 25, 1998 final demand letter of the BoC was addressed to
URC, not to Oilink. As such, the final demand sentto URC did not bind
Oilink unless the separate identities of the corporations were disregarded
in order to consider them as one.
2.
Oilink had a valid cause of action
The Commissioner of Customs positsthat the final demand letter dated
July 2, 1999 from which Oilink appealed was not the final "action" or
"ruling" from which an appeal could be taken as contemplated by Section
2402 of the Tariff and Customs Code; that what Section 7 of RA No. 1125
referred to as a decision that was appealable to the CTA was a judgment
or order of the Commissioner of Customs that was final in nature, not
merely an interlocutory one; that Oilink did notexhaust its administrative
remedies under Section 2308 of the Tariff and Customs Code by paying
the assessment under protest; that only when the ensuing decision of the
Collector and then the adverse decision of the Commissioner of Customs
would it be proper for Oilink to seek judicial relief from the CTA; and that,
accordingly, the CTA should have dismissed the petition for lack of cause
of action.
The position of the Commissioner of Customs lacks merit.
The CA correctly held that the principle of non-exhaustion of
administrative remedies was not an iron-clad rule because there were
instances in which the immediate resort to judicial action was proper. This
was one such exceptional instance when the principle did not apply. As
the records indicate, the Commissioner of Customs already decided to
deny the protest by Oilink on July 12, 1999, and stressed then that the
demand to pay was final. In that instance, the exhaustion of
administrative remedies would have been an exercise in futility because it
was already the Commissioner of Customs demanding the payment of
the deficiency taxes and duties.
3.
There was no ground to pierce the veil of corporate existence
A corporation, upon coming into existence, is invested by law with a
personality separate and distinct from those of the persons composing it
as well as from any other legal entity to which it may be related. For this
reason, a stockholder is generally not made to answer for the acts or
liabilities of the corporation, and vice versa. The separate and distinct
personality of the corporation is, however, a mere fiction established by
law for convenience and to promote the ends of justice. It may not be
used or invoked for ends that subvert the policy and purpose behind its
establishment, or intended by law to which the corporation owes its
being. This is true particularly when the fiction is used to defeat public
convenience, to justify wrong, to protect fraud, to defend crime, to
confuse legitimate legal or judicial issues, to perpetrate deception or
otherwise to circumvent the law. This is likewise true where the corporate
entity is being used as an alter ego, adjunct, or business conduit for the
sole benefit of the stockholders or of another corporate entity. In such
instances, the veil of corporate entity will be pierced or disregarded with
reference to the particular transaction involved. 9
In Philippine National Bank v. Ritratto Group, Inc., the Court has outlined
10
the following circumstances that are useful in the determination of
whether a subsidiary is a mere instrumentality of the parent-corporation,
viz:
1. Control, not mere majority or complete control, but complete
domination, not only of finances butof policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separatemind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetrate the violation of a statutory or other positive legal
duty, or dishonest and, unjust act incontravention of plaintiff's legal rights;
and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.
In applying the "instrumentality" or"alter ego" doctrine, the courts are
concerned with reality, not form, and with how the corporation operated
and the individual defendant's relationship to the
operation. Consequently, the absence of any one of the foregoing
11
elements disauthorizes the piercing of the corporate veil.
Indeed, the doctrine of piercing the corporate veil has no application here
because the Commissioner of Customs did not establish that Oilink had
been set up to avoid the payment of taxes or duties, or for purposes that
would defeat public convenience, justify wrong, protect fraud, defend
crime, confuse legitimate legal or judicial issues, perpetrate deception or
otherwise circumvent the law. It is also noteworthy that from the outset
the Commissioner of Customs sought to collect the deficiency taxes and
duties from URC, and that it was only on July 2, 1999 when the
Commissioner of Customs sent the demand letter to both URC and
Oilink. That was revealing, because the failure of the Commissioner of
Customs to pursue the remedies against Oilink from the outset
manifested that its belated pursuit of Oilink was only an afterthought.
WHEREFORE, the Court AFFIRMS the decision promulgated by the
Court of Appeals on September 29, 2003.
No pronouncement on costs of suit.
SO ORDERED.
[G.R. No. 100812. June 25, 1999]
FRANCISCO MOTORS CORPORATION, petitioner, vs.
COURT OF APPEALS and SPOUSES
GREGORIO and LIBRADA
MANUEL, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the Rules
of Court, seeks to annul the decision[1] of the Court of Appeals in C.A.
G.R. CV No. 10014 affirming the decision rendered by Branch 135,
Regional Trial Court of Makati, Metro Manila. The procedural
antecedents of this petition are as follows:
On January 23, 1985, petitioner filed a complaint[2] against private
respondents to recover three thousand four hundred twelve and six
centavos (P3,412.06), representing the balance of the jeep body
purchased by the Manuels from petitioner; an additional sum of twenty
thousand four hundred fifty-four and eighty centavos (P20,454.80)
representing the unpaid balance on the cost of repair of the vehicle;
and six thousand pesos (P6,000.00) for cost of suit and attorneys fees.
[3]
To the original balance on the price of jeep body were added the
costs of repair.[4] In their answer, private respondents interposed a
counterclaim for unpaid legal services by Gregorio Manuel in the
amount of fifty thousand pesos (P50,000) which was not paid by the
incorporators, directors and officers of the petitioner. The trial court
decided the case on June 26, 1985, in favor of petitioner in regard to
the petitioners claim for money, but also allowed the counter-claim of
private respondents. Both parties appealed. On April 15, 1991, the
Court of Appeals sustained the trial courts decision. [5] Hence, the
present petition.
For our review in particular is the propriety of the permissive
counterclaim which private respondents filed together with their
answer to petitioners complaint for a sum of money. Private
respondent Gregorio Manuel alleged as an affirmative defense that,
while he was petitioners Assistant Legal Officer, he represented
members of the Francisco family in the intestate estate proceedings of
the late Benita Trinidad. However, even after the termination of the
proceedings, his services were not paid. Said family members, he said,
were also incorporators, directors and officers of petitioner. Hence to
counter petitioners collection suit, he filed a permissive counterclaim
for the unpaid attorneys fees.[6]
For failure of petitioner to answer the counterclaim, the trial court
declared petitioner in default on this score, and evidence ex-parte was
presented on the counterclaim. The trial court ruled in favor of private
respondents and found that Gregorio Manuel indeed rendered legal
services to the Francisco family in Special Proceedings Number 7803-
In the Matter of Intestate Estate of Benita Trinidad. Said court also
found that his legal services were not compensated despite repeated
demands, and thus ordered petitioner to pay him the amount of fifty
thousand (P50,000.00) pesos.[7]
 Dissatisfied with the trial courts order, petitioner elevated the excused from answering the counterclaim. Court records showed that
matter to the Court of Appeals, posing the following issues: its former counsel, Nicanor G. Alvarez, received the copy of the
I.
answer with counterclaim two (2) days prior to his withdrawal as
counsel for petitioner. Moreover when petitioners new counsel, Jose N.
Aquino, entered his appearance, three (3) days still remained within
WHETHER OR NOT THE DECISION RENDERED BY 
the period to file an answer to the counterclaim. Having failed to
THE LOWER COURT IS NULL AND VOID AS IT NEVER  answer, petitioner was correctly considered in default by the trial court.
ACQUIRED JURISDICTION OVER THE PERSON OF THE [9]
Even assuming that the trial court acquired no jurisdiction over
DEFENDANT. petitioner, respondent court also said, but having filed a motion for
reconsideration seeking relief from the said order of default, petitioner
II. was estopped from further questioning the trial courts jurisdiction.[10]
On the question of its liability for attorneys fees owing to private
WHETHER OR NOT PLAINTIFF­APPELLANT NOT  respondent Gregorio Manuel, petitioner argued that being a
BEING A REAL PARTY IN THE ALLEGED PERMISSIVE  corporation, it should not be held liable therefor because these fees
COUNTERCLAIM SHOULD BE HELD LIABLE TO THE  were owed by the incorporators, directors and officers of the
CLAIM OF DEFENDANT­APPELLEES. corporation in their personal capacity as heirs of Benita
Trinidad. Petitioner stressed that the personality of the corporation,
III. vis--vis the individual persons who hired the services of private
respondent, is separate and distinct,[11] hence, the liability of said
WHETHER OR NOT THERE IS FAILURE ON THE PART  individuals did not become an obligation chargeable against petitioner.
OF PLAINTIFF­APPELLANT TO ANSWER THE  Nevertheless, on the foregoing issue, the Court of Appeals ruled as
ALLEGED PERMISSIVE COUNTERCLAIM.[8] follows:

Petitioner contended that the trial court did not acquire jurisdiction
over it because no summons was validly served on it together with the
copy of the answer containing the permissive counterclaim. Further,
petitioner questions the propriety of its being made party to the case
because it was not the real party in interest but the individual members
of the Francisco family concerned with the intestate case.
In its assailed decision now before us for review, respondent Court
of Appeals held that a counterclaim must be answered in ten (10) days,
pursuant to Section 4, Rule 11, of the Rules of Court; and nowhere
does it state in the Rules that a party still needed to be summoned
anew if a counterclaim was set up against him. Failure to serve
summons, said respondent court, did not effectively negate trial courts
jurisdiction over petitioner in the matter of the counterclaim. It
likewise pointed out that there was no reason for petitioner to be
However, this distinct and separate personality is merely a 
fiction created by law for convenience and to promote 
justice. Accordingly, this separate personality of the 
corporation may be disregarded, or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover for found 
(sic) illegality, or to work an injustice, or where necessary to 
achieve equity or when necessary for the protection of 
creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 
347) Corporations are composed of natural persons and the 
legal fiction of a separate corporate personality is not a shield 
for the commission of injustice and inequity. (Chemplex 
Philippines, Inc. vs. Pamatian, 57 SCRA 408)
In the instant case, evidence shows that the plaintiff­appellant  petitioner are personal in nature. Hence, it avers the heirs should have
Francisco Motors Corporation is composed of the heirs of the  been sued in their personal capacity, and not involve the corporation.[14]
late Benita Trinidad as directors and incorporators for whom  With regard to the permissive counterclaim, petitioner also insists
defendant Gregorio Manuel rendered legal services in the  that there was no proper service of the answer containing the
intestate estate case of their deceased mother. Considering the  permissive counterclaim. It claims that the counterclaim is a separate
case which can only be properly served upon the opposing party
aforestated principles and circumstances established in this 
through summons. Further petitioner states that by nature, a permissive
case, equity and justice demands plaintiff­appellants veil of  counterclaim is one which does not arise out of nor is necessarily
corporate identity should be pierced and the defendant be  connected with the subject of the opposing partys claim. Petitioner
compensated for legal services rendered to the heirs, who are  avers that since there was no service of summons upon it with regard
directors of the plaintiff­appellant corporation.[12] to the counterclaim, then the court did not acquire jurisdiction over
petitioner. Since a counterclaim is considered an action independent
Now before us, petitioner assigns the following errors: from the answer, according to petitioner, then in effect there should be
two simultaneous actions between the same parties: each party is at the
I. same time both plaintiff and defendant with respect to the other,
[15]
requiring in each case separate summonses.
THE COURT OF APPEALS ERRED IN APPLYING THE 
In their Comment, private respondents focus on the two questions
DOCTRINE OF PIERCING THE VEIL OF CORPORATE 
raised by petitioner. They defend the propriety of piercing the veil of
ENTITY. corporate fiction, but deny the necessity of serving separate
summonses on petitioner in regard to their permissive counterclaim
II.
contained in the answer.
THE COURT OF APPEALS ERRED IN AFFIRMING THAT Private respondents maintain both trial and appellate courts found
THERE WAS JURISDICTION OVER PETITIONER WITH  that respondent Gregorio Manuel was employed as assistant legal
officer of petitioner corporation, and that his services were solicited by
RESPECT TO THE COUNTERCLAIM.[13]
the incorporators, directors and members to handle and represent them
in Special Proceedings No. 7803, concerning the Intestate Estate of the
Petitioner submits that respondent court should not have resorted late Benita Trinidad. They assert that the members of petitioner
to piercing the veil of corporate fiction because the transaction corporation took advantage of their positions by not compensating
concerned only respondent Gregorio Manuel and the heirs of the late respondent Gregorio Manuel after the termination of the estate
Benita Trinidad. According to petitioner, there was no cause of action proceedings despite his repeated demands for payment of his
by said respondent against petitioner; personal concerns of the heirs services. They cite findings of the appellate court that support piercing
should be distinguished from those involving corporate affairs. the veil of corporate identity in this particular case. They assert that the
Petitioner further contends that the present case does not fall among corporate veil may be disregarded when it is used to defeat public
the instances wherein the courts may look beyond the distinct convenience, justify wrong, protect fraud, and defend crime. It may
personality of a corporation. According to petitioner, the services for also be pierced, according to them, where the corporate entity is being
which respondent Gregorio Manuel seeks to collect fees from used as an alter ego, adjunct, or business conduit for the sole benefit of
the stockholders or of another corporate entity. In these instances, they
aver, the corporation should be treated merely as an association of
individual persons.[16]
Private respondents dispute petitioners claim that its right to due
process was violated when respondents counterclaim was granted due
course, although no summons was served upon it. They claim that no
provision in the Rules of Court requires service of summons upon a
defendant in a counterclaim. Private respondents argue that when the
petitioner filed its complaint before the trial court it voluntarily
submitted itself to the jurisdiction of the court. As a consequence, the
issuance of summons on it was no longer necessary. Private
respondents say they served a copy of their answer with affirmative
defenses and counterclaim on petitioners former counsel, Nicanor G.
Alvarez. While petitioner would have the Court believe that
respondents served said copy upon Alvarez after he had withdrawn his
appearance as counsel for the petitioner, private respondents assert that
this contention is utterly baseless. Records disclose that the answer
was received two (2) days before the former counsel for petitioner
withdrew his appearance, according to private respondents. They
maintain that the present petition is but a form of dilatory appeal, to set
off petitioners obligations to the respondents by running up more
interest it could recover from them. Private respondents therefore
claim damages against petitioner.[17]
To resolve the issues in this case, we must first determine the
propriety of piercing the veil of corporate fiction.
Basic in corporation law is the principle that a corporation has a
separate personality distinct from its stockholders and from other
corporations to which it may be connected. [18] However, under the
doctrine of piercing the veil of corporate entity, the corporations
separate juridical personality may be disregarded, for example, when
the corporate identity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime. Also, where the corporation is a
mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation, then its distinct personality may be
ignored.[19] In these circumstances, the courts will treat the corporation
as a mere aggrupation of persons and the liability will directly attach to
them. The legal fiction of a separate corporate personality in those
cited instances, for reasons of public policy and in the interest of
justice, will be justifiably set aside.
In our view, however, given the facts and circumstances of this
case, the doctrine of piercing the corporate veil has no relevant
application here. Respondent court erred in permitting the trial courts
resort to this doctrine. The rationale behind piercing a corporations
identity in a given case is to remove the barrier between the
corporation from the persons comprising it to thwart the fraudulent and
illegal schemes of those who use the corporate personality as a shield
for undertaking certain proscribed activities. However, in the case at
bar, instead of holding certain individuals or persons responsible for an
alleged corporate act, the situation has been reversed. It is the
petitioner as a corporation which is being ordered to answer for the
personal liability of certain individual directors, officers and
incorporators concerned.Hence, it appears to us that the doctrine has
been turned upside down because of its erroneous invocation. Note
that according to private respondent Gregorio Manuel his services
were solicited as counsel for members of the Francisco family to
represent them in the intestate proceedings over Benita Trinidads
estate. These estate proceedings did not involve any business of
petitioner.
Note also that he sought to collect legal fees not just from certain
Francisco family members but also from petitioner corporation on the
claims that its management had requested his services and he acceded
thereto as an employee of petitioner from whom it could be deduced
he was also receiving a salary. His move to recover unpaid legal fees
through a counterclaim against Francisco Motors Corporation, to offset
the unpaid balance of the purchase and repair of a jeep body could
only result from an obvious misapprehension that petitioners corporate
assets could be used to answer for the liabilities of its individual
directors, officers, and incorporators. Such result if permitted could
easily prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services involved,
whatever obligation said incorporators, directors and officers of the
corporation had incurred, it was incurred in their personal
capacity.When directors and officers of a corporation are unable to
compensate a party for a personal obligation, it is far-fetched to allege
that the corporation is perpetuating fraud or promoting injustice, and
be thereby held liable therefor by piercing its corporate veil. While
there are no hard and fast rules on disregarding separate corporate
identity, we must always be mindful of its function and purpose. A
court should be careful in assessing the milieu where the doctrine of
piercing the corporate veil may be applied. Otherwise an injustice,
although unintended, may result from its erroneous application.
The personality of the corporation and those of its incorporators,
directors and officers in their personal capacities ought to be kept
separate in this case. The claim for legal fees against the concerned
individual incorporators, officers and directors could not be properly
directed against the corporation without violating basic principles
governing corporations. Moreover, every action including a
counterclaim must be prosecuted or defended in the name of the real
party in interest.[20] It is plainly an error to lay the claim for legal fees of
private respondent Gregorio Manuel at the door of petitioner (FMC)
rather than individual members of the Francisco family.
However, with regard to the procedural issue raised by petitioners
allegation, that it needed to be summoned anew in order for the court
to acquire jurisdiction over it, we agree with respondent courts view to
the contrary. Section 4, Rule 11 of the Rules of Court provides that a
counterclaim or cross-claim must be answered within ten (10) days
from service. Nothing in the Rules of Court says that summons should
first be served on the defendant before an answer to counterclaim must
be made. The purpose of a summons is to enable the court to acquire
jurisdiction over the person of the defendant. Although a counterclaim
is treated as an entirely distinct and independent action, the defendant
in the counterclaim, being the plaintiff in the original complaint, has
already submitted to the jurisdiction of the court. Following Rule 9,
Section 3 of the 1997 Rules of Civil Procedure,[21] if a defendant (herein
petitioner) fails to answer the counterclaim, then upon motion of
plaintiff, the defendant may be declared in default.This is what
happened to petitioner in this case, and this Court finds no procedural
error in the disposition of the appellate court on this particular
issue. Moreover, as noted by the respondent court, when petitioner
filed its motion seeking to set aside the order of default, in effect it
submitted itself to the jurisdiction of the court. As well said by
respondent court:
Further on the lack of jurisdiction as raised by plaintiff­
appellant[,] [t]he records show that upon its request, plaintiff­
appellant was granted time to file a motion for reconsideration 
of the disputed decision.Plaintiff­appellant did file its motion 
for reconsideration to set aside the order of default and the 
judgment rendered on the counterclaim.
Thus, even if the court acquired no jurisdiction over plaintiff­
appellant on the counterclaim, as it vigorously insists, plaintiff­
appellant is considered to have submitted to the courts 
jurisdiction when it filed the motion for reconsideration 
seeking relief from the court. (Soriano vs. Palacio, 12 SCRA 
447). A party is estopped from assailing the jurisdiction of a 
court after voluntarily submitting himself to its 
jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel 
is a bar against any claims of lack of jurisdiction. (Balais vs. 
Balais, 159 SCRA 37).[22]
WHEREFORE, the petition is hereby GRANTED and the
assailed decision is hereby REVERSED insofar only as it held
Francisco Motors Corporation liable for the legal obligation owing to
private respondent Gregorio Manuel; but this decision is without
prejudice to his filing the proper suit against the concerned members of
the Francisco family in their personal capacity. No pronouncement as
to costs.
SO ORDERED.
G.R. No. 119858 April 29, 2003
EDWARD C. ONG, petitioner,
vs.
THE COURT OF APPEALS AND THE PEOPLE OF THE
PHILIPPINES, respondents.
CARPIO, J.:
The Case
Petitioner Edward C. Ong ("petitioner") filed this petition for review on
certiorari1 to nullify the Decision2 dated 27 October 1994 of the Court of
Appeals in CA-G.R. C.R. No. 14031, and its Resolution 3 dated 18 April
1995, denying petitioner's motion for reconsideration. The assailed
Decision affirmed in toto petitioner's conviction4 by the Regional Trial
Court of Manila, Branch 35,5 on two counts of estafa for violation of the
Trust Receipts Law,6 as follows:
WHEREFORE, judgment is rendered: (1) pronouncing accused
EDWARD C. ONG guilty beyond reasonable doubt on two counts,
as principal on both counts, of ESTAFA defined under No. 1 (b) of
Article 315 of the Revised Penal Code in relation to Section 13 of
Presidential Decree No. 115, and penalized under the 1st
paragraph of the same Article 315, and sentenced said accused
in each count to TEN (10) YEARS of prision mayor, as minimum,
to TWENTY (20) YEARS of reclusion temporal, as maximum;
(2) ACQUITTING accused BENITO ONG of the crime charged
against him, his guilt thereof not having been established by the
People beyond reasonable doubt;
(3) Ordering accused Edward C. Ong to pay private complainant
Solid Bank Corporation the aggregate sum of P2,976,576.37 as
reparation for the damages said accused caused to the private
complainant, plus the interest thereon at the legal rate and the
penalty of 1% per month, both interest and penalty computed
from July 15, 1991, until the principal obligation is fully paid;
(4) Ordering Benito Ong to pay, jointly and severally with Edward
C. Ong, the private complainant the legal interest and the penalty
of 1% per month due and accruing on the unpaid amount of
P1,449,395.71, still owing to the private offended under the trust
receipt Exhibit C, computed from July 15, 1991, until the said
unpaid obligation is fully paid;
(5) Ordering accused Edward C. Ong to pay the costs of these
two actions.
SO ORDERED.7
The Charge
Assistant City Prosecutor Dina P. Teves of the City of Manila charged
petitioner and Benito Ong with two counts of estafa under separate
Informations dated 11 October 1991.
In Criminal Case No. 92-101989, the Information indicts petitioner and
Benito Ong of the crime of estafa committed as follows:
That on or about July 23, 1990, in the City of Manila, Philippines,
the said accused, representing ARMAGRI International
Corporation, conspiring and confederating together did then and
there willfully, unlawfully and feloniously defraud the SOLIDBANK
Corporation represented by its Accountant, DEMETRIO LAZARO,
a corporation duly organized and existing under the laws of the
Philippines located at Juan Luna Street, Binondo, this City, in the
following manner, to wit: the said accused received in trust from
said SOLIDBANK Corporation the following, to wit:
10,000 bags of urea
valued at P2,050,000.00 specified in a Trust Receipt Agreement
and covered by a Letter of Credit No. DOM GD 90-009 in favor of
the Fertiphil Corporation; under the express obligation on the part
of the said accused to account for said goods to Solidbank
Corporation and/or remit the proceeds of the sale thereof within
the period specified in the Agreement or return the goods, if
unsold immediately or upon demand; but said accused, once in
possession of said goods, far from complying with the aforesaid
obligation failed and refused and still fails and refuses to do so
despite repeated demands made upon him to that effect and with
intent to defraud, willfully, unlawfully and feloniously misapplied,
misappropriated and converted the same or the value thereof to
his own personal use and benefit, to the damage and prejudice of
the said Solidbank Corporation in the aforesaid amount of
P2,050,000.00 Philippine Currency.
Contrary to law.
In Criminal Case No. 92-101990, the Information likewise charges
petitioner of the crime of estafa committed as follows:
That on or about July 6, 1990, in the City of Manila, Philippines,
the said accused, representing ARMAGRI International
Corporation, did then and there willfully, unlawfully and feloniously
defraud the SOLIDBANK Corporation represented by its
Accountant, DEMETRIO LAZARO, a corporation duly organized
and existing under the laws of the Philippines located at Juan
Luna Street, Binondo, this City, in the following manner, to wit: the
said accused received in trust from said SOLIDBANK Corporation
the following goods, to wit:
125 pcs. Rear diff. assy RNZO 49"
50 pcs. Front & Rear diff assy. Isuzu Elof
85 units 1-Beam assy. Isuzu Spz
all valued at P2,532,500.00 specified in a Trust Receipt
Agreement and covered by a Domestic Letter of Credit No. DOM
GD 90-006 in favor of the Metropole Industrial Sales with address
at P.O. Box AC 219, Quezon City; under the express obligation on
the part of the said accused to account for said goods to
Solidbank Corporation and/or remit the proceeds of the sale
thereof within the period specified in the Agreement or return the
goods, if unsold immediately or upon demand; but said accused,
once in possession of said goods, far from complying with the
aforesaid obligation failed and refused and still fails and refuses
to do so despite repeated demands made upon him to that effect
and with intent to defraud, willfully, unlawfully and feloniously
misapplied, misappropriated and converted the same or the value
thereof to his own personal use and benefit, to the damage and
prejudice of the said Solidbank Corporation in the aforesaid
amount of P2,532,500.00 Philippine Currency.
Contrary to law.
Arraignment and Plea
With the assistance of counsel, petitioner and Benito Ong both pleaded
not guilty when arraigned. Thereafter, trial ensued.
Version of the Prosecution
The prosecution's evidence disclosed that on 22 June 1990, petitioner,
representing ARMAGRI International Corporation 8 ("ARMAGRI"), applied
for a letter of credit for P2,532,500.00 with SOLIDBANK Corporation
("Bank") to finance the purchase of differential assemblies from
Metropole Industrial Sales. On 6 July 1990, petitioner, representing
ARMAGRI, executed a trust receipt9 acknowledging receipt from the Bank
of the goods valued at P2,532,500.00.
On 12 July 1990, petitioner and Benito Ong, representing ARMAGRI,
applied for another letter of credit for P2,050,000.00 to finance the
purchase of merchandise from Fertiphil Corporation. The Bank approved
the application, opened the letter of credit and paid to Fertiphil
Corporation the amount of P2,050,000.00. On 23 July 1990, petitioner,
signing for ARMAGRI, executed another trust receipt 10 in favor of the
Bank acknowledging receipt of the merchandise.
Both trust receipts contained the same stipulations. Under the trust
receipts, ARMAGRI undertook to account for the goods held in trust for
the Bank, or if the goods are sold, to turn over the proceeds to the Bank.
ARMAGRI also undertook the obligation to keep the proceeds in the form
of money, bills or receivables as the separate property of the Bank or to
return the goods upon demand by the Bank, if not sold. In addition,
petitioner executed the following additional undertaking stamped on the
dorsal portion of both trust receipts:
I/We jointly and severally agreed to any increase or decrease in
the interest rate which may occur after July 1, 1981, when the
Central Bank floated the interest rates, and to pay additionally the
penalty of 1% per month until the amount/s or installment/s due
and unpaid under the trust receipt on the reverse side hereof
is/are fully paid.11
Petitioner signed alone the foregoing additional undertaking in the Trust
Receipt for P2,253,500.00, while both petitioner and Benito Ong signed
the additional undertaking in the Trust Receipt for P2,050,000.00.
When the trust receipts became due and demandable, ARMAGRI failed
to pay or deliver the goods to the Bank despite several demand
letters.12 Consequently, as of 31 May 1991, the unpaid account under the
first trust receipt amounted to P1,527,180.66, 13 while the unpaid account
under the second trust receipt amounted to P1,449,395.71. 14
 Version of the Defense
After the prosecution rested its case, petitioner and Benito Ong, through
counsel, manifested in open court that they were waiving their right to
present evidence. The trial court then considered the case submitted for
decision.15
The Ruling of the Court of Appeals
Petitioner appealed his conviction to the Court of Appeals. On 27 October
1994, the Court of Appeals affirmed the trial court's decision in toto.
Petitioner filed a motion for reconsideration but the same was denied by
the Court of Appeals in the Resolution dated 18 April 1995.
The Court of Appeals held that although petitioner is neither a director nor
an officer of ARMAGRI, he certainly comes within the term "employees or
other x x x persons therein responsible for the offense" in Section 13 of
the Trust Receipts Law. The Court of Appeals explained as follows:
It is not disputed that appellant transacted with the Solid Bank on
behalf of ARMAGRI. This is because the Corporation cannot by
itself transact business or sign documents it being an artificial
person. It has to accomplish these through its agents. A
corporation has a personality distinct and separate from those
acting on its behalf. In the fulfillment of its purpose, the
corporation by necessity has to employ persons to act on its
behalf.
Being a mere artificial person, the law (Section 13, P.D. 115)
recognizes the impossibility of imposing the penalty of
imprisonment on the corporation itself. For this reason, it is the
officers or employees or other persons whom the law holds
responsible.16
The Court of Appeals ruled that what made petitioner liable was his
failure to account to the entruster Bank what he undertook to perform
under the trust receipts. The Court of Appeals held that ARMAGRI, which
petitioner represented, could not itself negotiate the execution of the trust
receipts, go to the Bank to receive, return or account for the entrusted
goods. Based on the representations of petitioner, the Bank accepted the
trust receipts and, consequently, expected petitioner to return or account
for the goods entrusted.17
The Court of Appeals also ruled that the prosecution need not prove that
petitioner is occupying a position in ARMAGRI in the nature of an officer
or similar position to hold him the "person(s) therein responsible for the
offense." The Court of Appeals held that petitioner's admission that his
participation was merely incidental still makes him fall within the purview
of the law as one of the corporation's "employees or other officials or
persons therein responsible for the offense." Incidental or not, petitioner
was then acting on behalf of ARMAGRI, carrying out the corporation's
decision when he signed the trust receipts.
The Court of Appeals further ruled that the prosecution need not prove
that petitioner personally received and misappropriated the goods subject
of the trust receipts. Evidence of misappropriation is not required under
the Trust Receipts Law. To establish the crime of estafa, it is sufficient to
show failure by the entrustee to turn over the goods or the proceeds of
the sale of the goods covered by a trust receipt. Moreover, the bank is not
obliged to determine if the goods came into the actual possession of the
entrustee. Trust receipts are issued to facilitate the purchase of
merchandise. To obligate the bank to examine the fact of actual
possession by the entrustee of the goods subject of every trust receipt
will greatly impede commercial transactions.
Hence, this petition.
The Issues
Petitioner seeks to reverse his conviction by contending that the Court of
Appeals erred:
1. IN RULING THAT, BY THE MERE CIRCUMSTANCE THAT
PETITIONER ACTED AS AGENT AND SIGNED FOR THE
ENTRUSTEE CORPORATION, PETITIONER WAS
NECESSARILY THE ONE RESPONSIBLE FOR THE OFFENSE;
AND
2. IN CONVICTING PETITIONER UNDER SPECIFICATIONS
NOT ALLEGED IN THE INFORMATION.
The Ruling of the Court
The Court sustains the conviction of petitioner.
 First Assigned Error: Petitioner comes
within the purview of Section 13 of the Trust Receipts Law.
Petitioner contends that the Court of Appeals erred in finding him liable
for the default of ARMAGRI, arguing that in signing the trust receipts, he
merely acted as an agent of ARMAGRI. Petitioner asserts that nowhere
in the trust receipts did he assume personal responsibility for the
undertakings of ARMAGRI which was the entrustee.
Petitioner's arguments fail to persuade us.
The pivotal issue for resolution is whether petitioner comes within the
purview of Section 13 of the Trust Receipts Law which provides:
x x x . If the violation 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 the civil liabilities arising from the
offense. (Emphasis supplied)
We hold that petitioner is a person responsible for violation of the Trust
Receipts Law.
The relevant penal provision of the Trust Receipts Law reads:
SEC. 13. Penalty Clause. - The failure of the entrustee to turn
over the proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to
return said goods, documents or instruments if they were not sold
or disposed of in accordance with the terms of the trust receipt
shall constitute the crime of estafa, punishable under the
provisions of Article Three Hundred and Fifteen, Paragraph One
(b), of Act Numbered Three Thousand Eight Hundred and Fifteen,
as amended, otherwise known as the Revised Penal Code. 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 the civil liabilities arising from the
criminal offense. (Emphasis supplied)
The Trust Receipts Law is violated whenever the entrustee fails to: (1)
turn over the proceeds of the sale of the goods, or (2) return the goods
covered by the trust receipts if the goods are not sold. 18 The mere failure
to account or return gives rise to the crime which is malum
prohibitum.19 There is no requirement to prove intent to defraud. 20
The Trust Receipts Law recognizes the impossibility of imposing the
penalty of imprisonment on a corporation. Hence, if the entrustee is a
corporation, the law makes the officers or employees or other persons
responsible for the offense liable to suffer the penalty of imprisonment.
The reason is obvious: corporations, partnerships, associations and other
juridical entities cannot be put to jail. Hence, the criminal liability falls on
the human agent responsible for the violation of the Trust Receipts Law.
In the instant case, the Bank was the entruster while ARMAGRI was the
entrustee. Being the entrustee, ARMAGRI was the one responsible to
account for the goods or its proceeds in case of sale. However, the
criminal liability for violation of the Trust Receipts Law falls on the human
agent responsible for the violation. Petitioner, who admits being the agent
of ARMAGRI, is the person responsible for the offense for two reasons.
First, petitioner is the signatory to the trust receipts, the loan applications
and the letters of credit. Second, despite being the signatory to the trust
receipts and the other documents, petitioner did not explain or show why
he is not responsible for the failure to turn over the proceeds of the sale
or account for the goods covered by the trust receipts.
The Bank released the goods to ARMAGRI upon execution of the trust
receipts and as part of the loan transactions of ARMAGRI. The Bank had
a right to demand from ARMAGRI payment or at least a return of the
goods. ARMAGRI failed to pay or return the goods despite repeated
demands by the Bank.
It is a well-settled doctrine long before the enactment of the Trust
Receipts Law, that the failure to account, upon demand, for funds or
property held in trust is evidence of conversion or
misappropriation.21 Under the law, mere failure by the entrustee to
account for the goods received in trust constitutes estafa. The Trust
Receipts Law punishes dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of public order. 22The mere
failure to deliver the proceeds of the sale or the goods if not sold
constitutes a criminal offense that causes prejudice not only to the
creditor, but also to the public interest.23 Evidently, the Bank suffered
prejudice for neither money nor the goods were turned over to the Bank.
The Trust Receipts Law expressly makes the corporation's officers or
employees or other persons therein responsible for the offense liable to
suffer the penalty of imprisonment. In the instant case, petitioner signed
the two trust receipts on behalf of ARMAGRI 24 as the latter could only
act through its agents. When petitioner signed the trust receipts, he
acknowledged receipt of the goods covered by the trust receipts. In
addition, petitioner was fully aware of the terms and conditions stated in
the trust receipts, including the obligation to turn over the proceeds of the
sale or return the goods to the Bank, to wit:
Received, upon the TRUST hereinafter mentioned from
SOLIDBANK CORPORATION (hereafter referred to as the
BANK), the following goods and merchandise, the property of
said BANK specified in the bill of lading as follows: x x x and in
consideration thereof, I/we hereby agree to hold said goods in
Trust for the said BANKand 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 by way of conditional sale, pledge, or
otherwise.
In case of sale I/we 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 SOLIDBANK CORPORATION.
xxx xxx xxx.
I/we agree to keep said goods, manufactured products, or
proceeds thereof, whether in the form of money or bills,
receivables, or accounts, separate and capable of identification
as the property of the BANK.
I/we further agree to return the goods, documents, or instruments
in the event of their non-sale, upon demand or within ____ days,
at the option of the BANK.
xxx xxx xxx. (Emphasis supplied) 25
True, petitioner acted on behalf of ARMAGRI. However, it is a well-settled
rule that the law of agency governing civil cases has no application in
criminal cases. When a person participates in the commission of a crime,
he cannot escape punishment on the ground that he simply acted as an
agent of another party.26 In the instant case, the Bank accepted the trust
receipts signed by petitioner based on petitioner's representations. It is
the fact of being the signatory to the two trust receipts, and thus a direct
participant to the crime, which makes petitioner a person responsible for
the offense.
Petitioner could have raised the defense that he had nothing to do with
the failure to account for the proceeds or to return the goods. Petitioner
could have shown that he had severed his relationship with ARMAGRI
prior to the loss of the proceeds or the disappearance of the goods.
Petitioner, however, waived his right to present any evidence, and thus
failed to show that he is not responsible for the violation of the Trust
Receipts Law.
There is no dispute that on 6 July 1990 and on 23 July 1990, petitioner
signed the two trust receipts27 on behalf of ARMAGRI. Petitioner, acting
on behalf of ARMAGRI, expressly acknowledged receipt of the goods in
trust for the Bank. ARMAGRI failed to comply with its undertakings under
the trust receipts. On the other hand, petitioner failed to explain and
communicate to the Bank what happened to the goods despite repeated
demands from the Bank. As of 13 May 1991, the unpaid account under
the first and second trust receipts amounted to P1,527,180.60 and
P1,449,395.71, respectively.28
Second Assigned Error: Petitioner's conviction under the
allegations in the two Informations for Estafa.
Petitioner argues that he cannot be convicted on a new set of facts not
alleged in the Informations. Petitioner claims that the trial court's decision
found that it was ARMAGRI that transacted with the Bank, acting through
petitioner as its agent. Petitioner asserts that this contradicts the specific
allegation in the Informations that it was petitioner who was constituted as
the entrustee and was thus obligated to account for the goods or its
proceeds if sold. Petitioner maintains that this absolves him from criminal
liability.
We find no merit in petitioner's arguments.
Contrary to petitioner's assertions, the Informations explicitly allege that
petitioner, representing ARMAGRI, defrauded the Bank by failing to remit
the proceeds of the sale or to return the goods despite demands by the
Bank, to the latter's prejudice. As an essential element of estafa with
abuse of confidence, it is sufficient that the Informations specifically
allege that the entrustee received the goods. The Informations expressly
state that ARMAGRI, represented by petitioner, received the goods in
trust for the Bank under the express obligation to remit the proceeds of
the sale or to return the goods upon demand by the Bank. There is no
need to allege in the Informations in what capacity petitioner participated
to hold him responsible for the offense. Under the Trust Receipts Law, it
is sufficient to allege and establish the failure of ARMAGRI, whom
petitioner represented, to remit the proceeds or to return the goods to the
Bank.
When petitioner signed the trust receipts, he claimed he was representing
ARMAGRI. The corporation obviously acts only through its human agents
and it is the conduct of such agents which the law must deter. 29 The
existence of the corporate entity does not shield from prosecution the
agent who knowingly and intentionally commits a crime at the instance of
a corporation.30
Penalty for the crime of Estafa.
The penalty for the crime of estafa is prescribed in Article 315 of the
Revised Penal Code, as follows:
1st. The penalty of prision correccional in its maximum period
to prision mayor in its minimum period, if the amount of the fraud
is over 12,000 pesos but does not exceed 22,000 pesos; and if
such amount exceeds the latter sum, the penalty provided in this
paragraph shall be imposed in its maximum period, adding one
year for each additional 10,000 pesos; but the total penalty which
may be imposed should not exceed twenty years. x x x .
In the instant case, the amount of the fraud in Criminal Case No. 92-
101989 is P1,527,180.66. In Criminal Case No. 92-101990, the amount
of the fraud is P1,449,395.71. Since the amounts of the fraud in
each estafa exceeds P22,000.00, the penalty of prision
correccional maximum to prision mayor minimum should be imposed in
its maximum period as prescribed in Article 315 of the Revised Penal
Code. The maximum indeterminate sentence should be taken from this
maximum period which has a duration of 6 years, 8 months and 21 days
to 8 years. One year is then added for each additional P10,000.00, but
the total penalty should not exceed 20 years. Thus, the maximum penalty
for each count of estafa in this case should be 20 years.
Under the Indeterminate Sentence Law, the minimum indeterminate
sentence can be anywhere within the range of the penalty next lower in
degree to the penalty prescribed by the Code for the offense. The
minimum range of the penalty is determined without first considering any
modifying circumstance attendant to the commission of the crime and
without reference to the periods into which it may be subdivided. 31 The
modifying circumstances are considered only in the imposition of the
maximum term of the indeterminate sentence. 32 Since the penalty
prescribed in Article 315 is prision correccional maximum to prision
mayor minimum, the penalty next lower in degree would be prision
correccional minimum to medium. Thus, the minimum term of the
indeterminate penalty should be anywhere within 6 months and 1 day to
4 years and 2 months.33
Accordingly, the Court finds a need to modify in part the penalties
imposed by the trial court. The minimum penalty for each count
of estafa should be reduced to four (4) years and two (2) months
of prision correccional.
As for the civil liability arising from the criminal offense, the question is
whether as the signatory for ARMAGRI, petitioner is personally liable
pursuant to the provision of Section 13 of the Trust Receipts Law.
In Prudential Bank v. Intermediate Appellate Court,34 the Court discussed
the imposition of civil liability for violation of the Trust Receipts Law in this
wise:
It is clear that if the violation or offense is committed by
a corporation, partnership, association or other juridical entities,
the penalty shall be imposed upon the directors, officers,
employees or other officials or persons responsible for the
offense. The penalty referred to is imprisonment, the duration of
which would depend on the amount of the fraud as provided for in
Article 315 of the Revised Penal Code. The reason for this is
obvious: corporation, partnership, association or other juridical
entities cannot be put in jail. However, it is these entities which
are made liable for the civil liabilities arising from the criminal
offense. This is the import of the clause 'without prejudice to the
civil liabilities arising from the criminal offense'. (Emphasis
supplied)
In Prudential Bank, the Court ruled that the person signing the trust
receipt for the corporation is not solidarily liable with the entrustee-
corporation for the civil liability arising from the criminal offense. He may,
however, be personally liable if he bound himself to pay the debt of the
corporation under a separate contract of surety or guaranty.
In the instant case, petitioner did not sign in his personal capacity the
solidary guarantee clause 35 found on the dorsal portion of the trust
receipts. Petitioner placed his signature after the typewritten words
"ARMCO INDUSTRIAL CORPORATION" found at the end of the solidary
guarantee clause. Evidently, petitioner did not undertake to guaranty
personally the payment of the principal and interest of ARMAGRI's debt
under the two trust receipts.
In contrast, petitioner signed the stamped additional undertaking without
any indication he was signing for ARMAGRI. Petitioner merely placed his
signature after the additional undertaking. Clearly, what petitioner signed
in his personal capacity was the stamped additional undertaking to pay a
monthly penalty of 1% of the total obligation in case of ARMAGRI's
default.
In the additional undertaking, petitioner bound himself to pay "jointly and
severally" a monthly penalty of 1% in case of ARMAGRI's default. 35
Thus, petitioner is liable to the Bank for the stipulated monthly penalty of
1% on the outstanding amount of each trust receipt. The penalty shall be
computed from 15 July 1991, when petitioner received the demand letter,
36 until the debt is fully paid.
WHEREFORE, the assailed Decision is AFFIRMED with
MODIFICATION. In Criminal Case No. 92-101989 and in Criminal Case
No. 92-101990, for each count of estafa, petitioner EDWARD C. ONG is
sentenced to an indeterminate penalty of imprisonment from four (4)
years and two (2) months of prision correctional as MINIMUM, to twenty
(20) years of reclusion temporal as MAXIMUM. Petitioner is ordered to
pay SOLIDBANK CORPORATION the stipulated penalty of 1% per
month on the outstanding balance of the two trust receipts to be
computed from 15 July 1991 until the debt is fully paid.
SO ORDERED.
[G.R. No. 141994. January 17, 2005]
FILIPINAS BROADCASTING NETWORK,
INC., petitioner, vs. AGO MEDICAL AND
EDUCATIONAL CENTER-BICOL CHRISTIAN
COLLEGE OF MEDICINE, (AMEC-BCCM) and
ANGELITA F. AGO, respondents.
DECISION
CARPIO, J.:
The Case
This petition for review[1] assails the 4 January 1999
Decision[2] and 26 January 2000 Resolution of the Court
of Appeals in CA-G.R. CV No. 40151. The Court of
Appeals affirmed with modification the 14 December
1992 Decision[3] of the Regional Trial Court of Legazpi
City, Branch 10, in Civil Case No. 8236. The Court of
Appeals held Filipinas Broadcasting Network, Inc. and its
broadcasters Hermogenes Alegre and Carmelo Rima
liable for libel and ordered them to solidarily pay Ago
Medical and Educational 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 informed that course would be moved to a later date because 
and Alegre exposed various alleged complaints from the school is still searching for the appropriate instructor.
students, teachers and parents against Ago Medical and
Educational Center-Bicol Christian College of Medicine xxx
(AMEC) and its administrators. Claiming that the
broadcasts were defamatory, AMEC and Angelita Ago It is a public knowledge that the Ago Medical and Educational 
(Ago), as Dean of AMECs College of Medicine, filed a Center has survived and has been surviving for the past few 
complaint for damages[7] against FBNI, Rima and Alegre years since its inception because of funds support from foreign
on 27 February 1990. Quoted are portions of the foundations. If you will take a look at the AMEC premises 
allegedly libelous broadcasts: youll find out that the names of the buildings there are foreign 
soundings. There is a McDonald Hall. Why not Jose Rizal or 
JUN ALEGRE: Bonifacio Hall? That is a very concrete and undeniable 
evidence that the support of foreign foundations for AMEC is 
Let us begin with the less burdensome: if you have children  substantial, isnt it? With the report which is the basis of the 
taking medical course at AMEC­BCCM, advise them to  expose in DZRC today, it would be very easy for detractors 
pass all subjects because if they fail in any subject they will  and enemies of the Ago family to stop the flow of support of 
repeat their year level, taking up all subjects including  foreign foundations who assist the medical school on the basis 
those they have passed already. Several students had  of the latters purpose. But if the purpose of the institution 
approached me stating that they had consulted with the DECS  (AMEC) is to deceive students at cross purpose with its reason 
which told them that there is no such regulation. If [there] is no for being it is possible for these foreign foundations to lift or 
such regulation why is AMEC doing the same? suspend their donations temporarily.[8]

xxx xxx

Second: Earlier AMEC students in Physical Therapy had  On the other hand, the administrators of AMEC­BCCM, 
complained that the course is not recognized by DECS. xxx AMEC Science High School and the AMEC­Institute of 
Mass Communication in their effort to minimize expenses 
Third: Students are required to take and pay for the subject in terms of salary are absorbing or continues to accept 
even if the subject does not have an instructor ­ such greed  rejects. For example how many teachers in AMEC are former 
for money on the part of AMECs administration. Take the  teachers of Aquinas University but were removed because of 
subject Anatomy: students would pay for the subject upon  immorality? Does it mean that the present administration of 
enrolment because it is offered by the school. However there  AMEC have the total definite moral foundation from catholic 
would be no instructor for such subject. Students would be  administrator of Aquinas University. I will prove to you my 
friends, that AMEC is a dumping ground, garbage, not  xxx
merely of moral and physical misfits. Probably they only 
qualify in terms of intellect. The Dean of Student Affairs of  xxx On our end our task is to attend to the interests of students.
AMEC is Justita Lola, as the family name implies. She is too  It is likely that the students would be influenced by evil. When
old to work, being an old woman. Is the AMEC administration they become members of society outside of campus will be 
exploiting the very [e]nterprising or compromising and  liabilities rather than assets. What do you expect from a 
undemanding Lola? Could it be that AMEC is just patiently  doctor who while studying at AMEC is so much burdened with
making use of Dean Justita Lola were if she is very old. As in  unreasonable imposition? What do you expect from a student 
atmospheric situation zero visibility the plane cannot land,  who aside from peculiar problems because not all students are 
meaning she is very old, low pay follows. By the way, Dean  rich in their struggle to improve their social status are even 
Justita Lola is also the chairman of the committee on  more burdened with false regulations. xxx[9] (Emphasis 
scholarship in AMEC. She had retired from Bicol University a  supplied)
long time ago but AMEC has patiently made use of her.
The complaint further alleged that AMEC is a
xxx reputable learning institution. With the supposed exposs,
FBNI, Rima and Alegre transmitted malicious
MEL RIMA: imputations, and as such, destroyed plaintiffs (AMEC
and Ago) reputation. AMEC and Ago included FBNI as
xxx My friends based on the expose, AMEC is a dumping  defendant for allegedly failing to exercise due diligence in
ground for moral and physically misfit people. What does this  the selection and supervision of its employees,
mean? Immoral and physically misfits as teachers. particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through
May I say Im sorry to Dean Justita Lola. But this is the truth.  Atty. Rozil Lozares, filed an Answer[10] alleging that the
The truth is this, that your are no longer fit to teach. You are  broadcasts against AMEC were fair and true. FBNI, Rima
too old. As an aviation, your case is zero visibility. Dont insist. and Alegre claimed that they were plainly impelled by a
sense of public duty to report the goings-on in AMEC,
xxx Why did AMEC still absorb her as a teacher, a dean, and  [which is] an institution imbued with public interest.
chairman of the scholarship committee at that. The reason is 
practical cost saving in salaries, because an old person is not  Thereafter, trial ensued. During the presentation of
fastidious, so long as she has money to buy the ingredient of  the evidence for the defense, Atty. Edmundo Cea,
collaborating counsel of Atty. Lozares, filed a Motion to
beetle juice. The elderly can get by thats why she (Lola) was 
Dismiss[11] on FBNIs behalf. The trial court denied the
taken in as Dean.
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:
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 Center­Bicol Christian College of 
Medicine (AMEC­BCCM) the amount of P300,000.00 moral 
damages, plus P30,000.00 reimbursement of attorneys fees, 
and to pay the costs of suit.
SO ORDERED. [13] (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one
hand, and AMEC and Ago, on the other, appealed the
decision to the Court of Appeals. The Court of Appeals
affirmed the trial courts judgment with modification. The
appellate court made Rima solidarily liable with FBNI and
Alegre. The appellate court denied Agos claim for
damages and attorneys fees because the broadcasts
were directed against AMEC, and not against her. The
dispositive portion of the Court of Appeals decision
reads:
WHEREFORE, the decision appealed from is 
hereby AFFIRMED, subject to the modification that 
broadcaster Mel Rima is SOLIDARILY ADJUDGED liable 
with FBN[I] and Hermo[g]enes Alegre.
SO ORDERED.[14]

WHEREFORE, premises considered, this court finds for the  FBNI, Rima and Alegre filed a motion for

plaintiff. Considering the degree of damages caused by the  reconsideration which the Court of Appeals denied in its
controversial utterances, which are not found by this court  26 January 2000 Resolution.
to be really very serious and damaging, and there being no  Hence, FBNI filed this petition.[15]
 The Ruling of the Court of Appeals
The Court of Appeals upheld the trial courts ruling
that the questioned broadcasts are libelous per se and
that FBNI, Rima and Alegre failed to overcome the legal
presumption of malice. The Court of Appeals found Rima
and Alegres claim that they were actuated by their moral
and social duty to inform the public of the students gripes
as insufficient to justify the utterance of the defamatory
remarks.
Finding no factual basis for the imputations against
AMECs administrators, the Court of Appeals ruled that
the broadcasts were made with reckless disregard as to
whether they were true or false. The appellate court
pointed out that FBNI, Rima and Alegre failed to present
in court any of the students who allegedly complained
against AMEC. Rima and Alegre merely gave a single
name when asked to identify the students. According to
the Court of Appeals, these circumstances cast doubt on
the veracity of the broadcasters claim that they were
impelled by their moral and social duty to inform the
public about the students gripes.
The Court of Appeals found Rima also liable for libel
since he remarked that (1) AMEC-BCCM is a dumping
ground for morally and physically misfit teachers; (2)
AMEC obtained the services of Dean Justita Lola to
minimize expenses on its employees salaries; and (3)
AMEC burdened the students with unreasonable
imposition and false regulations.[16]
The Court of Appeals held that FBNI failed to
exercise due diligence in the selection and supervision of
its employees for allowing Rima and Alegre to make the
radio broadcasts without the proper KBP accreditation.
The Court of Appeals denied Agos claim for damages
and attorneys fees because the libelous remarks were
directed against AMEC, and not against her. The Court of
Appeals adjudged FBNI, Rima and Alegre solidarily liable
to pay AMEC moral damages, attorneys fees and costs
of suit.
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL 
DAMAGES;
III. WHETHER THE AWARD OF ATTORNEYS FEES 
IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH 
RIMA AND ALEGRE FOR PAYMENT OF 
MORAL DAMAGES, ATTORNEYS FEES AND 
COSTS OF SUIT.
The Courts Ruling
We deny the petition.
This is a civil action for damages as a result of the
allegedly defamatory remarks of Rima and Alegre
against AMEC.[17] While AMEC did not point out clearly
the legal basis for its complaint, a reading of the
complaint reveals that AMECs cause of action is based
on Articles 30 and 33 of the Civil Code. Article
30[18] authorizes a separate civil action to recover civil
liability arising from a criminal offense. On the other
hand, Article 33[19] particularly provides that the injured
party may bring a separate civil action for damages in
cases of defamation, fraud, and physical injuries. AMEC
also invokes Article 19[20] of the Civil Code to justify its
claim for damages. AMEC cites Articles 2176[21] and
2180[22] of the Civil Code to hold FBNI solidarily liable
with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel[23] is a public and malicious imputation of a
crime, or of a vice or defect, real or imaginary, or any act
or omission, condition, status, or circumstance tending to
cause the dishonor, discredit, or contempt of a natural or
juridical person, or to blacken the memory of one who is
dead.[24]
There is no question that the broadcasts were made
public and imputed to AMEC defects or circumstances
tending to cause it dishonor, discredit and contempt.
Rima and Alegres remarks such as greed for money on
the part of AMECs administrators; AMEC is a dumping
ground, garbage of xxx moral and physical misfits; and
AMEC students who graduate will be liabilities rather
than assets of the society are libelous per se. Taken as a
whole, the broadcasts suggest that AMEC is a money-
making institution where physically and morally unfit
teachers abound.
However, FBNI contends that the broadcasts are not
malicious. FBNI claims that Rima and Alegre were plainly
impelled by their civic duty to air the students gripes.
FBNI alleges that there is no evidence that ill will or spite
motivated Rima and Alegre in making the broadcasts.
FBNI further points out that Rima and Alegre exerted
efforts to obtain AMECs side and gave Ago the
opportunity to defend AMEC and its administrators. FBNI
concludes that since there is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious.
Rima and Alegre failed to show adequately their good
[25]
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 imputation is directed against a public person in his public 
figures. Under this privilege, a republisher capacity, it is not necessarily actionable. In order that such 
who accurately and disinterestedly reports certain discreditable imputation to a public official may be 
defamatory statements made against public figures is actionable, it must either be a false allegation of fact or a 
shielded from liability, regardless of the republishers
comment based on a false supposition. If the comment is an
subjective awareness of the truth or falsity of the
accusation.[29] Rima and Alegre cannot invoke the expression of opinion, based on established facts, then it is 
privilege of neutral reportage because unfounded immaterial that the opinion happens to be mistaken, as long as 
comments abound in the broadcasts. Moreover, there is it might reasonably be inferred from the facts.[32] (Emphasis 
no existing controversy involving AMEC when the supplied)
broadcasts were made. The privilege of neutral
reportage applies where the defamed person is a public True, AMEC is a private learning institution whose
figure who is involved in an existing controversy, and a business of educating students is genuinely imbued with
party to that controversy makes the defamatory public interest. The welfare of the youth in general and
statement.[30] AMECs students in particular is a matter which the public
has the right to know. Thus, similar to the newspaper
However, FBNI argues vigorously that malice in law articles in Borjal, the subject broadcasts dealt with
does not apply to this case. Citing Borjal v. Court of matters of public interest. However, unlike in Borjal, the
Appeals,[31] FBNI contends that the broadcasts fall within questioned broadcasts are not based on established
the coverage of qualifiedly privileged communications for facts. The record supports the following findings of the
being commentaries on matters of public interest. Such trial court:
being the case, AMEC should prove malice in fact or
actual malice. Since AMEC allegedly failed to prove xxx Although defendants claim that they were motivated by 
actual malice, there is no libel. consistent reports of students and parents against plaintiff, yet, 
FBNIs reliance on Borjal is misplaced. In Borjal, the defendants have not presented in court, nor even gave name of 
Court elucidated on the doctrine of fair comment, thus: a single student who made the complaint to them, much less 
present written complaint or petition to that effect. To accept 
[F]air commentaries on matters of public interest are  this defense of defendants is too dangerous because it could 
privileged and constitute a valid defense in an action for libel  easily give license to the media to malign people and 
or slander. The doctrine of fair comment means that while in  establishments based on flimsy excuses that there were reports 
general every discreditable imputation publicly made is  to them although they could not satisfactorily establish it. Such
deemed false, because every man is presumed innocent until  laxity would encourage careless and irresponsible broadcasting
his guilt is judicially proved, and every false imputation is  which is inimical to public interests.
deemed malicious, nevertheless, when the discreditable 
Secondly, there is reason to believe that defendant radio  even those they have already passed, nor their claim that the 
broadcasters, contrary to the mandates of their duties, did not  school charges laboratory fees even if there are no laboratories 
verify and analyze the truth of the reports before they aired it,  in the school. No evidence was presented to prove the bases 
in order to prove that they are in good faith. for these claims, at least in order to give semblance of good 
faith.
Alegre contended that plaintiff school had no permit and is not 
accredited to offer Physical Therapy courses. Yet, plaintiff  As for the allegation that plaintiff is the dumping ground for 
produced a certificate coming from DECS that as of Sept. 22,  misfits, and immoral teachers, defendant[s] singled out Dean 
1987 or more than 2 years before the controversial broadcast,  Justita Lola who is said to be so old, with zero visibility 
accreditation to offer Physical Therapy course had already  already. Dean Lola testified in court last Jan. 21, 1991, and 
been given the plaintiff, which certificate is signed by no less  was found to be 75 years old. xxx Even older people prove to 
than the Secretary of Education and Culture herself, Lourdes  be effective teachers like Supreme Court Justices who are still 
R. Quisumbing (Exh. C­rebuttal). Defendants could have  very much in demand as law professors in their late years. 
easily known this were they careful enough to verify. And yet,  Counsel for defendants is past 75 but is found by this court to 
defendants were very categorical and sounded too positive  be still very sharp and effective. So is plaintiffs counsel.
when they made the erroneous report that plaintiff had no 
permit to offer Physical Therapy courses which they were  Dr. Lola was observed by this court not to be physically 
offering. decrepit yet, nor mentally infirmed, but is still alert and docile.

The allegation that plaintiff was getting tremendous aids from  The contention that plaintiffs graduates become liabilities 
foreign foundations like Mcdonald Foundation prove not to be  rather than assets of our society is a mere conclusion. Being 
true also. The truth is there is no Mcdonald Foundation  from the place himself, this court is aware that majority of the 
existing. Although a big building of plaintiff school was given  medical graduates of plaintiffs pass the board examination 
the name Mcdonald building, that was only in order to honor  easily and become prosperous and responsible professionals.[33]
the first missionary in Bicol of plaintiffs religion, as explained 
by Dr. Lita Ago. Contrary to the claim of defendants over the  Had the comments been an expression of opinion
air, not a single centavo appears to be received by plaintiff  based on established facts, it is immaterial that the
school from the aforementioned McDonald Foundation which  opinion happens to be mistaken, as long as it might
does not exist. reasonably be inferred from the facts.[34] However, the
comments of Rima and Alegre were not backed up by
Defendants did not even also bother to prove their claim,  facts. Therefore, the broadcasts are not privileged and
though denied by Dra. Ago, that when medical students fail in  remain libelous per se.
one subject, they are made to repeat all the other subject[s], 
 The broadcasts also violate the Radio Code[35] of radio broadcast industry that radio broadcast
the Kapisanan ng mga Brodkaster sa Pilipinas, practitioners are subject to a code by which their conduct
Ink. (Radio Code). Item I(B) of the Radio Code provides: are measured for lapses, liability and sanctions.
The public has a right to expect and demand that
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND 
radio broadcast practitioners live up to the code of
COMMENTARIES conduct of their profession, just like other professionals.
A professional code of conduct provides the standards
1. x x x for determining whether a person has acted justly,
honestly and with good faith in the exercise of his rights
4. Public affairs program shall present public issues 
and performance of his duties as required by Article
free from personal bias, prejudice and inaccurate  19[37] of the Civil Code. A professional code of conduct
and misleading information. x x x Furthermore,  also provides the standards for determining whether a
the station shall strive to present balanced  person who willfully causes loss or injury to another has
discussion of issues. x x x. acted in a manner contrary to morals or good customs
under Article 21[38] of the Civil Code.
x x x
II.
7. The station shall be responsible at all times in the  Whether AMEC is entitled to moral damages
supervision of public affairs, public issues and 
commentary programs so that they conform to the  FBNI contends that AMEC is not entitled to moral
provisions and standards of this code. damages because it is a corporation.[39]
A juridical person is generally not entitled to moral
8. It shall be the responsibility of the newscaster, 
damages because, unlike a natural person, it cannot
commentator, host and announcer to protect public  experience physical suffering or such sentiments as
interest, general welfare and good order in the  wounded feelings, serious anxiety, mental anguish or
presentation of public affairs and public issues.[36] moral shock.[40] The Court of Appeals cites Mambulao
(Emphasis supplied) Lumber Co. v. PNB, et al.[41] to justify the award of moral
damages. However, the Courts statement
The broadcasts fail to meet the standards prescribed in Mambulao that a corporation may have a good
in the Radio Code, which lays down the code of ethical reputation which, if besmirched, may also be a ground
conduct governing practitioners in the radio broadcast for the award of moral damages is an obiter dictum.[42]
industry. The Radio Code is a voluntary code of conduct
imposed by the radio broadcast industry on its own Nevertheless, AMECs claim for moral damages falls
members. The Radio Code is a public warranty by the under item 7 of Article 2219[43] of the Civil Code. This
provision expressly authorizes the recovery of moral
damages in cases of libel, slander or any other form of
defamation. Article 2219(7) does not qualify whether the
plaintiff is a natural or juridical person. Therefore, a
juridical person such as a corporation can validly
complain for libel or any other form of defamation and
claim for moral damages.[44]
Moreover, where the broadcast is libelous per se, the
law implies damages.[45] In such a case, evidence of an
honest mistake or the want of character or reputation of
the party libeled goes only in mitigation of damages.
[46]
Neither in such a case is the plaintiff required to
introduce evidence of actual damages as a condition
precedent to the recovery of some damages.[47] In this
case, the broadcasts are libelous per se. Thus, AMEC is
entitled to moral damages.
However, we find the award of P300,000 moral
damages unreasonable. The record shows that even
though the broadcasts were libelous per se, AMEC has
not suffered any substantial or material damage to its
reputation. Therefore, we reduce the award of moral
damages from P300,000 to P150,000.
III.
Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to
moral damages, there is no basis for the award of
attorneys fees. FBNI adds that the instant case does not
fall under the enumeration in Article 2208[48] of the Civil
Code.
The award of attorneys fees is not proper because
AMEC failed to justify satisfactorily its claim for attorneys
fees. AMEC did not adduce evidence to warrant the
award of attorneys fees. Moreover, both the trial and
appellate courts failed to explicitly state in their
respective decisions the rationale for the award of
attorneys fees.[49] In Inter-Asia Investment Industries,
Inc. v. Court of Appeals,[50] we held that:
[I]t is an accepted doctrine that the award thereof as an item of 
damages is the exception rather than the rule, and counsels fees
are not to be awarded every time a party wins a suit. The 
power of the court to award attorneys fees under Article 
2208 of the Civil Code demands factual, legal and equitable
justification, without which the award is a conclusion 
without a premise, its basis being improperly left to 
speculation and conjecture. In all events, the court must 
explicitly state in the text of the decision, and not only in the 
decretal portion thereof, the legal reason for the award of 
attorneys fees.[51](Emphasis supplied)
While it mentioned about the award of attorneys fees
by stating that it lies within the discretion of the court and
depends upon the circumstances of each case, the Court
of Appeals failed to point out any circumstance to justify
the award.
IV.
Whether FBNI is solidarily liable with Rima and
Alegre
for moral damages, attorneys fees
and costs of suit
 FBNI contends that it is not solidarily liable with Rima
and Alegre for the payment of damages and attorneys
fees because it exercised due diligence in the selection
and supervision of its employees, particularly Rima and
Alegre. FBNI maintains that its broadcasters, including
Rima and Alegre, undergo a very regimented process
before they are allowed to go on air. Those who apply for
broadcaster are subjected to interviews, examinations
and an apprenticeship program.
FBNI further argues that Alegres age and lack of
training are irrelevant to his competence as a
broadcaster. FBNI points out that the minor deficiencies
in the KBP accreditation of Rima and Alegre do not in
any way prove that FBNI did not exercise the diligence of
a good father of a family in selecting and supervising
them. Rimas accreditation lapsed due to his non-
payment of the KBP annual fees while Alegres
accreditation card was delayed allegedly for reasons
attributable to the KBP Manila Office. FBNI claims that
membership in the KBP is merely voluntary and not
required by any law or government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort
feasors are jointly and severally liable for the tort which
they commit.[52] Joint tort feasors are all the persons who
command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission
of a tort, or who approve of it after it is done, if done for
their benefit.[53] Thus, AMEC correctly anchored its cause
of action against FBNI on Articles 2176 and 2180 of the
Civil Code.
As operator of DZRC-AM and employer of Rima and
Alegre, FBNI is solidarily liable to pay for damages
arising from the libelous broadcasts. As stated by the
Court of Appeals, recovery for defamatory statements
published by radio or television may be had from
the owner of the station, a licensee, the operator of
the station, or a person who procures, or participates in,
the making of the defamatory statements.[54] An employer
and employee are solidarily liable for a defamatory
statement by the employee within the course and scope
of his or her employment, at least when the employer
authorizes or ratifies the defamation.[55] In this case, Rima
and Alegre were clearly performing their official duties as
hosts of FBNIs radio program Expos when they aired the
broadcasts. FBNI neither alleged nor proved that Rima
and Alegre went beyond the scope of their work at that
time. There was likewise no showing that FBNI did not
authorize and ratify the defamatory broadcasts.
Moreover, there is insufficient evidence on record that
FBNI exercised due diligence in
the selection and supervision of its employees,
particularly Rima and Alegre. FBNI merely showed that it
exercised diligence in the selection of its broadcasters
without introducing any evidence to prove that it
observed the same diligence in the supervision of Rima
and Alegre. FBNI did not show how it exercised diligence
in supervising its broadcasters. FBNIs alleged constant
reminder to its broadcasters to observe truth, fairness
and objectivity and to refrain from using libelous and
indecent language is not enough to prove due diligence
in the supervision of its broadcasters. Adequate training
of the broadcasters on the industrys code of conduct,
sufficient information on libel laws, and continuous
evaluation of the broadcasters performance are but a few
of the many ways of showing diligence in the supervision MAGLASANG, as Heirs of
of broadcasters.
Deceased SPOUSES RAYMUNDO QUISUMBING, J.,
FBNI claims that it has taken all the precaution in
the selection of Rima and Alegre as broadcasters, I. CRYSTAL and DESAMPARADOS Chairperson,
bearing in mind their qualifications. However, no clear
and convincing evidence shows that Rima and Alegre C. CRYSTAL, CARPIO MORALES,
underwent FBNIs regimented process of application.
Furthermore, FBNI admits that Rima and Alegre had Petitioners, TINGA,
deficiencies in their KBP accreditation,[56] which is one of VELASCO, JR., and
FBNIs requirements before it hires a broadcaster.
Significantly, membership in the KBP, while voluntary, BRION, JJ.
indicates the broadcasters strong commitment to
observe the broadcast industrys rules and regulations. - versus -
Clearly, these circumstances show FBNIs lack of
diligence in selecting and supervising Rima and Alegre. Promulgated:
Hence, FBNI is solidarily liable to pay damages together November 28, 2008
with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We BANK OF THE PHILIPPINE ISLANDS,
AFFIRM the Decision of 4 January 1999 and Resolution
Respondent.
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 x-------------------------------------------------------------------
petitioner. ---------x
SO ORDERED.

HERMAN C. CRYSTAL, LAMBERTO G.R. No. 172428

DECISION
C. CRYSTAL, ANN GEORGIA C.
SOLANTE, and DORIS C. Present: TINGA, J.:

Before us is a Petition for Review[1] of the Decision[2] and
Resolution[3] of the Court of Appeals dated 24 October 2005
and 31 March 2006, respectively, in CA G.R. CV No. 72886,
which affirmed the 8 June 2001 decision of the Regional
Trial Court, Branch 5, of Cebu City.[4]
The facts, as culled from the records, follow.
On 28 March 1978, spouses Raymundo and Desamparados
Crystal obtained a P300,000.00 loan in behalf of the Cebu
Contractors Consortium Co. (CCCC) from the Bank of the
Philippine Islands-Butuan branch (BPI-Butuan). The loan
was secured by a chattel mortgage on heavy equipment and
machinery of CCCC. On the same date, the spouses
executed in favor of BPI-Butuan a Continuing
Suretyship[5] where they bound themselves as surety of
CCCC in the aggregate principal sum of not
exceeding P300,000.00.Thereafter, or on 29 March
1979, Raymundo Crystal executed a promissory note[6] for
the amount of P300,000.00, also in favor of BPI-Butuan.
Sometime in August 1979, CCCC renewed a previous loan,
this time from BPI, Cebu City branch (BPI-Cebu City). The
renewal was evidenced by a promissory note[7] dated 13
August 1979, signed by the spouses in their personal
capacities and as managing partners of CCCC. The
promissory note states that the spouses are jointly and
severally liable with CCCC. It appears that before the
original loan could be granted, BPI-Cebu City required
CCCC to put up a security.
However, CCCC had no real property to offer as security for
the loan; hence, the spouses executed a real estate
mortgage[8] over their own real property on 22 September
1977.[9] On 3 October 1977, they executed another real estate
mortgage over the same lot in favor of BPI-Cebu City, to
secure an additional loan of P20,000.00 of CCCC.[10]
CCCC failed to pay its loans to both BPI-Butuan and BPI-
Cebu City when they became due. CCCC, as well as the
spouses, failed to pay their obligations despite demands.
Thus, BPI resorted to the foreclosure of the chattel mortgage
and the real estate mortgage. The foreclosure sale on the
chattel mortgage was initially stalled with the issuance of a
restraining order against BPI.[11] However, following BPIs
compliance with the necessary requisites of extrajudicial
foreclosure, the foreclosure sale on the chattel mortgage was
consummated on 28 February 1988, with the proceeds
amounting to P240,000.00 applied to the loan from BPI-
Butuan which had then reached P707,393.90. Meanwhile, on
7 July 1981, Insular Bank of Asia and America (IBAA),
through its Vice-President for Legal and Corporate Affairs,
offered to buy the lot subject of the two (2) real estate
mortgages and to pay directly the spouses indebtedness in
exchange for the release of the mortgages. BPI rejected
IBAAs offer to pay.[13] BPI filed a complaint for sum of
money against CCCC and the spouses before the Regional
Trial Court of Butuan City (RTC Butuan), seeking to recover
the deficiency of the loan of CCCC and the spouses with
BPI-Butuan. The trial court ruled in favor of BPI. Pursuant
to the decision, BPI instituted extrajudicial foreclosure of the
spouses mortgaged property.[14]
On 10 April 1985, the spouses filed an action
for Injunction With Damages, With A Prayer For A
Restraining Order and/ or Writ of Preliminary Injunction.
[15]
The spouses claimed that the foreclosure of the real estate
mortgages is illegal because BPI should have
exhausted CCCCs properties first, stressing that they are
mere guarantors of the renewed loans. They also prayed that
they be awarded moral and exemplary damages, attorneys
fees, litigation expenses and cost of suit. Subsequently, the
spouses filed an amended complaint,[16] additionally alleging
that CCCC had opened and maintained a foreign currency
savings account (FCSA-197) with bpi, Makati branch (BPI-
Makati), and that said FCSA was used as security
for a P450,000.00 loan also extended by BPI-
Makati. The P450,000.00 loan was allegedly paid, and
thereafter the spouses demanded the return of the FCSA
passbook. BPI rejected the demand; thus, the spouses were
unable to withdraw from the said account to pay for their
other obligations to BPI.
The trial court dismissed the spouses complaint and ordered
them to pay moral and exemplary damages and attorneys
fees to BPI.[17] It ruled that since the spouses agreed to bind
themselves jointly and severally, they are solidarily liable for
the loans; hence, BPI can validly foreclose the two real
estate mortgages. Moreover, being guarantors-mortgagors,
the spouses are not entitled to the benefit of exhaustion.
Anent the FCSA, the trial court found that CCCC originally
had FCDU SA No. 197 with BPI, Dewey Boulevard branch,
which was transferred to BPI-Makati as FCDU SA 76/0035,
at the request of Desamparados Crystal. FCDU SA 76/0035
was thus closed, but DesamparadosCrystal failed to
surrender the passbook because it was lost. The transferred
FCSA in BPI-Makati was the one used as security for
CCCCs P450,000.00 loan from BPI-Makati. CCCC was no
longer allowed to withdraw from FCDU SA No. 197
because it was already closed.
The spouses appealed the decision of the trial court to the
Court of Appeals, but their appeal was dismissed.[18] The
spouses moved for the reconsideration of the decision, but
the Court of Appeals also denied their motion for
reconsideration.[19] Hence, the present petition.
Before the Court, petitioners who are the heirs of the
spouses argue that the failure of the spouses to pay the BPI-
Cebu City loan of P120,000.00 was due to BPIs illegal
refusal to accept payment for the loan unless
the P300,000.00 loan from BPI-Butuan would also be paid.
Consequently, in view of BPIs unjust refusal to accept
payment of the BPI-Cebu City loan, the loan obligation of
the spouses was extinguished, petitioners contend.
The contention has no merit. Petitioners rely
on IBAAs offer to purchase the mortgaged lot from them
and to directly pay BPI out of the proceeds thereof to settle
the loan.[20]BPIs refusal to agree to such payment scheme
cannot extinguish the spouses loan obligation. In the first
place, IBAA is not privy to the loan agreement or the
promissory note between the spouses and BPI. Contracts,
after all, take effect only between the parties, their
successors in interest, heirs and assigns.[21] Besides, under
Art. 1236 of the Civil Code, the creditor is not bound to
accept payment or performance by a third person who has no
interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary. We see no stipulation in the
promissory note which states that a third person may fulfill
the spouses obligation. Thus, it is clear that the spouses
alone bear responsibility for the same.
In any event, the promissory note is the controlling
repository of the obligation of the spouses. Under the
promissory note, the spouses defined the parameters of their
obligation as follows:
On or before June 29, 1980 on demand, for value
received, I/we promise to pay, jointly and severally, to
the BANK OF THE PHILIPPINE ISLANDS, at its
office in the city of Cebu Philippines, the sum of ONE
HUNDRED TWENTY THOUSAND
PESOS (P120,0000.00), Philippine Currency, subject to
periodic installments on the principal as
follows: P30,000.00 quarterly amortization starting
September 28, 1979. x x x [22]
A solidary obligation is one in which each of the debtors is
liable for the entire obligation, and each of the creditors is
entitled to demand the satisfaction of the whole obligation
from any or all of the debtors. [23] A liability is solidary only
when the obligation expressly
so states, when the law so provides or when the nature of the
obligation so requires.[24] Thus, when the obligor undertakes
to be jointly and severally liable, it means that the obligation
is solidary,[25] such as in this case. By stating I/we promise to
pay, jointly and severally, to the BANK OF THE
PHILIPPINE ISLANDS, the spouses agreed to be sought
out and be demanded payment from, by BPI. BPI did
demand payment from them, but they failed to comply with
their obligation, prompting BPIs valid resort to the
foreclosure of the chattel mortgage and the real estate
mortgages.
More importantly, the promissory note, wherein the
spouses undertook to be solidarily liable for the principal
loan, partakes the nature of a suretyship and therefore is an
additional security for the loan. Thus we held in one case
that if solidary liability was instituted to guarantee a
principal obligation, the law deems the contract to be one of
suretyship.[26] And while a contract of a surety is in essence
secondary only to a valid principal obligation, the
suretys liability to the creditor or promisee of the principal is
said to be direct, primary, and absolute; in other words, the
surety is directly and equally bound with the principal. The
surety therefore becomes liable for the debt or duty of
another even if he possesses no direct or personal interest
over the obligations nor does he receive any
benefit therefrom.[27]
Petitioners contend that the Court of Appeals erred in not
granting their counterclaims, considering that they suffered
moral damages in view of the unjust refusal of BPI to accept
the payment scheme proposed by IBAA and the allegedly
unjust and illegal foreclosure of the real estate mortgages on
their property.[28] Conversely, they argue that the Court of
Appeals erred in awarding moral damages to BPI, which is a
corporation, as well as exemplary damages, attorneys fees
and expenses of litigation.[29]
We do not agree. Moral damages are meant to compensate
the claimant for any physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation and similar injuries
unjustly caused.[30] Such damages, to be recoverable, must be
the proximate result of a wrongful act or omission the
factual basis for which is satisfactorily established by the
aggrieved party.[31] There being no wrongful or unjust act on
the part of BPI in demanding payment from them and in
seeking the foreclosure of the chattel and real estate
mortgages, there is no lawful basis for award of damages in
favor of the spouses.
Neither is BPI entitled to moral damages. A juridical person
is generally not entitled to moral damages because, unlike a
natural person, it cannot experience physical suffering or
such sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock.[32] The Court of Appeals
found BPI as being famous and having gained its familiarity
and respect not only in the Philippines but also in the whole
world because of its good will and good reputation must
protect and defend the same against any unwarranted suit
such as the case at bench.[33] In holding that BPI is entitled to
moral damages, the Court of Appeals relied on the case
of People v. Manero,[34] wherein the Court ruled that [i]t is
only when a juridical person has a good reputation that is
debased, resulting in social humiliation, that moral damages
may be awarded.[35]
We do not agree with the Court of Appeals. A statement
similar to that made by the Court in Manero can be found in
the case of Mambulao Lumber Co. v. PNB, et al.,[36] thus:
x x x Obviously, an artificial person like herein
appellant corporation cannot experience physical
sufferings, mental anguish, fright, serious anxiety,
 wounded feelings, moral shock or social
humiliation which are basis of moral damages. A
corporation may have good reputation which, if
besmirched may also be a ground for the award
of moral damages. x x x (Emphasis supplied)
Nevertheless, in the more recent cases of ABS-CBN Corp. v.
Court of Appeals, et al.,[37] and Filipinas Broadcasting
Network, Inc. v. Ago Medical and Educational Center-Bicol
Christian College of Medicine (AMEC-BCCM),[38] the Court
held that the statements in Manero and Mambulao were
mere obiter dicta, implying that the award of moral damages
to corporations is not a hard and fast rule. Indeed, while the
Court may allow the grant of moral damages to corporations,
it is not automatically granted; there must still be proof of
the existence of the factual basis of the damage and its
causal relation to the defendants acts. This is so because
moral damages, though incapable of pecuniary estimation,
are in the category of an award designed to compensate the
claimant for actual injury suffered and not to impose a
penalty on the wrongdoer.[39]
The spouses complaint against BPI proved to be unfounded,
but it does not automatically entitle BPI to moral
damages. Although the institution of a clearly unfounded
civil suit can at times be a legal justification for an award of
attorney's fees, such filing, however, has almost invariably
been held not to be a ground for an award of moral damages.
The rationale for the rule is that the law could not have
meant to impose a penalty on the right to litigate. Otherwise,
moral damages must every time be awarded in favor of the
prevailing defendant against an unsuccessful plaintiff.[40] BPI
may have been inconvenienced by the suit, but we do not see
how it could have possibly suffered besmirched reputation
on account of the single suit alone. Hence, the award of
moral damages should be deleted.
The awards of exemplary damages and attorneys fees,
however, are proper. Exemplary damages, on the other hand,
are imposed by way of example or correction for the public
good, when the party to a contract acts in a wanton,
fraudulent, oppressive or malevolent manner, while
attorneys fees are allowed when exemplary damages are
awarded and when the party to a suit is compelled to incur
expenses to protect his interest.[41] The spouses instituted
their complaint against BPI notwithstanding the fact that
they were the ones who failed to pay their obligations.
Consequently, BPI was forced to litigate and defend its
interest. For these reasons, BPI is entitled to the awards of
exemplary damages and attorneys fees.
WHEREFORE, the petition is DENIED. The Decision and
Resolution of the Court of Appeals dated 24 October 2005
and 31 March 2006, respectively, are hereby AFFIRMED,
with the MODIFICATION that the award of moral
damages to Bank of the Philippine Islands is DELETED.
Costs against the petitioners.
SO ORDERED.
G.R. No. 198436
PIONEER INSURANCE SURETY CORPORATION, Petitioner,
vs.
MORNING STAR TRAVEL & TOURS, INC., ESTELITA CO WONG,
BENNY H. WONG, ARSENIO CHUA, SONNY CHUA, AND WONG YAN
TAK, Respondents.
DECISION
LEONEN, J.:
As a general rule, a corporation has a separate and distinct personality
from those who represent it. Its officers are solidarily liable only when
1
exceptional circumstances exist, such as cases enumerated in Section
31 of the Corporation Code. The liability of the officers must be proven by
2
evidence sufficient to overcome the burden of proof borne by the plaintiff.
This case originated from a Complaint for Collection of Sum of Money
3
and Damages filed by Pioneer Insurance & Surety Corporation (Pioneer)
against Morning Star Travel & Tours, Inc. (Morning Star) for the amounts
Pioneer paid the International Air Transport Association under its credit
insurance policy. The amounts of P100,479,171.59 and US$457,834.14
represent Morning Star’s overdue remittances to the International Air
Transport Association. 4
Pioneer filed this Petition for Review assailing the Court of Appeals’
5
February 28, 2011 Decision "only insofar as it absolved the individual
6
respondents of their joint and solidary liability to petitioner[,]" and August
7
31, 2011 Resolution denying reconsideration.
8
Morning Star is a travel and tours agency with Benny Wong, Estelita
Wong, Arsenio Chua, Sonny Chua, and Wong Yan Tak as shareholders
and members of the board of directors. 9
International Air Transport Association is a Canadian corporation licensed
to do business in the Philippines "to promote safe, regular and
economical air transport for all people, among others."
International Air Transport Association appointed Morning Star as an
accredited travel agent. Morning Star "avail[ed] of the privilege of getting
on credit . . . air transport tickets from various airline companies [to be
sold] to passengers at prices fixed by the airline companies[.]"
Morning Star and International Air Transport Association entered a
Passenger Sales Agency Agreement such that Morning Star must report
all air transport ticket sales to International Air Transport Association and
account all payments received through the centralized system called
Billing and Settlement Plan. Morning Star only holds in trust all monies
collected as these belong to the airline companies.
International Air Transport Association obtained a Credit Insurance Policy
from Pioneer to assure itself of payments by accredited travel agents for
ticket sales and monies due to the airline companies under the Billing and
Settlement Plan. The policy was for the period from November 1, 2001
15
to December 31, 2002, renewed for the period from January 1, 2003 to
December 31, 2003. 16
The policy was made known to the accredited travel agents. Morning
Star, through its President, Benny Wong, was among those that declared
itself liable to indemnify Pioneer for any and all claims under the policy.
He executed a registration form under the Credit Insurance Program for
BSP-Philippines Agents. 17
Morning Star had an accrued billing of P49,051,641.80 and
US$325,865.35 for the period from December 16, 2002 to December 31,
2002. It failed to remit these amounts through the Billing and Settlement
Plan, prompting the International Air Transport Association to send a
letter dated January 17, 2003 advising on the overdue remittance. 18
International Air Transport Association again declared Morning Star in
default by a letter dated January 20, 2003 for its overdue account
covering the period from January 1, 2003 to January 20, 2003. 19
Pursuant to the credit insurance policies, International Air Transport
Association demanded from Pioneer the sums of P109,728,051.00 and
US$457,834.14 representing Morning Star’s overdue account as of April
30, 2003. Pioneer investigated, ascertained, and validated the claims,
then paid International Air Transport Association the amounts of
P100,479,171.59 and US$457,834.14. 20
Consequently, Pioneer demanded these amounts from Morning Star 2. Php100,000.00 as attorney’s fees;
through a letter dated September 23, 2003. International Air Transport
21

Association executed in Pioneer’s favor a Release of Claim and 3. Php100,000.00 as exemplary damages;
Subrogation Receipt on December 23, 2003. 22

4. Php200,000.00 as litigation expenses[;]

On November 10, 2005, Pioneer filed a Complaint for Collection of Sum
of Money and Damages against Morning Star and its shareholders and 5. costs of suit.
directors.
23

SO ORDERED. 32

Morning Star, Benny Wong, and Estelita Wong were served with
summons and a copy of the Complaint on November 22, 2005, while
The Court of Appeals, in its Decision dated February 28, 2011, affirmed
Arsenio Chua, Sonny Chua, and Wong Yan Tak were unserved. 24

the trial court with modification in that only Morning Star was liable to pay
petitioner:
The trial court granted Pioneer’s Motion to Declare Respondents in
Default for failure to file an Answer within the period. Pioneer presented
25

WHEREFORE, premises considered, the instant Appeal is DENIED.

its evidence ex-parte. 26

Accordingly, the assailed 9 November 2007 Decision of the Regional Trial

Meanwhile, Pioneer filed an Ex-Parte Motion for Issuance of Alias
Summons since Morning Star was previously served through substituted
service. The trial court granted the Motion, and alias summons was
served on February 5, 2007. Upon motion, Morning Star was declared in
default for failure to file an Answer within the period.
27
On June 28, 2007, Morning Star filed a Motion for Leave of Court to File
Attached Answer explaining that it only received a copy of the Complaint
Court of Makati City, Branch 143 in Civil Case No. 05-993 is AFFIRMED
with MODIFICATION. Insofar as the trial court ordered Defendants-
Appellants Estelita Co Wong, Benny H. Wong, Arsenio Chua, Sonny
Chua and Wong Yan Tak to jointly and severally pay the amounts
awarded to Plaintiff-Appellee, the same is deleted. Only Morning Star is
held personally liable for the payment thereof. Further, exemplary
damages and attorney’s fees are likewise deleted for lack of basis.
SO ORDERED. 33

on February 5, 2007. Its counsel also alleged that he was retained only
28

on June 22, 2007. The trial court denied the Motion on July 23, 2007,
29

The Court of Appeals denied Pioneer’s Motion for Partial

and also denied reconsideration. 30

Reconsideration. Thus, Pioneer filed this Petition.

34

The Regional Trial Court in its Decision dated November 9, 2007 ruled in
31

Pioneer submits that its Petition falls under the exceptions to the general
favor of Pioneer and ordered respondents to jointly and severally pay
rule that petitions for review may raise only questions of law. Pioneer
35

Pioneer:
raises conflicting findings and conclusions by the lower courts regarding
solidary liability, and misapprehension of facts by the Court of Appeals. 36

WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered

in favor of the plaintiff as against the defendants ordering the latter to
jointly and severally pay the following amount:
1. One Hundred Million Four Hundred Seventy Nine Thousand
One Hundred Seventy One Pesos and Fifty Nine
(Php100,479,171.59) and Four Hundred Fifty Seven Thousand
Pioneer argues that "the individual respondents were, at the very least,
grossly negligent in running the affairs of respondent Morning Star by
knowingly allowing it to amass huge debts to [International Air Transport
Association] despite its financial distress, thus, giving sufficient ground for
the court to pierce the corporate veil and hold said individual respondents
personally liable." It cites Section 31 of the Corporation Code on the
37

Eight Hundred Thirty Four Dollars and 14/100 (US$457,834.14), liability of directors "guilty of gross negligence or bad faith in directing the
with interest at 12% per annum from September 23, 2003 until affairs of the corporation[.]"
38

the sum is fully paid;

Pioneer also cites jurisprudence on the requisites for the doctrine of
39
I
piercing the corporate veil to apply. It submits that all requisites are
40

present, thus, the individual respondents should be held solidarily liable Only questions of law may be raised in a petition for review. Factual
54

with Morning Star. It cites at length the testimony of its witness Atty.
41
findings of the Court of Appeals are generally "final and conclusive, and
Vincenzo Nonato M. Taggueg (Atty. Taggueg) that based on Morning
42
cannot be reviewed on appeal by [this court], provided they are borne out
Star’s General Information Sheet and financial statements, Morning Star by the record or based on substantial evidence." 55

"has been accumulating losses as early as 1998 continuing to 1999 and

2000 resulting to a deficit of Php26,168,1768.00 [sic] as of December 31, Issues such as whether the separate and distinct personality of a
2000[.]"
43
corporation was used for fraudulent ends, or whether the evidence
warrants a piercing of the corporate veil, involve questions of fact. 56

Pioneer contends that the abnormally large indebtedness to International

Air Transport Association was incurred in fraud and bad faith, with Jurisprudence established exceptions from the general rule against a
Morning Star having no intention to pay its debt. It cites Oria
44
factual review by this court. These exceptions include cases when the
v. McMicking on the badges of fraud. Pioneer then enumerates "the
45 46
judgment appears to be based on a "patent misappreciation of facts." 57

unmistakable badges of fraud and deceit committed by individual

respondents" such as the fact that Morning Star had no assets, but the
47 48

Petitioner invokes this exception in alleging that "the conflicting findings

two corporations also "controlled and managed by the individual
and conclusions between the Court of Appeals and the trial court insofar
respondents were doing relatively well [at] the time . . . Morning Star was
as the solidary liability of respondents to pay petitioner and the
incurring huge losses[.]" Moreover, a new travel agency called Morning
49

misapprehensions of facts by the Court of Appeals constrains petitioner

Star Tour Planners, Inc. now operates at the Morning Star’s former
to raise both questions of fact and law in the Petition." 58

principal place of business in Pedro Gil, Manila, with the children of

individual respondents as its stockholders, directors, and officers. 50

In ruling against the solidary liability of the individual respondents with

respondent Morning Star, the Court of Appeals discussed that "the trial
Respondents counter with the general rule clothing corporations with
court merely stated in the dispositive portion thereof that Defendants-
personality separate and distinct from their officers and
Appellants are ordered to pay Plaintiff-Appellee jointly and severally the
stockholders. They submit that "[m]ere sweeping allegations that officers
51

judgment award without discussing in the body of the decision the reason
acted in bad faith because it incurred obligations it cannot pay will not
for such conclusion."59

hold any water." Respondents argue that Pioneer failed to prove bad
52

faith, relying only on Atty. Taggueg’s testimony, but "Mr. Taggueg admitted
that his knowledge about the defendant Morning Star was merely based The Court of Appeals then enumerated the exceptional circumstances
on his assumptions and his examination of the [Securities and Exchange warranting solidary liabilities by corporate agents based on jurisprudence,
Commission] documents." 53 and found none to be present in this case. 60

The issues for resolution are: We affirm the Court of Appeals.

First, whether this case involves an exception to the general rule that II
petitions for review are limited to questions of law; and
The law vests corporations with a separate and distinct personality from
Second, whether the doctrine of piercing the corporate veil applies to hold those that represent these corporations. 61

the individual respondents solidarily liable with respondent Morning Star

Travel and Tours, Inc. to pay the award in favor of petitioner Pioneer The corporate legal structure draws its "economic superiority" from key
62

Insurance & Surety Corporation. features such as a separate corporate personality. Unlike other business
associations such as partnerships, the corporate framework encourages
investment by allowing even small capital contributors to be part of a big
business endeavor made possible by the aggregation of their capital
funds. The consequent limited liability feature, since corporate assets
63
will answer for corporate debts, also proves attractive for investors.
However, this legal structure should not be abused.
A separate corporate personality shields corporate officers acting in good
faith and within their scope of authority from personal liability except for
situations enumerated by law and jurisprudence, thus: 64
Personal liability of a corporate director, trustee or officer along (although
not necessarily) with the corporation may so validly attach, as a rule, only
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.’ 65
The first exception comes from Section 31 of the Corporation Code:
SECTION 31. Liability of Directors, Trustees or Officers. —
Directors or trustees who wilfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons. (Emphasis supplied)
Petitioner imputes gross negligence and bad faith on the part of the
individual respondents for incurring the huge indebtedness to
International Air Transport Association. 66
Bad faith "imports a dishonest purpose or some moral obliquity and
conscious doing of a wrong, not simply bad judgment or
negligence." "[I]t means breach of a known duty through some motive or
67
interest or ill will; it partakes of the nature of fraud."
68
The trial court gave weight to its finding that respondent Morning Star still
availed itself of loans and/or obligations with International Air Transport
Association despite its financial standing of operating at a loss:
Based on the plaintiff’s examination of the financial statements submitted
by the defendant Morning Star with the Securities and Exchange
Commission (SEC) for the years 2000 and 2001 with comparative figures
for the years ending 1998, 1999 and 2000, herein defendant corporation
has been accumulating losses as early as 1998 continuing to 1999 and
2000 resulting to a deficit of Php26, 168,176.80 as of December 31,
2000. It was also shown that for the prior years of 1998 and 1999,
defendant Morning Star incurred a deficit of Php3,910,763.00 as of
December 31, 1998 and Php2,841,626.00 as of December 31, 1999 and
in the Balance Sheet, it indicated therein the defendants’ total assets of
Php150,579,421.00 while the total liabilities amounted to
Php160,222,966.00, thereby making the defendant Morning Star
insolvent. Despite the fact that defendant Morning Star was already
incurring losses as early as 1998 up to the year 2000, the latter still
contracted loans and/or obligations with IATA sometime in 2002 and
which indebtedness ballooned to the huge amount of
Php109,728,051.00 andUS$496,403.21 as of April 30, 2003, which
obviously it could not pay considering its financial standing.
Further investigation by the plaintiff shows that it could not find any
assets or properties in the name of defendant Morning Star because
even the land and the building where it held office was registered in the
name of "Morning Star Management Ventures Corporation", as
evidenced by the certified true copies of the transfer certificates of title
(TCT) nos. 192243 and 192244 in the name of Morning Star
Management Ventures Corporation and unlike the defendant Morning
Star, which has practically the same officers and members of the Board,
has only an asset of Php125,392,960.00 and liabilities of
Php4,306,702[.]00 and an income deficit of Php26,922,598.00 as of
December 31, 2001. Similarly, the Pic [‘]N Pac Mart, Inc., which has the
same set of officers, said corporation has shown a total assets of
Php5,423,201.30 and liabilities/stockholders equity of Php5,423,201.30
but with a retained earnings of Php194,412[.]74 as of December 31,
1999. Plaintiff contends that in such a case, defendant Morning Star
has used the separate and distinct corporate personality accorded
to it under the Corporation Code to commit said fraudulent
transaction of incurring corporate debts and allow the herein
individual defendants to escape personal liability and placing the
assets beyond the reach of the creditors. (Emphasis supplied,
69
citations omitted)
On the other hand, the Court of Appeals ruled that the general rule on
separate corporate personality and against personal liability by corporate
officers applies since petitioner failed to prove bad faith amounting to
fraud by the corporate officers:
The mere fact that Morning Star has been incurring huge losses and that
it has no assets at the time it contracted large financial obligations to
IATA, cannot be considered that its officers, Defendants-Appellants
Estelita Co Wong, Benny H. Wong, Arsenio Chua, Sonny Chua and
Wong Yan Tak, acted in bad faith or such circumstance would amount to
fraud, warranting personal and solidary liability of its corporate officers.
The same is also true with the fact that Morning Star Management
Ventures Corporation and Pic ‘N Pac Mart, Inc., corporations having the
same set of officers as Morning Star, were doing relatively well during the
time that the former incurred huge losses. Thus, only Morning Star should
be held personally liable to Plaintiff- Appellee, and not its corporate
officers.
70
Piercing the corporate veil in order to hold corporate officers personally
liable for the corporation’s debts requires that "the bad faith or
wrongdoing of the director must be established clearly and
convincingly [as] [b]ad faith is never presumed." 71
III
Oria v. McMicking enumerates several badges of fraud. Petitioner
72
argues the existence of the fourth to sixth badges: 73
1. The fact that the consideration of the conveyance is fictitious or
is inadequate.
2. A transfer made by a debtor after suit has been begun and
while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor,
especially when he is insolvent or greatly embarrassed
financially.
6. The fact that the transfer is made between father and son,
when there are present other of the above circumstances.
7. The failure of the vendee to take exclusive possession of all the
property. (Emphasis supplied)
74
Petitioner listed the following circumstances as constituting badges of
fraud by the individual respondents:
Attention is drawn to the following badges of fraud by individual
respondents to use the corporate fiction of respondent Morning Star as a
veil or cloak to insulate themselves from any liability to pay its
indebtedness to [sic], to wit:
a. As members of the Board of Directors and at the same time,
officers of respondent Morning Star, individual respondents
Estelita Co Wong (President and Member of the Board), Benny H.
Wong (Chairman of the Board), Arsenio Chua (Member of the
Board), Sonny Chua (Secretary and Member of the Board) and
Wong Yan Tak (Treasurer and Member of the Board) undoubtedly
exercised complete control and direction of the financial
management and business operations of respondent Morning
Star;
b. Similarly, the individual respondents are likewise in direct
control of the management of two other corporations, Morning
Star Management Ventures Corp. and Pic ‘N Pac Mart[,] Inc.,
being the shareholders, members of the Board and officers of the
said corporations, as evidenced by the General Information
Sheets (GIS) of the said corporations filed with the Securities and
Exchange Commission (Exhibits "O" to "O-4" and "P" to "P-3" of
petitioner’s Formal Offer of Evidence dated August 15, 2007);
c. Respondent Morning Star has no assets or property in its name
that may be levied upon for attachment and execution to secure
and to satisfy any judgment debt, as in fact the land and building
where its offices can be found and situated at J. Bocobo Street
cor. Pedro Gil Street, Ermita Manila is not even registered in its
name but in the name of another corporation "Morning Star
 Management Ventures Corporation" which is similarly owned and
controlled by the individual respondents (Exhibits "S" to "S-2" and
"T" to "T-2" of petitioner’s Formal Offer of Evidence dated August
15, 2007);
d. As early as 1998, respondent Morning Star had already been
incurring huge losses which clearly show the inability to pay its
obligations to IATA but the individual respondents contracted its
huge financial obligations from IATA knowing fully well that
respondent Morning Star will be unable to pay such obligations;
e. Strangely, on the other hand, Pic ‘N Pac Mart, Inc. and Morning
Star Management Ventures Corp., the other two (2) corporations
similarly controlled and managed by the individual respondents,
were doing relatively well during the time that respondent Morning
Star was incurring huge losses (Exhibits "U" to "U-7" and "V" to
"V-9" of petitioner’s Formal Offer of Evidence dated August 15,
2007);
f. Individual respondents allowed the indebtedness of respondent
Morning Star to balloon to a staggering amount of
Php100,479,171.59 and US$457,834.14[.] (Citations omitted)
75
This court finds that petitioner was not able to clearly and convincingly
establish bad faith by the individual respondents, nor substantiate the
alleged badges of fraud. 1avvphi1
IV
First, petitioner failed to substantiate the fourth badge of fraud on
"[e]vidence of large indebtedness or complete insolvency." 76
In 1993, International Air Transport Association appointed respondent
Morning Star as an accredited travel agent with the privilege of getting air
tickets on credit, and they entered a Passenger Sales Agency
Agreement. None of the parties made allegations on the financial status
77
or business standing of respondent Morning Star during the first five
years from its accreditation in 1993.
Petitioner relies on Atty. Taggueg’s testimony regarding respondent
Morning Star’s financial statements with the Securities and Exchange
Commission.
Atty. Taggueg testified on the comparative figures for the years ended
1998, 1999, and 2000 and how the company was "accumulating losses
as early as 1998 continuing to 1999 and 2000 resulting to a deficit of
Php26,168,1768.00 [sic] as of December 31, 2000 . . . deficit of
Php3,910,763.00 as of December 31, 1998 and another deficit of
Php2,841,626.00 as of December 31, 1999[.]" He testified that as of
78
December 31, 2000, respondent Morning Star had total assets of
Php150,579,421.00 and total liabilities of Php160,222,966.00. 79
Atty. Taggueg then testified that despite this insolvency, "Morning Star
Travel still contracted loans and/or obligations from the IATA sometime in
December 2002 which indebtedness with IATA ballooned to the huge
amount of Php109,728,051.00 and US$496,403.21 as of April 30,
2003[.]" 80
Petitioner did not present Securities and Exchange Commission
documents on respondent Morning Star’s total assets as of December
2002. It did not present respondent Morning Star’s financial statements
1a\^/phi1
for December 2002, the year it incurred obligations from International Air
Transport Association. 81
The financial statements for years 1998 to 1999 and 1999 to 2000
testified on by Atty. Taggueg are not representative of the financial status
of respondent Morning Star’s business. Year 2000 reflected total assets
of P150,579,421.00 and total liabilities of P160,222,966.00. On the other
82
hand, year 1999 showed total assets of P134,361,353.00 and total
liabilities of P120,678,345.00. Businesses may earn profits in some
83
years and operate at a loss in others as a result of changing economic
conditions. These two financial statements do not show that respondent
Morning Star was operating at a loss in 2002. Deficits in the years 1998
to 2000 do not necessarily mean deficits in 2002. It is unclear if these
figures included previous obligations to International Air Transport
Association, or whether some or all of such obligations were paid in
subsequent years as an indication of respondent Morning Star’s credit
history.
In any event, it is in the nature of businesses to take risks when making
business judgments, and this includes taking loans and incurring
liabilities.
Atty. Taggueg’s association with respondent Morning Star, or this case, is
also unclear. Respondents submit in their memorandum that "[i]n his
testimony[,] Mr. Taggueg admitted that his knowledge about . . . Morning
Star was merely based on his assumptions and his examination of the
[Securities and Exchange Commission] documents." 84
Petitioner’s reliance on Atty. Taggueg’s testimony on respondentMorning
Star’s financial statements for previous years fails to clearly and
convincingly establish bad faith by the individual respondents.
V C. Wong and Benny C. Wong, Jr., who all have the same address as
Second, petitioner failed to substantiate the fifth badge of fraud on the
"transfer of all or nearly all of his property by a debtor, especially when he
is insolvent or greatly embarrassed financially."85
Mere allegations that Morning Star Management Ventures Corporation
and Pic ‘N Pac Mart, Inc. "were doing relatively well during the time that
respondent Morning Star was incurring huge losses" do not establish
86
bad faith or fraud by the individual respondents. Such allegations alone
do not prove that the individual respondents were transferring respondent
Morning Star’s properties in fraud of its creditors.
Neither does the allegation that Morning Star Management Ventures
Corporation has title over the land and building where the offices can be
found establish bad faith or fraud. Petitioner did not show that this title
was originally in respondent Morning Star’s name and was later
transferred to respondent Morning Star.
This court has held that the "existence of interlocking directors, corporate
officers and shareholders is not enough justification to pierce the veil of
corporate fiction in the absence of fraud or other public policy
considerations." 87
VI
Third, petitioner also failed to substantiate the sixth badge of fraud that
"the transfer is made between father and son, when there are present
other of the above circumstances." 88
Petitioner submits that:
It would be the height of injustice to allow individual respondents to get
away with their gross negligence to the prejudice of petitioner, especially
since there is now another travel agency in the name of Morning Star
Tour Planners, Inc. operating at the respondent Morning Star’s former
principal place of business at 1600 J. Bocobo St. corner Pedro Gil
Malate, Manila. . . .
....
Curiously, among the stockholders, directors and officers of Morning Star
Tour Planners, Inc., are the following: Belinda Wong, Billy Wong, Barbara
individual respondents Estelita Co Wong and Benny H. Wong.
Given, these vital pieces of information, it is at once indubitable that
respondents have established another travel agency in the name of their
children in order to escape their solidary liability to petitioner! (Citation
89
omitted)
This court has held that "compliance with the recognized modes of
acquisition of jurisdiction cannot be dispensed with even in piercing the
veil of corporate fiction[.]" Morning Star Tour Planners, Inc. is not a party
90
in this case. It would offend due process rights if what petitioner ultimately
seeks in its allegation is to hold Morning Star Tour Planners, Inc.
responsible for respondent Morning Star’s liability.
In any event, petitioner failed to plead and prove the circumstances that
would pass the following control test for the operation of the alter ego
doctrine:
(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 right; and
(3) The aforesaid control and breach of duty must [have]
proximately caused the injury or unjust loss complained of. 91
The records do not show that the individual respondents controlled
Morning Star Tour Planners, Inc. and that such control was used to
commit fraud against petitioner. Neither does this suspicion support
petitioner’s position that the individual respondents were in bad faith or
gross negligence in directing the affairs of respondent Morning Star.

Finally, pursuant to this court's pronouncement in Nacar v. Gallery

Frames, the interest rate should be 6% per annum on the amount owing
92

to petitioner representing respondent Morning Star's unpaid air transport

tickets availed on credit.

WHEREFORE, the Petition is DENIED. The Court of Appeals Decision

is AFFIRMED with MODIFICATION in that legal interest is 6% per
annum from September 23, 2003 until fully paid.

SO ORDERED.