Republic of the Philippines

SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 167530 March 13, 2013

PHILIPPINE NATIONAL BANK, Petitioner,

vs.

HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

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

G.R. No. 167561

ASSET PRIVATIZATION TRUST, Petitioner,

vs.

HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

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

G.R. No. 167603

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs.

HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision2 dated November 30, 2004 and the
Resolution3 dated March 22, 2005 of the Court of Appeals in CA-G.R. CV No. 57553. The said
Decision affirmed the Decision4 dated November 6, 1995 of the Regional Trial Court (RTC) of
Makati City, Branch 62, granting a judgment award of ₱8,370,934.74, plus legal interest, in
favor of respondent Hydro Resources Contractors Corporation (HRCC) with the modification
that the Privatization and Management Office (PMO), successor of petitioner Asset Privatization
Trust (APT),5 has been held solidarily liable with Nonoc Mining and Industrial Corporation
(NMIC)6 and petitioners Philippine National Bank (PNB) and Development Bank of the
Philippines (DBP), while the Resolution denied reconsideration separately prayed for by PNB,
DBP, and APT.

Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the
properties of Marinduque Mining and Industrial Corporation (MMIC). As a result of the
foreclosure, DBP and PNB acquired substantially all the assets of MMIC and resumed the
business operations of the defunct MMIC by organizing NMIC.7 DBP and PNB owned 57% and
43% of the shares of NMIC, respectively, except for five qualifying shares.8 As of September
1984, the members of the Board of Directors of NMIC, namely, Jose Tengco, Jr., Rolando Zosa,
Ruben Ancheta, Geraldo Agulto, and Faustino Agbada, were either from DBP or PNB.9

Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC’s Mine Stripping and Road
Construction Program in 1985 for a total contract price of ₱35,770,120. After computing the
payments already made by NMIC under the program and crediting the NMIC’s receivables from

Hercon, Inc., the latter found that NMIC still has an unpaid balance of ₱8,370,934.74.10 Hercon,
Inc. made several demands on NMIC, including a letter of final demand dated August 12, 1986,
and when these were not heeded, a complaint for sum of money was filed in the RTC of Makati,
Branch 136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount
owing Hercon, Inc.11 The case was docketed as Civil Case No. 15375.

Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This
prompted the amendment of the complaint to substitute HRCC for Hercon, Inc.12

Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50
creating the APT for the expeditious disposition and privatization of certain government
corporations and/or the assets thereof. Pursuant to the said Proclamation, on February 27, 1987,
DBP and PNB executed their respective deeds of transfer in favor of the National Government
assigning, transferring and conveying certain assets and liabilities, including their respective
stakes in NMIC.13 In turn and on even date, the National Government transferred the said assets
and liabilities to the APT as trustee under a Trust Agreement.14 Thus, the complaint was
amended for the second time to implead and include the APT as a defendant.

In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its
contract with HRCC was entered into by its then President without any authority. Moreover, the
said contract allegedly failed to comply with laws, rules and regulations concerning government
contracts. NMIC further claimed that the contract amount was manifestly excessive and grossly
disadvantageous to the government. NMIC made counterclaims for the amounts already paid to
Hercon, Inc. and attorney’s fees, as well as payment for equipment rental for four trucks,
replacement of parts and other services, and damage to some of NMIC’s properties.16

For its part, DBP’s answer17 raised the defense that HRCC had no cause of action against it
because DBP was not privy to HRCC’s contract with NMIC. Moreover, NMIC’s juridical
personality is separate from that of DBP. DBP further interposed a counterclaim for attorney’s
fees.18

PNB’s answer19 also invoked lack of cause of action against it. It also raised estoppel on
HRCC’s part and laches as defenses, claiming that the inclusion of PNB in the complaint was the
first time a demand for payment was made on it by HRCC. PNB also invoked the separate
juridical personality of NMIC and made counterclaims for moral damages and attorney’s fees.20
APT set up the following defenses in its answer21: lack of cause of action against it, lack of
privity between Hercon, Inc. and APT, and the National Government’s preferred lien over the
assets of NMIC.22

After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of HRCC. It
pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with NMIC:

On the issue of whether or not there is sufficient ground to pierce the veil of corporate fiction,
this Court likewise finds for the plaintiff.

From the documentary evidence adduced by the plaintiff, some of which were even adopted by
defendants and DBP and PNB as their own evidence (Exhibits "I", "I-1", "I-2", "I-3", "I-4", "I-
5", "I5-A", "I-5-B", "I-5-C", "I-5-D" and submarkings, inclusive), it had been established that
except for five (5) qualifying shares, NMIC is owned by defendants DBP and PNB, with the
former owning 57% thereof, and the latter 43%. As of September 24, 1984, all the members of
NMIC’s Board of Directors, namely, Messrs. Jose Tengco, Jr., Rolando M. Zosa, Ruben
Ancheta, Geraldo Agulto, and Faustino Agbada are either from DBP or PNB (Exhibits "I-5", "I-
5-C", "I-5-D").

The business of NMIC was then also being conducted and controlled by both DBP and PNB. In
fact, it was Rolando M. Zosa, then Governor of DBP, who was signing and entering into
contracts with third persons, on behalf of NMIC.

In this jurisdiction, it is well-settled that "where it appears that the business enterprises are
owned, conducted and controlled by the same parties, both law and equity will, when necessary
to protect the rights of third persons, disregard legal fiction that two (2) corporations are distinct
entities, and treat them as identical." (Phil. Veterans Investment Development Corp. vs. CA, 181
SCRA 669).

From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of
both DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for the
latter’s unpaid obligations to plaintiff.23
Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the Decision
of the trial court reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff
HYDRO RESOURCES CONTRACTORS CORPORATION and against the defendants
NONOC

MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE

PHILIPPINES and PHILIPPINE NATIONAL BANK, ordering the aforenamed defendants, to
pay the plaintiff jointly and severally, the sum of ₱8,370,934.74 plus legal interest thereon from
date of demand, and attorney’s fees equivalent to 25% of the judgment award.

The complaint against APT is hereby dismissed. However, APT, as trustee of NONOC MINING
AND INDUSTRIAL CORPORATION is directed to ensure compliance with this Decision.24

DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it was
wrong for the RTC to pierce the veil of NMIC’s corporate personality and hold DBP and PNB
solidarily liable with NMIC.25

The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the piercing of
the veil of the corporate personality of NMIC and held DBP, PNB, and APT solidarily liable
with NMIC. In particular, the Court of Appeals made the following findings:

In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB to
the extent of 57% and 43% respectively; that said two (2) appellants are the only stockholders,
with the qualifying stockholders of five (5) consisting of its own officers and included in its
charter merely to comply with the requirement of the law as to number of incorporators; and that
the directorates of DBP, PNB and [NMIC] are interlocked.

xxxx
We find it therefore correct for the lower court to have ruled that:

"From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of
both DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for the
latter’s unpaid obligation to plaintiff."26 (Citation omitted.)

The Court of Appeals then concluded that, "in keeping with the concept of justice and fair play,"
the corporate veil of NMIC should be pierced, ratiocinating:

For to treat NMIC as a separate legal entity from DBP and PNB for the purpose of securing
beneficial contracts, and then using such separate entity to evade the payment of a just debt,
would be the height of injustice and iniquity. Surely that could not have been the intendment of
the law with respect to corporations. x x x.27

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The
judgment in favor of appellee Hydro Resources Contractors Corporation in the amount of
₱8,370,934.74 with legal interest from date of demand is hereby AFFIRMED, but the dismissal
of the case as against Assets Privatization Trust is REVERSED, and its successor the
Privatization and Management Office is INCLUDED as one of those jointly and severally liable
for such indebtedness. The award of attorney’s fees is DELETED.

All other claims and counter-claims are hereby DISMISSED.

Costs against appellants.28

The respective motions for reconsideration of DBP, PNB, and APT were denied.29
Hence, these consolidated petitions.30

All three petitioners assert that NMIC is a corporate entity with a juridical personality separate
and distinct from both PNB and DBP. They insist that the majority ownership by DBP and PNB
of NMIC is not a sufficient ground for disregarding the separate corporate personality of NMIC
because NMIC was not a mere adjunct, business conduit or alter ego of DBP and PNB.
According to them, the application of the doctrine of piercing the corporate veil is unwarranted
as nothing in the records would show that the ownership and control of the shareholdings of
NMIC by DBP and PNB were used to commit fraud, illegality or injustice. In the absence of
evidence that the stock control by DBP and PNB over NMIC was used to commit some fraud or
a wrong and that said control was the proximate cause of the injury sustained by HRCC, resort to
the doctrine of "piercing the veil of corporate entity" is misplaced.31

DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to pay
NMIC’s exclusive and separate corporate indebtedness to HRCC, such liability of the two banks
was transferred to and assumed by the National Government through the APT, now the PMO,
under the respective deeds of transfer both dated February 27, 1997 executed by DBP and PNB
pursuant to Proclamation No. 50 dated December 8, 1986 and Administrative Order No. 14 dated
February 3, 1987.32

For its part, the APT contends that, in the absence of an unqualified assumption by the National
Government of all liabilities incurred by NMIC, the National Government through the APT
could not be held liable for NMIC’s contractual liability. The APT asserts that HRCC had not
sufficiently shown that the APT is the successor-in-interest of all the liabilities of NMIC, or of
DBP and PNB as transferors, and that the adjudged liability is included among the liabilities
assigned and transferred by DBP and PNB in favor of the National Government.33

HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing the veil
of corporate fiction." It claims that NMIC was the alter ego of DBP and PNB which owned,
conducted and controlled the business of NMIC as shown by the following circumstances:
NMIC was owned by DBP and PNB, the officers of DBP and PNB were also the officers of
NMIC, and DBP and PNB financed the operations of NMIC. HRCC further argues that a parent
corporation may be held liable for the contracts or obligations of its subsidiary corporation where
the latter is a mere agency, instrumentality or adjunct of the parent corporation.34
Moreover, HRCC asserts that the APT was properly held solidarily liable with DBP, PNB, and
NMIC because the APT assumed the obligations of DBP and PNB as the successor-in-interest of
the said banks with respect to the assets and liabilities of NMIC.35 As trustee of the Republic of
the Philippines, the APT also assumed the responsibility of the Republic pursuant to the
following provision of Section 2.02 of the respective deeds of transfer executed by DBP and
PNB in favor of the Republic:

SECTION 2. TRANSFER OF BANK’S LIABILITIES

xxxx

2.02 With respect to the Bank’s liabilities which are contingent and those liabilities where the
Bank’s creditors consent to the transfer thereof is not obtained, said liabilities shall remain in the
books of the BANK with the GOVERNMENT funding the payment thereof.36

After a careful review of the case, this Court finds the petitions impressed with merit.

A corporation is an artificial entity created by operation of law. It possesses the right of

succession and such powers, attributes, and properties expressly authorized by law or incident to
its existence.37 It has a personality separate and distinct from that of its stockholders and from
that of other corporations to which it may be connected.38 As a consequence of its status as a
distinct legal entity and as a result of a conscious policy decision to promote capital formation,39
a corporation incurs its own liabilities and is legally responsible for payment of its obligations.40
In other words, by virtue of the separate juridical personality of a corporation, the corporate debt
or credit is not the debt or credit of the stockholder.41 This protection from liability for
shareholders is the principle of limited liability.42

Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation. For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be
impaled only when it becomes a shield for fraud, illegality or inequity committed against third
persons.43

However, the rule is that a court should be careful in assessing the milieu where the doctrine of
the corporate veil may be applied. Otherwise an injustice, although unintended, may result from
its erroneous application.44 Thus, cutting through the corporate cover requires an approach
characterized by due care and caution:

Hence, any application of the doctrine of piercing the corporate veil should be done with caution.
A court should be mindful of the milieu where it is to be applied. It must be certain that the
corporate fiction was misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. x x x.45 (Emphases supplied; citations omitted.)

Sarona v. National Labor Relations Commission46 has defined the scope of application of the
doctrine of piercing the corporate veil:

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat
of public convenience as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect
fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation. (Citation omitted.)

Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as
assignee of DBP and PNB) should be held solidarily liable for using NMIC as alter ego.47 The
RTC sustained the allegation of HRCC and pierced the corporate veil of NMIC pursuant to the
alter ego theory when it concluded that NMIC "is a mere adjunct, business conduit or alter ego of
both DBP and PNB."48 The Court of Appeals upheld such conclusion of the trial court.49 In
other words, both the trial and appellate courts relied on the alter ego theory when they
disregarded the separate corporate personality of NMIC.
In this connection, case law lays down a three-pronged test to determine the application of the
alter ego theory, which is also known as the instrumentality theory, namely:

(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.50 (Emphases omitted.)

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be
completely under the control and domination of the parent.51 It examines the parent
corporation’s relationship with the subsidiary.52 It inquires whether a subsidiary corporation is
so organized and controlled and its affairs are so conducted as to make it a mere instrumentality
or agent of the parent corporation such that its separate existence as a distinct corporate entity
will be ignored.53 It seeks to establish whether the subsidiary corporation has no autonomy and
the parent corporation, though acting through the subsidiary in form and appearance, "is
operating the business directly for itself."54

The second prong is the "fraud" test. This test requires that the parent corporation’s conduct in
using the subsidiary corporation be unjust, fraudulent or wrongful.55 It examines the relationship
of the plaintiff to the corporation.56 It recognizes that piercing is appropriate only if the parent
corporation uses the subsidiary in a way that harms the plaintiff creditor.57 As such, it requires a
showing of "an element of injustice or fundamental unfairness."58

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s
control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm
suffered.59 A causal connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendant’s exercise of control and improper use of the
corporate form and, thereby, suffer damages.60

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence
of three elements: control of the corporation by the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by
the fraudulent or unfair act of the corporation. The absence of any of these elements prevents
piercing the corporate veil.61

This Court finds that none of the tests has been satisfactorily met in this case.

In applying the alter ego doctrine, the courts are concerned with reality and not form, with how
the corporation operated and the individual defendant’s relationship to that operation.62 With
respect to the control element, it refers not to paper or formal control by majority or even
complete stock control but actual control which amounts to "such domination of finances,
policies and practices that the controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal."63 In addition, the control must be
shown to have been exercised at the time the acts complained of took place.64

Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the corporate
cover of NMIC based on two factors: (1) the ownership by DBP and PNB of effectively all the
stocks of NMIC, and (2) the alleged interlocking directorates of DBP, PNB and NMIC.65
Unfortunately, the conclusion of the trial and appellate courts that the DBP and PNB fit the alter
ego theory with respect to NMIC’s transaction with HRCC on the premise of complete stock
ownership and interlocking directorates involved a quantum leap in logic and law exposing a gap
in reason and fact.

While ownership by one corporation of all or a great majority of stocks of another corporation
and their interlocking directorates may serve as indicia of control, by themselves and without
more, however, these circumstances are insufficient to establish an alter ego relationship or
connection between DBP and PNB on the one hand and NMIC on the other hand, that will
justify the puncturing of the latter’s corporate cover. This Court has declared that "mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality."66 This Court has likewise ruled 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."67

True, the findings of fact of the Court of Appeals are conclusive and cannot be reviewed on
appeal to this Court, provided they are borne out of the record or are based on substantial
evidence.68 It is equally true that the question of whether one corporation is merely an alter ego
of another is purely one of fact. So is the question of whether a corporation is a paper company, a
sham or subterfuge or whether the requisite quantum of evidence has been adduced warranting
the piercing of the veil of corporate personality.69 Nevertheless, it has been held in Sarona v.
National Labor Relations Commission70 that this Court has the power to resolve a question of
fact, such as whether a corporation is a mere alter ego of another entity or whether the corporate
fiction was invoked for fraudulent or malevolent ends, if the findings in the assailed decision are
either not supported by the evidence on record or based on a misapprehension of facts.

In this case, nothing in the records shows that the corporate finances, policies and practices of
NMIC were dominated by DBP and PNB in such a way that NMIC could be considered to have
no separate mind, will or existence of its own but a mere conduit for DBP and PNB. On the
contrary, the evidence establishes that HRCC knew and acted on the knowledge that it was
dealing with NMIC, not with NMIC’s stockholders. The letter proposal of Hercon, Inc., HRCC’s
predecessor-in-interest, regarding the contract for NMIC’s mine stripping and road construction
program was addressed to and accepted by NMIC.71 The various billing reports, progress
reports, statements of accounts and communications of Hercon, Inc./HRCC regarding NMIC’s
mine stripping and road construction program in 1985 concerned NMIC and NMIC’s officers,
without any indication of or reference to the control exercised by DBP and/or PNB over NMIC’s
affairs, policies and practices.72

HRCC has presented nothing to show that DBP and PNB had a hand in the act complained of,
the alleged undue disregard by NMIC of the demands of HRCC to satisfy the unpaid claims for
services rendered by HRCC in connection with NMIC’s mine stripping and road construction
program in 1985. On the contrary, the overall picture painted by the evidence offered by HRCC
is one where HRCC was dealing with NMIC as a distinct juridical person acting through its own
corporate officers.73
Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were
interlocking has no basis. HRCC’s Exhibit "I-5,"74 the initial General Information Sheet
submitted by NMIC to the Securities and Exchange Commission, relied upon by the trial court
and the Court of Appeals may have proven that DBP and PNB owned the stocks of NMIC to the
extent of 57% and 43%, respectively. However, nothing in it supports a finding that NMIC,
DBP, and PNB had interlocking directors as it only indicates that, of the five members of
NMIC’s board of directors, four were nominees of either DBP or PNB and only one was a
nominee of both DBP and PNB.75 Only two members of the board of directors of NMIC, Jose
Tengco, Jr. and Rolando Zosa, were established to be members of the board of governors of DBP
and none was proved to be a member of the board of directors of PNB.76 No director of NMIC
was shown to be also sitting simultaneously in the board of governors/directors of both DBP and
PNB.

In reaching its conclusion of an alter ego relationship between DBP and PNB on the one hand
and NMIC on the other hand, the Court of Appeals invoked Sibagat Timber Corporation v.
Garcia,77 which it described as "a case under a similar factual milieu."78 However, in Sibagat
Timber Corporation, this Court took care to enumerate the circumstances which led to the
piercing of the corporate veil of Sibagat Timber Corporation for being the alter ego of Del
Rosario & Sons Logging Enterprises, Inc. Those circumstances were as follows: holding office
in the same building, practical identity of the officers and directors of the two corporations and
assumption of management and control of Sibagat Timber Corporation by the directors/officers
of Del Rosario & Sons Logging Enterprises, Inc.

Here, DBP and PNB maintain an address different from that of NMIC.79 As already discussed,
there was insufficient proof of interlocking directorates. There was not even an allegation of
similarity of corporate officers. Instead of evidence that DBP and PNB assumed and controlled
the management of NMIC, HRCC’s evidence shows that NMIC operated as a distinct entity
endowed with its own legal personality. Thus, what obtains in this case is a factual backdrop
different from, not similar to, Sibagat Timber Corporation.

In relation to the second element, to disregard the separate juridical personality of a corporation,
the wrongdoing or unjust act in contravention of a plaintiff’s legal rights must be clearly and
convincingly established; it cannot be presumed. Without a demonstration that any of the evils
sought to be prevented by the doctrine is present, it does not apply.80
In this case, the Court of Appeals declared:

We are not saying that PNB and DBP are guilty of fraud in forming NMIC, nor are we implying
that NMIC was used to conceal fraud. x x x.81

Such a declaration clearly negates the possibility that DBP and PNB exercised control over
NMIC which DBP and PNB used "to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s
legal rights." It is a recognition that, even assuming that DBP and PNB exercised control over
NMIC, there is no evidence that the juridical personality of NMIC was used by DBP and PNB to
commit a fraud or to do a wrong against HRCC.

There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed
against HRCC by DBP and PNB under the guise of NMIC, there is no basis to hold that NMIC
was a mere alter ego of DBP and PNB. As this Court ruled in Ramoso v. Court of Appeals82:

As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient
reason to the contrary appears. When the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as
an association of persons. Also, the corporate entity may be disregarded in the interest of justice
in such cases as fraud that may work inequities among members of the corporation internally,
involving no rights of the public or third persons. In both instances, there must have been fraud,
and proof of it. For the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established. It cannot be presumed.

As regards the third element, in the absence of both control by DBP and PNB of NMIC and
fraud or fundamental unfairness perpetuated by DBP and PNB through the corporate cover of
NMIC, no harm could be said to have been proximately caused by DBP and PNB on HRCC for
which HRCC could hold DBP and PNB solidarily liable with NMIC.1âwphi1

Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the APT
as transferee of the rights, titles and interests of DBP and PNB in NMIC will attach only if DBP
and PNB are held liable, the APT incurs no liability for the judgment indebtedness of NMIC.
Even HRCC recognizes that "as assignee of DBP and PNB 's loan receivables," the APT simply
"stepped into the shoes of DBP and PNB with respect to the latter's rights and obligations" in
NMIC.83 As such assignee, therefore, the APT incurs no liability with respect to NMIC other
than whatever liabilities may be imputable to its assignors, DBP and PNB.

Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB which
HRCC invokes, the APT cannot be held liable. The contingent liability for which the National
Government, through the APT, may be held liable under the said provision refers to contingent
liabilities of DBP and PNB. Since DBP and PNB may not be held solidarily liable with NMIC,
no contingent liability may be imputed to the APT as well. Only NMIC as a distinct and separate
legal entity is liable to pay its corporate obligation to HRCC in the amount of ₱8,370,934.74,
with legal interest thereon from date of demand.

As trustee of the. assets of NMIC, however, the APT should ensure compliance by NMIC of the
judgment against it. The APT itself acknowledges this.84

WHEREFORE, the petitions are hereby GRANTED.

The complaint as against Development Bank of the Philippines, the Philippine National Bank,
and the Asset Privatization Trust, now the Privatization and Management Office, is DISMISSED
for lack of merit. The Asset Privatization Trust, now the Privatization and Management Office,
as trustee of Nonoc Mining and Industrial Corporation, now the Philnico Processing Corporation,
is DIRECTED to ensure compliance by the Nonoc Mining and Industrial Corporation, now the
Philnico Processing Corporation, with this Decision.

SO ORDERED.
FIRST DIVISION

G. R. No. 164317 February 6, 2006

ALFREDO CHING, Petitioner,

vs.

THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-

VILLAVERT, JUDGE EDGARDO SUDIAM of the Regional Trial Court, Manila, Branch 52;
RIZAL COMMERCIAL BANKING CORP. and THE PEOPLE OF THE PHILIPPINES,
Respondents.

DECISION

CALLEJO, SR., J.:

Before the Court is a petition for review on certiorari of the Decision1 of the Court of Appeals
(CA) in CA-G.R. SP No. 57169 dismissing the petition for certiorari, prohibition and mandamus
filed by petitioner Alfredo Ching, and its Resolution2 dated June 28, 2004 denying the motion
for reconsideration thereof.

Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime
in September to October 1980, PBMI, through petitioner, applied with the Rizal Commercial
Banking Corporation (respondent bank) for the issuance of commercial letters of credit to
finance its importation of assorted goods.3

Respondent bank approved the application, and irrevocable letters of credit were issued in favor
of petitioner. The goods were purchased and delivered in trust to PBMI. Petitioner signed 13
trust receipts4 as surety, acknowledging delivery of the following goods:
T/R Nos.

Date Granted

Maturity Date

Principal

Description of Goods

1845

12-05-80

03-05-81

P1,596,470.05

79.9425 M/T "SDK" Brand Synthetic Graphite Electrode

1853

12-08-80

03-06-81
P198,150.67

3,000 pcs. (15 bundles) Calorized Lance Pipes

1824

11-28-80

02-26-81

P707,879.71

One Lot High Fired Refractory Tundish Bricks

1798

11-21-80

02-19-81

P835,526.25

5 cases spare parts for CCM

1808

11-21-80

02-19-81

P370,332.52

200 pcs. ingot moulds

2042

01-30-81

04-30-81

P469,669.29

High Fired Refractory Nozzle Bricks

1801

11-21-80

02-19-81
P2,001,715.17

Synthetic Graphite Electrode [with] tapered pitch filed nipples

1857

12-09-80

03-09-81

P197,843.61

3,000 pcs. (15 bundles calorized lance pipes [)]

1895

12-17-80

03-17-81

P67,652.04

Spare parts for Spectrophotometer

1911

12-22-80

03-20-81

P91,497.85

50 pcs. Ingot moulds

2041

01-30-81

04-30-81

P91,456.97

50 pcs. Ingot moulds

2099

02-10-81

05-11-81
P66,162.26

8 pcs. Kubota Rolls for rolling mills

2100

02-10-81

05-12-81

P210,748.00

Spare parts for Lacolaboratory Equipment5

Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with authority to
sell but not by way of conditional sale, pledge or otherwise; and in case such goods were sold, to
turn over the proceeds thereof as soon as received, to apply against the relative acceptances and
payment of other indebtedness to respondent bank. In case the goods remained unsold within the
specified period, the goods were to be returned to respondent bank without any need of demand.
Thus, said "goods, manufactured products or proceeds thereof, whether in the form of money or
bills, receivables, or accounts separate and capable of identification" were respondent bank’s
property.

When the trust receipts matured, petitioner failed to return the goods to respondent bank, or to
return their value amounting to ₱6,940,280.66 despite demands. Thus, the bank filed a criminal
complaint for estafa6 against petitioner in the Office of the City Prosecutor of Manila.
After the requisite preliminary investigation, the City Prosecutor found probable cause estafa
under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to Presidential Decree
(P.D.) No. 115, otherwise known as the Trust Receipts Law. Thirteen (13) Informations were
filed against the petitioner before the Regional Trial Court (RTC) of Manila. The cases were
docketed as Criminal Cases No. 86-42169 to 86-42181, raffled to Branch 31 of said court.

Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The
appeal was dismissed in a Resolution7 dated March 17, 1987, and petitioner moved for its
reconsideration. On December 23, 1987, the Minister of Justice granted the motion, thus
reversing the previous resolution finding probable cause against petitioner.8 The City Prosecutor
was ordered to move for the withdrawal of the Informations.

This time, respondent bank filed a motion for reconsideration, which, however, was denied on
February 24, 1988.9 The RTC, for its part, granted the Motion to Quash the Informations filed by
petitioner on the ground that the material allegations therein did not amount to estafa.10

In the meantime, the Court rendered judgment in Allied Banking Corporation v. Ordoñez,11
holding that the penal provision of P.D. No. 115 encompasses any act violative of an obligation
covered by the trust receipt; it is not limited to transactions involving goods which are to be sold
(retailed), reshipped, stored or processed as a component of a product ultimately sold. The Court
also ruled that "the non-payment of the amount covered by a trust receipt is an act violative of
the obligation of the entrustee to pay."12

On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against
petitioner before the Office of the City Prosecutor of Manila. The case was docketed as I.S. No.
95B-07614.

Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there was
no probable cause to charge petitioner with violating P.D. No. 115, as petitioner’s liability was
only civil, not criminal, having signed the trust receipts as surety.13 Respondent bank appealed
the resolution to the Department of Justice (DOJ) via petition for review, alleging that the City
Prosecutor erred in ruling:
1. That there is no evidence to show that respondent participated in the misappropriation of the
goods subject of the trust receipts;

2. That the respondent is a mere surety of the trust receipts; and

3. That the liability of the respondent is only civil in nature.14

On July 13, 1999, the Secretary of Justice issued Resolution No. 25015 granting the petition and
reversing the assailed resolution of the City Prosecutor. According to the Justice Secretary, the
petitioner, as Senior Vice-President of PBMI, executed the 13 trust receipts and as such, was the
one responsible for the offense. Thus, the execution of said receipts is enough to indict the
petitioner as the official responsible for violation of P.D. No. 115. The Justice Secretary also
declared that petitioner could not contend that P.D. No. 115 covers only goods ultimately
destined for sale, as this issue had already been settled in Allied Banking Corporation v.
Ordoñez,16 where the Court ruled that P.D. No. 115 is "not limited to transactions in goods
which are to be sold (retailed), reshipped, stored or processed as a component of a product
ultimately sold but covers failure to turn over the proceeds of the sale of entrusted goods, or to
return said goods if unsold or not otherwise disposed of in accordance with the terms of the trust
receipts."

The Justice Secretary further stated that the respondent bound himself under the terms of the
trust receipts not only as a corporate official of PBMI but also as its surety; hence, he could be
proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in its
decision in Rizal Commercial Banking Corporation v. Court of Appeals;17 and second, as the
corporate official responsible for the offense under P.D. No. 115, via criminal prosecution.
Moreover, P.D. No. 115 explicitly allows the prosecution of corporate officers "without
prejudice to the civil liabilities arising from the criminal offense." Thus, according to the Justice
Secretary, following Rizal Commercial Banking Corporation, the civil liability imposed is
clearly separate and distinct from the criminal liability of the accused under P.D. No. 115.

Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13
Informations against petitioner for violation of P.D. No. 115 before the RTC of Manila. The
cases were docketed as Criminal Cases No. 99-178596 to 99-178608 and consolidated for trial
before Branch 52 of said court. Petitioner filed a motion for reconsideration, which the Secretary
of Justice denied in a Resolution18 dated January 17, 2000.

Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing
the resolutions of the Secretary of Justice on the following grounds:

1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE
ACTING OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS
PROSECUTION DESPITE THE FACT THAT NO EVIDENCE HAD BEEN PRESENTED TO
PROVE HIS PARTICIPATION IN THE ALLEGED TRANSACTIONS.

2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE

ABUSE OF DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY
CONTINUED PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF TIME
INCURRED IN THE TERMINATION OF THE PRELIMINARY INVESTIGATION THAT
SHOULD JUSTIFY THE DISMISSAL OF THE INSTANT CASE.

3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY PROSECUTOR

ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN EXCESS OF
JURISDICTION WHEN THEY CONTINUED THE PROSECUTION OF THE PETITIONER
DESPITE LACK OF SUFFICIENT BASIS.19

In his petition, petitioner incorporated a certification stating that "as far as this Petition is
concerned, no action or proceeding in the Supreme Court, the Court of Appeals or different
divisions thereof, or any tribunal or agency. It is finally certified that if the affiant should learn
that a similar action or proceeding has been filed or is pending before the Supreme Court, the
Court of Appeals, or different divisions thereof, of any other tribunal or agency, it hereby
undertakes to notify this Honorable Court within five (5) days from such notice."20

In its Comment on the petition, the Office of the Solicitor General alleged that -

A.
THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER
ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED
AND THAT THE ACTS OF PETITIONER FALL WITHIN THE AMBIT OF VIOLATION OF
P.D. [No.] 115 IN RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL
CODE.

B.

THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE DELAY HAS

MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE CASE,
JUSTIFYING ITS DISMISSAL.

C.

THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND

MANDAMUS IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION OF
THE DEPARTMENT OF JUSTICE. THE PRESENT PETITION MUST THEREFORE BE
DISMISSED.21

On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on
procedural grounds. On the procedural issue, it ruled that (a) the certification of non-forum
shopping executed by petitioner and incorporated in the petition was defective for failure to
comply with the first two of the three-fold undertakings prescribed in Rule 7, Section 5 of the
Revised Rules of Civil Procedure; and (b) the petition for certiorari, prohibition and mandamus
was not the proper remedy of the petitioner.

On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of Justice
were correctly issued for the following reasons: (a) petitioner, being the Senior Vice-President of
PBMI and the signatory to the trust receipts, is criminally liable for violation of P.D. No. 115; (b)
the issue raised by the petitioner, on whether he violated P.D. No. 115 by his actuations, had
already been resolved and laid to rest in Allied Bank Corporation v. Ordoñez;22 and (c)
petitioner was estopped from raising the

City Prosecutor’s delay in the final disposition of the preliminary investigation because he failed
to do so in the DOJ.

Thus, petitioner filed the instant petition, alleging that:

THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE

GROUND THAT THE CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED
THEREIN WAS DEFECTIVE.

II

THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS
COMMITTED BY THE SECRETARY OF JUSTICE IN COMING OUT WITH THE
ASSAILED RESOLUTIONS.23

The Court will delve into and resolve the issues seriatim.

The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He
claims that the rules of procedure should be used to promote, not frustrate, substantial justice. He
insists that the Rules of Court should be construed liberally especially when, as in this case, his
substantial rights are adversely affected; hence, the deficiency in his certification of non-forum
shopping should not result in the dismissal of his petition.
The Office of the Solicitor General (OSG) takes the opposite view, and asserts that indubitably,
the certificate of non-forum shopping incorporated in the petition before the CA is defective
because it failed to disclose essential facts about pending actions concerning similar issues and
parties. It asserts that petitioner’s failure to comply with the Rules of Court is fatal to his petition.
The OSG cited Section 2, Rule 42, as well as the ruling of this Court in Melo v. Court of
Appeals.24

We agree with the ruling of the CA that the certification of non-forum shopping petitioner
incorporated in his petition before the appellate court is defective. The certification reads:

It is further certified that as far as this Petition is concerned, no action or proceeding in the
Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or agency.

It is finally certified that if the affiant should learn that a similar action or proceeding has been
filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof,
of any other tribunal or agency, it hereby undertakes to notify this Honorable Court within five
(5) days from such notice.25

Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition should
be accompanied by a sworn certification of non-forum shopping, as provided in the third
paragraph of Section 3, Rule 46 of said Rules. The latter provision reads in part:

SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. — The
petition shall contain the full names and actual addresses of all the petitioners and respondents, a
concise statement of the matters involved, the factual background of the case and the grounds
relied upon for the relief prayed for.

xxx

The petitioner shall also submit together with the petition a sworn certification that he has not
theretofore commenced any other action involving the same issues in the Supreme Court, the
Court of Appeals or different divisions thereof, or any other tribunal or agency; if there is such
other action or proceeding, he must state the status of the same; and if he should thereafter learn
that a similar action or proceeding has been filed or is pending before the Supreme Court, the
Court of Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes to
promptly inform the aforesaid courts and other tribunal or agency thereof within five (5) days
therefrom. xxx

Compliance with the certification against forum shopping is separate from and independent of
the avoidance of forum shopping itself. The requirement is mandatory. The failure of the
petitioner to comply with the foregoing requirement shall be sufficient ground for the dismissal
of the petition without prejudice, unless otherwise provided.26

Indubitably, the first paragraph of petitioner’s certification is incomplete and unintelligible.

Petitioner failed to certify that he "had not heretofore commenced any other action involving the
same issues in the Supreme Court, the Court of Appeals or the different divisions thereof or any
other tribunal or agency" as required by paragraph 4, Section 3, Rule 46 of the Revised Rules of
Court.

We agree with petitioner’s contention that the certification is designed to promote and facilitate
the orderly administration of justice, and therefore, should not be interpreted with absolute
literalness. In his works on the Revised Rules of Civil Procedure, former Supreme Court Justice
Florenz Regalado states that, with respect to the contents of the certification which the pleader
may prepare, the rule of substantial compliance may be availed of.27 However, there must be a
special circumstance or compelling reason which makes the strict application of the requirement
clearly unjustified. The instant petition has not alleged any such extraneous circumstance.
Moreover, as worded, the certification cannot even be regarded as substantial compliance with
the procedural requirement. Thus, the CA was not informed whether, aside from the petition
before it, petitioner had commenced any other action involving the same issues in other tribunals.

On the merits of the petition, the CA ruled that the petitioner failed to establish that the Secretary
of Justice committed grave abuse of discretion in finding probable cause against the petitioner
for violation of estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to
P.D. No. 115. Thus, the appellate court ratiocinated:
Be that as it may, even on the merits, the arguments advanced in support of the petition are not
persuasive enough to justify the desired conclusion that respondent Secretary of Justice gravely
abused its discretion in coming out with his assailed Resolutions. Petitioner posits that, except
for his being the Senior Vice-President of the PBMI, there is no iota of evidence that he was a
participes crimines in violating the trust receipts sued upon; and that his liability, if at all, is
purely civil because he signed the said trust receipts merely as a xxx surety and not as the
entrustee. These assertions are, however, too dull that they cannot even just dent the findings of
the respondent Secretary, viz:

"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:

‘xxx If the violation or offense is committed by a corporation, partnership, association or other

judicial 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.’

"There is no dispute that it was the respondent, who as senior vice-president of PBM, executed
the thirteen (13) trust receipts. As such, the law points to him as the official responsible for the
offense. Since a corporation cannot be proceeded against criminally because it cannot commit
crime in which personal violence or malicious intent is required, criminal action is limited to the
corporate agents guilty of an act amounting to a crime and never against the corporation itself
(West Coast Life Ins. Co. vs. Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus,
the execution by respondent of said receipts is enough to indict him as the official responsible for
violation of PD 115.

"Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which are
ultimately destined for sale and not goods, like those imported by PBM, for use in manufacture.
This issue has already been settled in the Allied Banking Corporation case, supra, where he was
also a party, when the Supreme Court ruled that PD 115 is ‘not limited to transactions in goods
which are to be sold (retailed), reshipped, stored or processed as a component or a product
ultimately sold’ but ‘covers failure to turn over the proceeds of the sale of entrusted goods, or to
return said goods if unsold or disposed of in accordance with the terms of the trust receipts.’
"In regard to the other assigned errors, we note that the respondent bound himself under the
terms of the trust receipts not only as a corporate official of PBM but also as its surety. It is
evident that these are two (2) capacities which do not exclude the other. Logically, he can be
proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in its
decision in RCBC vs. Court of Appeals, 178 SCRA 739; and, secondly, as the corporate official
responsible for the offense under PD 115, the present case is an appropriate remedy under our
penal law.

"Moreover, PD 115 explicitly allows the prosecution of corporate officers ‘without prejudice to
the civil liabilities arising from the criminal offense’ thus, the civil liability imposed on
respondent in RCBC vs. Court of Appeals case is clearly separate and distinct from his criminal
liability under PD 115.’"28

Petitioner asserts that the appellate court’s ruling is erroneous because (a) the transaction
between PBMI and respondent bank is not a trust receipt transaction; (b) he entered into the
transaction and was sued in his capacity as PBMI Senior Vice-President; (c) he never received
the goods as an entrustee for PBMI, hence, could not have committed any dishonesty or abused
the confidence of respondent bank; and (d) PBMI acquired the goods and used the same in
operating its machineries and equipment and not for resale.

The OSG, for its part, submits a contrary view, to wit:

34. Petitioner further claims that he is not a person responsible for the offense allegedly because
"[b]eing charged as the Senior Vice-President of Philippine Blooming Mills (PBM), petitioner
cannot be held criminally liable as the transactions sued upon were clearly entered into in his
capacity as an officer of the corporation" and that [h]e never received the goods as an entrustee
for PBM as he never had or took possession of the goods nor did he commit dishonesty nor
"abuse of confidence in transacting with RCBC." Such argument is bereft of merit.

35. Petitioner’s being a Senior Vice-President of the Philippine Blooming Mills does not
exculpate him from any liability. Petitioner’s responsibility as the corporate official of PBM who
received the goods in trust is premised on Section 13 of P.D. No. 115, which provides:
Section 13. Penalty Clause. The failure of an 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)

36. Petitioner having participated in the negotiations for the trust receipts and having received
the goods for PBM, it was inevitable that the petitioner is the proper corporate officer to be
proceeded against by virtue of the PBM’s violation of P.D. No. 115.29

The ruling of the CA is correct.

In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court held that the acts of a
quasi-judicial officer may be assailed by the aggrieved party via a petition for certiorari and
enjoined (a) when necessary to afford adequate protection to the constitutional rights of the
accused; (b) when necessary for the orderly administration of justice; (c) when the acts of the
officer are without or in excess of authority; (d) where the charges are manifestly false and
motivated by the lust for vengeance; and (e) when there is clearly no prima facie case against the
accused.31 The Court also declared that, if the officer conducting a preliminary investigation (in
that case, the Office of the Ombudsman) acts without or in excess of his authority and resolves to
file an Information despite the absence of probable cause, such act may be nullified by a writ of
certiorari.32

Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure,33 the Information
shall be prepared by the Investigating Prosecutor against the respondent only if he or she finds
probable cause to hold such respondent for trial. The Investigating Prosecutor acts without or in
excess of his authority under the Rule if the Information is filed against the respondent despite
absence of evidence showing probable cause therefor.34 If the Secretary of Justice reverses the
Resolution of the Investigating Prosecutor who found no probable cause to hold the respondent
for trial, and orders such prosecutor to file the Information despite the absence of probable cause,
the Secretary of Justice acts contrary to law, without authority and/or in excess of authority. Such
resolution may likewise be nullified in a petition for certiorari under Rule 65 of the Revised
Rules of Civil Procedure.35

A preliminary investigation, designed to secure the respondent against hasty, malicious and
oppressive prosecution, is an inquiry to determine whether (a) a crime has been committed; and
(b) whether there is probable cause to believe that the accused is guilty thereof. It is a means of
discovering the person or persons who may be reasonably charged with a crime. Probable cause
need not be based on clear and convincing evidence of guilt, as the investigating officer acts
upon probable cause of reasonable belief. Probable cause implies probability of guilt and
requires more than bare suspicion but less than evidence which would justify a conviction. A
finding of probable cause needs only to rest on evidence showing that more likely than not, a
crime has been committed by the suspect.36

However, while probable cause should be determined in a summary manner, there is a need to
examine the evidence with care to prevent material damage to a potential accused’s
constitutional right to liberty and the guarantees of freedom and fair play37 and to protect the
State from the burden of unnecessary expenses in prosecuting alleged offenses and holding trials
arising from false, fraudulent or groundless charges.38

In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse of
discretion in issuing the assailed resolutions. Indeed, he acted in accord with law and the
evidence.

Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the
meaning of this Decree, is any transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as entrustee, whereby the entruster,
who owns or holds absolute title or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon the latter’s execution and
delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds
himself to hold the designated goods, documents or instruments in trust for the entruster and to
sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over
to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt or the goods, documents or instruments themselves if they are unsold
or not otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt, or for other purposes substantially equivalent to any of the following:

1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture
or process the goods with the purpose of ultimate sale; Provided, That, in the case of goods
delivered under trust receipt for the purpose of manufacturing or processing before its ultimate
sale, the entruster shall retain its title over the goods whether in its original or processed form
until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load,
unload, ship or otherwise deal with them in a manner preliminary or necessary to their sale; or

2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them to a
principal; or c) to effect the consummation of some transactions involving delivery to a
depository or register; or d) to effect their presentation, collection or renewal.

The sale of goods, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of the transaction, has, as against the
buyer, general property rights in such goods, documents or instruments, or who sells the same to
the buyer on credit, retaining title or other interest as security for the payment of the purchase
price, does not constitute a trust receipt transaction and is outside the purview and coverage of
this Decree.

An entrustee is one having or taking possession of goods, documents or instruments under a trust
receipt transaction, and any successor in interest of such person for the purpose of payment
specified in the trust receipt agreement.39 The entrustee is obliged to: (1) hold the goods,
documents or instruments in trust for the entruster and shall dispose of them strictly in
accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for
the entruster and turn over the same to the entruster to the extent of the amount owing to the
entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss
from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in
money or whatever form, separate and capable of identification as property of the entruster; (5)
return the goods, documents or instruments in the event of non-sale or upon demand of the
entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the
provisions of the decree.40

The entruster shall be entitled to the proceeds from the sale of the goods, documents or
instruments released under a trust receipt to the entrustee to the extent of the amount owing to
the entruster or as appears in the trust receipt, or to the return of the goods, documents or
instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the
trust receipt; provided, such are not contrary to the provisions of the document.41

In the case at bar, the transaction between petitioner and respondent bank falls under the trust
receipt transactions envisaged in P.D. No. 115. Respondent bank imported the goods and
entrusted the same to PBMI under the trust receipts signed by petitioner, as entrustee, with the
bank as entruster. The agreement was as follows:

And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK as
its property with liberty to sell the same within ____days from the date of the execution of this
Trust Receipt and for the Bank’s account, but without authority to make any other disposition
whatsoever of the said goods or any part thereof (or the proceeds) either by way of conditional
sale, pledge or otherwise.

I/we agree to keep the said goods insured to their full value against loss from fire, theft, pilferage
or other casualties as directed by the BANK, the sum insured to be payable in case of loss to the
BANK, with the understanding that the BANK is, not to be chargeable with the storage premium
or insurance or any other expenses incurred on said goods.

In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the
BANK, to apply against the relative acceptances (as described above) and for the payment of any
other indebtedness of mine/ours to the BANK. In case of non-sale within the period specified
herein, I/we agree to return the goods under this Trust Receipt to the BANK without any need of
demand.
I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the
form of money or bills, receivables, or accounts separate and capable of identification as
property of the BANK.42

It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of
public policy, the failure of person to turn over the proceeds of the sale of the goods covered by a
trust receipt or to return said goods, if not sold, is a public nuisance to be abated by the
imposition of penal sanctions.43

The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions
involving goods procured as a component of a product ultimately sold has been resolved in the
affirmative in Allied Banking Corporation v. Ordoñez.44 The law applies to goods used by the
entrustee in the operation of its machineries and equipment. The non-payment of the amount
covered by the trust receipts or the non-return of the goods covered by the receipts, if not sold or
otherwise not disposed of, violate the entrustee’s obligation to pay the amount or to return the
goods to the entruster.

In Colinares v. Court of Appeals,45 the Court declared that there are two possible situations in a
trust receipt transaction. The first is covered by the provision which refers to money received
under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise
sold. The second is covered by the provision which refers to merchandise received under the
obligation to return it (devolvera) to the owner.46 Thus, failure of the entrustee to turn over the
proceeds of the sale of the goods covered by the trust receipts to the entruster or to return said
goods if they were not disposed of in accordance with the terms of the trust receipt is a crime
under P.D. No. 115, without need of proving intent to defraud. The law punishes dishonesty and
abuse of confidence in the handling of money or goods to the prejudice of the entruster,
regardless of whether the latter is the owner or not. A mere failure to deliver the proceeds of the
sale of the goods, if not sold, constitutes a criminal offense that causes prejudice, not only to
another, but more to the public interest.47

The Court rules that although petitioner signed the trust receipts merely as Senior Vice-President
of PBMI and had no physical possession of the goods, he cannot avoid prosecution for violation
of P.D. No. 115.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:

Section 13. Penalty Clause. The failure of an 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.1âwphi1 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.

The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under
paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It
may be committed by a corporation or other juridical entity or by natural persons. However, the
penalty for the crime is imprisonment for the periods provided in said Article 315, which reads:

ARTICLE 315. Swindling (estafa). – Any person who shall defraud another by any of the means
mentioned hereinbelow shall be punished by:

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 shall not exceed twenty years. In such cases, and in connection with the
accessory penalties which may be imposed and for the purpose of the other provisions of this
Code, the penalty shall be termed prision mayor or reclusion temporal, as the case may be;

2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of
the fraud is over 6,000 pesos but does not exceed 12,000 pesos;
3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum
period, if such amount is over 200 pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200
pesos, provided that in the four cases mentioned, the fraud be committed by any of the following
means; xxx

Though the entrustee is a corporation, nevertheless, the law specifically makes the officers,
employees or other officers or persons responsible for the offense, without prejudice to the civil
liabilities of such corporation and/or board of directors, officers, or other officials or employees
responsible for the offense. The rationale is that such officers or employees are vested with the
authority and responsibility to devise means necessary to ensure compliance with the law and, if
they fail to do so, are held criminally accountable; thus, they have a responsible share in the
violations of the law.48

If the crime is committed by a corporation or other juridical entity, the directors, officers,
employees or other officers thereof responsible for the offense shall be charged and penalized for
the crime, precisely because of the nature of the crime and the penalty therefor. A corporation
cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by
imprisonment.49 However, a corporation may be charged and prosecuted for a crime if the
imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a
corporation may be prosecuted and, if found guilty, may be fined.50

A crime is the doing of that which the penal code forbids to be done, or omitting to do what it
commands. A necessary part of the definition of every crime is the designation of the author of
the crime upon whom the penalty is to be inflicted. When a criminal statute designates an act of a
corporation or a crime and prescribes punishment therefor, it creates a criminal offense which,
otherwise, would not exist and such can be committed only by the corporation. But when a penal
statute does not expressly apply to corporations, it does not create an offense for which a
corporation may be punished. On the other hand, if the State, by statute, defines a crime that may
be committed by a corporation but prescribes the penalty therefor to be suffered by the officers,
directors, or employees of such corporation or other persons responsible for the offense, only
such individuals will suffer such penalty.51 Corporate officers or employees, through whose act,
default or omission the corporation commits a crime, are themselves individually guilty of the
crime.52
The principle applies whether or not the crime requires the consciousness of wrongdoing. It
applies to those corporate agents who themselves commit the crime and to those, who, by virtue
of their managerial positions or other similar relation to the corporation, could be deemed
responsible for its commission, if by virtue of their relationship to the corporation, they had the
power to prevent the act.53 Moreover, all parties active in promoting a crime, whether agents or
not, are principals.54 Whether such officers or employees are benefited by their delictual acts is
not a touchstone of their criminal liability. Benefit is not an operative fact.

In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the
cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a
corporate officer cannot protect himself behind a corporation where he is the actual, present and
efficient actor.55

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against
the petitioner.

SO ORDERED.
FIRST DIVISION

[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 and Alegre exposed various alleged
complaints from students, teachers and parents against Ago Medical and Educational Center-
Bicol Christian College of Medicine (AMEC) and its administrators. Claiming that the
broadcasts were defamatory, AMEC and Angelita Ago (Ago), as Dean of AMECs College of
Medicine, filed a complaint for damages[7] against FBNI, Rima and Alegre on 27 February
1990. Quoted are portions of the allegedly libelous broadcasts:

JUN ALEGRE:

Let us begin with the less burdensome: if you have children taking medical course at AMEC-
BCCM, advise them to pass all subjects because if they fail in any subject they will repeat their
year level, taking up all subjects including those they have passed already. Several students had
approached me stating that they had consulted with the DECS which told them that there is no
such regulation. If [there] is no such regulation why is AMEC doing the same?

xxx

Second: Earlier AMEC students in Physical Therapy had complained that the course is not
recognized by DECS. xxx

Third: Students are required to take and pay for the subject even if the subject does not have an
instructor - such greed for money on the part of AMECs administration. Take the subject
Anatomy: students would pay for the subject upon enrolment because it is offered by the school.
However there would be no instructor for such subject. Students would be informed that course
would be moved to a later date because the school is still searching for the appropriate instructor.

xxx

It is a public knowledge that the Ago Medical and Educational Center has survived and has been
surviving for the past few years since its inception because of funds support from foreign
foundations. If you will take a look at the AMEC premises youll find out that the names of the
buildings there are foreign soundings. There is a McDonald Hall. Why not Jose Rizal or
Bonifacio Hall? That is a very concrete and undeniable evidence that the support of foreign
foundations for AMEC is substantial, isnt it? With the report which is the basis of the expose in
DZRC today, it would be very easy for detractors and enemies of the Ago family to stop the flow
of support of foreign foundations who assist the medical school on the basis of the latters
purpose. But if the purpose of the institution (AMEC) is to deceive students at cross purpose
with its reason for being it is possible for these foreign foundations to lift or suspend their
donations temporarily.[8]

xxx

On the other hand, the administrators of AMEC-BCCM, AMEC Science High School and the
AMEC-Institute of Mass Communication in their effort to minimize expenses in terms of salary
are absorbing or continues to accept rejects. For example how many teachers in AMEC are
former teachers of Aquinas University but were removed because of immorality? Does it mean
that the present administration of AMEC have the total definite moral foundation from catholic
administrator of Aquinas University. I will prove to you my friends, that AMEC is a dumping
ground, garbage, not merely of moral and physical misfits. Probably they only qualify in terms of
intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the family name implies. She
is too old to work, being an old woman. Is the AMEC administration exploiting the very
[e]nterprising or compromising and undemanding Lola? Could it be that AMEC is just patiently
making use of Dean Justita Lola were if she is very old. As in atmospheric situation zero
visibility the plane cannot land, meaning she is very old, low pay follows. By the way, Dean
Justita Lola is also the chairman of the committee on scholarship in AMEC. She had retired from
Bicol University a long time ago but AMEC has patiently made use of her.

xxx

MEL RIMA:

xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit
people. What does this mean? Immoral and physically misfits as teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no
longer fit to teach. You are too old. As an aviation, your case is zero visibility. Dont insist.

xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship
committee at that. The reason is practical cost saving in salaries, because an old person is not
fastidious, so long as she has money to buy the ingredient of beetle juice. The elderly can get by
thats why she (Lola) was taken in as Dean.

xxx

xxx On our end our task is to attend to the interests of students. It is likely that the students
would be influenced by evil. When they become members of society outside of campus will be
liabilities rather than assets. What do you expect from a doctor who while studying at AMEC is
so much burdened with unreasonable imposition? What do you expect from a student who aside
from peculiar problems because not all students are rich in their struggle to improve their social
status are even more burdened with false regulations. xxx[9] (Emphasis supplied)

The complaint further alleged that AMEC is a reputable learning institution. With the supposed
exposs, FBNI, Rima and Alegre transmitted malicious imputations, and as such, destroyed
plaintiffs (AMEC and Ago) reputation. AMEC and Ago included FBNI as defendant for
allegedly failing to exercise due diligence in the selection and supervision of its employees,
particularly Rima and Alegre.

On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an Answer[10]
alleging that the broadcasts against AMEC were fair and true. FBNI, Rima and Alegre claimed
that they were plainly impelled by a sense of public duty to report the goings-on in AMEC,
[which is] an institution imbued with public interest.

Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty. Edmundo
Cea, collaborating counsel of Atty. Lozares, filed a Motion to Dismiss[11] on FBNIs behalf. The
trial court denied the motion to dismiss. Consequently, FBNI filed a separate Answer claiming
that it exercised due diligence in the selection and supervision of Rima and Alegre. FBNI
claimed that before hiring a broadcaster, the broadcaster should (1) file an application; (2) be
interviewed; and (3) undergo an apprenticeship and training program after passing the interview.
FBNI likewise claimed that it always reminds its broadcasters to observe truth, fairness and
objectivity in their broadcasts and to refrain from using libelous and indecent language.
Moreover, FBNI requires all broadcasters to pass the Kapisanan ng mga Brodkaster sa Pilipinas
(KBP) accreditation test and to secure a KBP permit.

On 14 December 1992, the trial court rendered a Decision[12] finding FBNI and Alegre liable
for libel except Rima. The trial court held that the broadcasts are libelous per se. The trial court
rejected the broadcasters claim that their utterances were the result of straight reporting because
it had no factual basis. The broadcasters did not even verify their reports before airing them to
show good faith. In holding FBNI liable for libel, the trial court found that FBNI failed to
exercise diligence in the selection and supervision of its employees.

In absolving Rima from the charge, the trial court ruled that Rimas only participation was when
he agreed with Alegres expos. The trial court found Rimas statement within the bounds of
freedom of speech, expression, and of the press. The dispositive portion of the decision reads:

WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree of
damages caused by the controversial utterances, which are not found by this court to be really
very serious and damaging, and there being no showing that indeed the enrollment of plaintiff
school dropped, defendants Hermogenes Jun Alegre, Jr. and Filipinas Broadcasting Network
(owner of the radio station DZRC), are hereby jointly and severally ordered to pay plaintiff Ago
Medical and Educational Center-Bicol Christian College of Medicine (AMEC-BCCM) the
amount of P300,000.00 moral damages, plus P30,000.00 reimbursement of attorneys fees, and to
pay the costs of suit.

SO ORDERED. [13] (Emphasis supplied)

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the other,
appealed the decision to the Court of Appeals. The Court of Appeals affirmed the trial courts
judgment with modification. The appellate court made Rima solidarily liable with FBNI and
Alegre. The appellate court denied Agos claim for damages and attorneys fees because the
broadcasts were directed against AMEC, and not against her. The dispositive portion of the
Court of Appeals decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification
that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes
Alegre.

SO ORDERED.[14]

FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied in
its 26 January 2000 Resolution.

Hence, FBNI filed this petition.[15]

The Ruling of the Court of Appeals

The Court of Appeals upheld the trial courts ruling that the questioned broadcasts are libelous
per se and that FBNI, Rima and Alegre failed to overcome the legal presumption of malice. The
Court of Appeals found Rima and Alegres claim that they were actuated by their moral and
social duty to inform the public of the students gripes as insufficient to justify the utterance of
the defamatory remarks.

Finding no factual basis for the imputations against AMECs administrators, the Court of Appeals
ruled that the broadcasts were made with reckless disregard as to whether they were true or false.
The appellate court pointed out that FBNI, Rima and Alegre failed to present in court any of the
students who allegedly complained against AMEC. Rima and Alegre merely gave a single name
when asked to identify the students. According to the Court of Appeals, these circumstances cast
doubt on the veracity of the broadcasters claim that they were impelled by their moral and social
duty to inform the public about the students gripes.

The Court of Appeals found Rima also liable for libel since he remarked that (1) AMEC-BCCM
is a dumping ground for morally and physically misfit teachers; (2) AMEC obtained the services
of Dean Justita Lola to minimize expenses on its employees salaries; and (3) AMEC burdened
the students with unreasonable imposition and false regulations.[16]

The Court of Appeals held that FBNI failed to exercise due diligence in the selection and
supervision of its employees for allowing Rima and Alegre to make the radio broadcasts without
the proper KBP accreditation. The Court of Appeals denied Agos claim for damages and
attorneys fees because the libelous remarks were directed against AMEC, and not against her.
The Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable to pay AMEC moral
damages, attorneys fees and costs of suit.

Issues

FBNI raises the following issues for resolution:

I. WHETHER THE BROADCASTS ARE LIBELOUS;

II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and

IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR
PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.

The Courts Ruling

We deny the petition.

This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and
Alegre against AMEC.[17] While AMEC did not point out clearly the legal basis for its
complaint, a reading of the complaint reveals that AMECs cause of action is based on Articles 30
and 33 of the Civil Code. Article 30[18] authorizes a separate civil action to recover civil
liability arising from a criminal offense. On the other hand, Article 33[19] particularly provides
that the injured party may bring a separate civil action for damages in cases of defamation, fraud,
and physical injuries. AMEC also invokes Article 19[20] of the Civil Code to justify its claim for
damages. AMEC cites Articles 2176[21] and 2180[22] of the Civil Code to hold FBNI solidarily
liable with Rima and Alegre.

I.

Whether the broadcasts are libelous

A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real or

imaginary, or any act or omission, condition, status, or circumstance tending to cause the
dishonor, discredit, or contempt of a natural or juridical person, or to blacken the memory of one
who is dead.[24]

There is no question that the broadcasts were made public and imputed to AMEC defects or
circumstances tending to cause it dishonor, discredit and contempt. Rima and Alegres remarks
such as greed for money on the part of AMECs administrators; AMEC is a dumping ground,
garbage of xxx moral and physical misfits; and AMEC students who graduate will be liabilities
rather than assets of the society are libelous per se. Taken as a whole, the broadcasts suggest that
AMEC is a money-making institution where physically and morally unfit teachers abound.

However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and
Alegre were plainly impelled by their civic duty to air the students gripes. FBNI alleges that
there is no evidence that ill will or spite motivated Rima and Alegre in making the broadcasts.
FBNI further points out that Rima and Alegre exerted efforts to obtain AMECs side and gave
Ago the opportunity to defend AMEC and its administrators. FBNI concludes that since there is
no malice, there is no libel.
FBNIs contentions are untenable.

Every defamatory imputation is presumed malicious.[25] Rima and Alegre failed to show
adequately their good intention and justifiable motive in airing the supposed gripes of the
students. As hosts of a documentary or public affairs program, Rima and Alegre should have
presented the public issues free from inaccurate and misleading information.[26] Hearing the
students alleged complaints a month before the expos,[27] they had sufficient time to verify their
sources and information. However, Rima and Alegre hardly made a thorough investigation of the
students alleged gripes. Neither did they inquire about nor confirm the purported irregularities in
AMEC from the Department of Education, Culture and Sports. Alegre testified that he merely
went to AMEC to verify his report from an alleged AMEC official who refused to disclose any
information. Alegre simply relied on the words of the students because they were many and not
because there is proof that what they are saying is true.[28] This plainly shows Rima and Alegres
reckless disregard of whether their report was true or not.

Contrary to FBNIs claim, the broadcasts were not the result of straight reporting. Significantly,
some courts in the United States apply the privilege of neutral reportage in libel cases involving
matters of public interest or public figures. Under this privilege, a republisher who accurately
and disinterestedly reports certain defamatory statements made against public figures is shielded
from liability, regardless of the republishers subjective awareness of the truth or falsity of the
accusation.[29] Rima and Alegre cannot invoke the privilege of neutral reportage because
unfounded comments abound in the broadcasts. Moreover, there is no existing controversy
involving AMEC when the broadcasts were made. The privilege of neutral reportage applies
where the defamed person is a public figure who is involved in an existing controversy, and a
party to that controversy makes the defamatory statement.[30]

However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal v.
Court of Appeals,[31] FBNI contends that the broadcasts fall within the coverage of qualifiedly
privileged communications for being commentaries on matters of public interest. Such being the
case, AMEC should prove malice in fact or actual malice. Since AMEC allegedly failed to prove
actual malice, there is no libel.

FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the doctrine of fair
comment, thus:
[F]air commentaries on matters of public interest are privileged and constitute a valid defense in
an action for libel or slander. The doctrine of fair comment means that while in general every
discreditable imputation publicly made is deemed false, because every man is presumed innocent
until his guilt is judicially proved, and every false imputation is deemed malicious, nevertheless,
when the discreditable imputation is directed against a public person in his public capacity, it is
not necessarily actionable. In order that such discreditable imputation to a public official may be
actionable, it must either be a false allegation of fact or a comment based on a false supposition.
If the comment is an expression of opinion, based on established facts, then it is immaterial that
the opinion happens to be mistaken, as long as it might reasonably be inferred from the facts.[32]
(Emphasis supplied)

True, AMEC is a private learning institution whose business of educating students is genuinely
imbued with public interest. The welfare of the youth in general and AMECs students in
particular is a matter which the public has the right to know. Thus, similar to the newspaper
articles in Borjal, the subject broadcasts dealt with matters of public interest. However, unlike in
Borjal, the questioned broadcasts are not based on established facts. The record supports the
following findings of the trial court:

xxx Although defendants claim that they were motivated by consistent reports of students and
parents against plaintiff, yet, defendants have not presented in court, nor even gave name of a
single student who made the complaint to them, much less present written complaint or petition
to that effect. To accept this defense of defendants is too dangerous because it could easily give
license to the media to malign people and establishments based on flimsy excuses that there were
reports to them although they could not satisfactorily establish it. Such laxity would encourage
careless and irresponsible broadcasting which is inimical to public interests.

Secondly, there is reason to believe that defendant radio broadcasters, contrary to the mandates
of their duties, did not verify and analyze the truth of the reports before they aired it, in order to
prove that they are in good faith.

Alegre contended that plaintiff school had no permit and is not accredited to offer Physical
Therapy courses. Yet, plaintiff produced a certificate coming from DECS that as of Sept. 22,
1987 or more than 2 years before the controversial broadcast, accreditation to offer Physical
Therapy course had already been given the plaintiff, which certificate is signed by no less than
the Secretary of Education and Culture herself, Lourdes R. Quisumbing (Exh. C-rebuttal).
Defendants could have easily known this were they careful enough to verify. And yet, defendants
were very categorical and sounded too positive when they made the erroneous report that
plaintiff had no permit to offer Physical Therapy courses which they were offering.

The allegation that plaintiff was getting tremendous aids from foreign foundations like Mcdonald
Foundation prove not to be true also. The truth is there is no Mcdonald Foundation existing.
Although a big building of plaintiff school was given the name Mcdonald building, that was only
in order to honor the first missionary in Bicol of plaintiffs religion, as explained by Dr. Lita Ago.
Contrary to the claim of defendants over the air, not a single centavo appears to be received by
plaintiff school from the aforementioned McDonald Foundation which does not exist.

Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that when
medical students fail in one subject, they are made to repeat all the other subject[s], even those
they have already passed, nor their claim that the school charges laboratory fees even if there are
no laboratories in the school. No evidence was presented to prove the bases for these claims, at
least in order to give semblance of good faith.

As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers,
defendant[s] singled out Dean Justita Lola who is said to be so old, with zero visibility already.
Dean Lola testified in court last Jan. 21, 1991, and was found to be 75 years old. xxx Even older
people prove to be effective teachers like Supreme Court Justices who are still very much in
demand as law professors in their late years. Counsel for defendants is past 75 but is found by
this court to be still very sharp and effective. So is plaintiffs counsel.

Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed, but
is still alert and docile.

The contention that plaintiffs graduates become liabilities rather than assets of our society is a
mere conclusion. Being from the place himself, this court is aware that majority of the medical
graduates of plaintiffs pass the board examination easily and become prosperous and responsible
professionals.[33]
Had the comments been an expression of opinion based on established facts, it is immaterial that
the opinion happens to be mistaken, as long as it might reasonably be inferred from the facts.[34]
However, the comments of Rima and Alegre were not backed up by facts. Therefore, the
broadcasts are not privileged and remain libelous per se.

The broadcasts also violate the Radio Code[35] of the Kapisanan ng mga Brodkaster sa Pilipinas,
Ink. (Radio Code). Item I(B) of the Radio Code provides:

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x

4. Public affairs program shall present public issues free from personal bias, prejudice and
inaccurate and misleading information. x x x Furthermore, the station shall strive to present
balanced discussion of issues. x x x.

xxx

7. The station shall be responsible at all times in the supervision of public affairs, public issues
and commentary programs so that they conform to the provisions and standards of this code.

8. It shall be the responsibility of the newscaster, commentator, host and announcer to protect
public interest, general welfare and good order in the presentation of public affairs and public
issues.[36] (Emphasis supplied)

The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the
code of ethical conduct governing practitioners in the radio broadcast industry. The Radio Code
is a voluntary code of conduct imposed by the radio broadcast industry on its own members. The
Radio Code is a public warranty by the radio broadcast industry that radio broadcast practitioners
are subject to a code by which their conduct are measured for lapses, liability and sanctions.
The public has a right to expect and demand that radio broadcast practitioners live up to the code
of conduct of their profession, just like other professionals. A professional code of conduct
provides the standards for determining whether a person has acted justly, honestly and with good
faith in the exercise of his rights and performance of his duties as required by Article 19[37] of
the Civil Code. A professional code of conduct also provides the standards for determining
whether a person who willfully causes loss or injury to another has acted in a manner contrary to
morals or good customs under Article 21[38] of the Civil Code.

II.

Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages because it is a corporation.[39]

A juridical person is generally not entitled to moral damages because, unlike a natural person, it
cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock.[40] The Court of Appeals cites Mambulao Lumber Co. v. PNB,
et al.[41] to justify the award of moral damages. However, the Courts statement in Mambulao
that a corporation may have a good reputation which, if besmirched, may also be a ground for
the award of moral damages is an obiter dictum.[42]

Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219[43] of the
Civil Code. This provision expressly authorizes the recovery of moral damages in cases of libel,
slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is
a natural or juridical person. Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for moral damages.[44]

Moreover, where the broadcast is libelous per se, the law implies damages.[45] In such a case,
evidence of an honest mistake or the want of character or reputation of the party libeled goes
only in mitigation of damages.[46] Neither in such a case is the plaintiff required to introduce
evidence of actual damages as a condition precedent to the recovery of some damages.[47] In
this case, the broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.

However, we find the award of P300,000 moral damages unreasonable. The record shows that
even though the broadcasts were libelous per se, AMEC has not suffered any substantial or
material damage to its reputation. Therefore, we reduce the award of moral damages from
P300,000 to P150,000.

III.

Whether the award of attorneys fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the award
of attorneys fees. FBNI adds that the instant case does not fall under the enumeration in Article
2208[48] of the Civil Code.

The award of attorneys fees is not proper because AMEC failed to justify satisfactorily its claim
for attorneys fees. AMEC did not adduce evidence to warrant the award of attorneys fees.
Moreover, both the trial and appellate courts failed to explicitly state in their respective decisions
the rationale for the award of attorneys fees.[49] In Inter-Asia Investment Industries, Inc. v.
Court of Appeals,[50] we held that:

[I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather
than the rule, and counsels fees are not to be awarded every time a party wins a suit. The power
of the court to award attorneys fees under Article 2208 of the Civil Code demands factual, legal
and equitable justification, without which the award is a conclusion without a premise, its basis
being improperly left to speculation and conjecture. In all events, the court must explicitly state
in the text of the decision, and not only in the decretal portion thereof, the legal reason for the
award of attorneys fees.[51] (Emphasis supplied)
While it mentioned about the award of attorneys fees by stating that it lies within the discretion
of the court and depends upon the circumstances of each case, the Court of Appeals failed to
point out any circumstance to justify the award.

IV.

Whether FBNI is solidarily liable with Rima and Alegre

for moral damages, attorneys fees

and costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages
and attorneys fees because it exercised due diligence in the selection and supervision of its
employees, particularly Rima and Alegre. FBNI maintains that its broadcasters, including Rima
and Alegre, undergo a very regimented process before they are allowed to go on air. Those who
apply for broadcaster are subjected to interviews, examinations and an apprenticeship program.

FBNI further argues that Alegres age and lack of training are irrelevant to his competence as a
broadcaster. FBNI points out that the minor deficiencies in the KBP accreditation of Rima and
Alegre do not in any way prove that FBNI did not exercise the diligence of a good father of a
family in selecting and supervising them. Rimas accreditation lapsed due to his non-payment of
the KBP annual fees while Alegres accreditation card was delayed allegedly for reasons
attributable to the KBP Manila Office. FBNI claims that membership in the KBP is merely
voluntary and not required by any law or government regulation.

FBNIs arguments do not persuade us.

The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for the
tort which they commit.[52] Joint tort feasors are all the persons who command, instigate,
promote, encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or
who approve of it after it is done, if done for their benefit.[53] Thus, AMEC correctly anchored
its cause of action against FBNI on Articles 2176 and 2180 of the Civil Code.

As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for
damages arising from the libelous broadcasts. As stated by the Court of Appeals, recovery for
defamatory statements published by radio or television may be had from the owner of the station,
a licensee, the operator of the station, or a person who procures, or participates in, the making of
the defamatory statements.[54] An employer and employee are solidarily liable for a defamatory
statement by the employee within the course and scope of his or her employment, at least when
the employer authorizes or ratifies the defamation.[55] In this case, Rima and Alegre were
clearly performing their official duties as hosts of FBNIs radio program Expos when they aired
the broadcasts. FBNI neither alleged nor proved that Rima and Alegre went beyond the scope of
their work at that time. There was likewise no showing that FBNI did not authorize and ratify the
defamatory broadcasts.

Moreover, there is insufficient evidence on record that FBNI exercised due diligence in the
selection and supervision of its employees, particularly Rima and Alegre. FBNI merely showed
that it exercised diligence in the selection of its broadcasters without introducing any evidence to
prove that it observed the same diligence in the supervision of Rima and Alegre. FBNI did not
show how it exercised diligence in supervising its broadcasters. FBNIs alleged constant reminder
to its broadcasters to observe truth, fairness and objectivity and to refrain from using libelous and
indecent language is not enough to prove due diligence in the supervision of its broadcasters.
Adequate training of the broadcasters on the industrys code of conduct, sufficient information on
libel laws, and continuous evaluation of the broadcasters performance are but a few of the many
ways of showing diligence in the supervision of broadcasters.FBNI claims that it has taken all
the precaution in the selection of Rima and Alegre as broadcasters, bearing in mind their
qualifications. However, no clear and convincing evidence shows that Rima and Alegre
underwent FBNIs regimented process of application. Furthermore, FBNI admits that Rima and
Alegre had deficiencies in their KBP accreditation,[56] which is one of FBNIs requirements
before it hires a broadcaster. Significantly, membership in the KBP, while voluntary, indicates
the broadcasters strong commitment to observe the broadcast industrys rules and regulations.
Clearly, these circumstances show FBNIs lack of diligence in selecting and supervising Rima
and Alegre. Hence, FBNI is solidarily liable to pay damages together with Rima and
Alegre.WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January
1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with
the MODIFICATION that the award of moral damages is reduced from P300,000 to P150,000
and the award of attorneys fees is deleted. Costs against petitioner.
EN BANC

BOY SCOUTS OF THE PHILIPPINES,

Petitioner,
- versus -

COMMISSION ON AUDIT,
Respondent.

G.R. No. 177131

Present:

CORONA, C.J.,

CARPIO,

CARPIO MORALES,

VELASCO, JR.,

NACHURA,

LEONARDO-DE CASTRO,

BRION,
PERALTA,

BERSAMIN,

DEL CASTILLO,

ABAD,

VILLARAMA, JR.,

PEREZ,

MENDOZA, and

SERENO, JJ.

Promulgated:
June 7, 2011

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

DECISION

LEONARDO-DE CASTRO, J.:

The jurisdiction of the Commission on Audit (COA) over the Boy Scouts of the Philippines
(BSP) is the subject matter of this controversy that reached us via petition for prohibition[1] filed
by the BSP under Rule 65 of the 1997 Rules of Court. In this petition, the BSP seeks that the
COA be prohibited from implementing its June 18, 2002 Decision,[2] its February 21, 2007
Resolution,[3] as well as all other issuances arising therefrom, and that all of the foregoing be
rendered null and void. [4]
Antecedent Facts and Background of the Case

This case arose when the COA issued Resolution No. 99-011[5] on August 19, 1999 (the COA
Resolution), with the subject Defining the Commissions policy with respect to the audit of the
Boy Scouts of the Philippines. In its whereas clauses, the COA Resolution stated that the BSP
was created as a public corporation under Commonwealth Act No. 111, as amended by
Presidential Decree No. 460 and Republic Act No. 7278; that in Boy Scouts of the Philippines v.
National Labor Relations Commission,[6] the Supreme Court ruled that the BSP, as constituted
under its charter, was a government-controlled corporation within the meaning of Article
IX(B)(2)(1) of the Constitution; and that the BSP is appropriately regarded as a government
instrumentality under the 1987 Administrative Code.[7] The COA Resolution also cited its
constitutional mandate under Section 2(1), Article IX (D). Finally, the COA Resolution reads:

NOW THEREFORE, in consideration of the foregoing premises, the COMMISSION PROPER

HAS RESOLVED, AS IT DOES HEREBY RESOLVE, to conduct an annual financial audit of
the Boy Scouts of the Philippines in accordance with generally accepted auditing standards, and
express an opinion on whether the financial statements which include the Balance Sheet, the
Income Statement and the Statement of Cash Flows present fairly its financial position and
results of operations.

xxxx
BE IT RESOLVED FURTHERMORE, that for purposes of audit supervision, the Boy Scouts of
the Philippines shall be classified among the government corporations belonging to the
Educational, Social, Scientific, Civic and Research Sector under the Corporate Audit Office I, to
be audited, similar to the subsidiary corporations, by employing the team audit approach.[8]
(Emphases supplied.)

The BSP sought reconsideration of the COA Resolution in a letter[9] dated November 26, 1999
signed by the BSP National President Jejomar C. Binay, who is now the Vice President of the
Republic, wherein he wrote:

It is the position of the BSP, with all due respect, that it is not subject to the Commissions
jurisdiction on the following grounds:

1. We reckon that the ruling in the case of Boy Scouts of the Philippines vs. National Labor
Relations Commission, et al. (G.R. No. 80767) classifying the BSP as a government-controlled
corporation is anchored on the substantial Government participation in the National Executive
Board of the BSP. It is to be noted that the case was decided when the BSP Charter is defined by
Commonwealth Act No. 111 as amended by Presidential Decree 460.
However, may we humbly refer you to Republic Act No. 7278 which amended the BSPs charter
after the cited case was decided. The most salient of all amendments in RA No. 7278 is the
alteration of the composition of the National Executive Board of the BSP.

The said RA virtually eliminated the substantial government participation in the National
Executive Board by removing: (i) the President of the Philippines and executive secretaries, with
the exception of the Secretary of Education, as members thereof; and (ii) the appointment and
confirmation power of the President of the Philippines, as Chief Scout, over the members of the
said Board.

The BSP believes that the cited case has been superseded by RA 7278. Thereby weakening the
cases conclusion that the BSP is a government-controlled corporation (sic). The 1987
Administrative Code itself, of which the BSP vs. NLRC relied on for some terms, defines
government-owned and controlled corporations as agencies organized as stock or non-stock
corporations which the BSP, under its present charter, is not.

Also, the Government, like in other GOCCs, does not have funds invested in the BSP. What RA
7278 only provides is that the Government or any of its subdivisions, branches, offices, agencies
and instrumentalities can from time to time donate and contribute funds to the BSP.

xxxx
Also the BSP respectfully believes that the BSP is not appropriately regarded as a government
instrumentality under the 1987 Administrative Code as stated in the COA resolution. As defined
by Section 2(10) of the said code, instrumentality refers to any agency of the National
Government, not integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering special funds,
and enjoying operational autonomy, usually through a charter.

The BSP is not an entity administering special funds. It is not even included in the DECS
National Budget. x x x

It may be argued also that the BSP is not an agency of the Government. The 1987 Administrative
Code, merely referred the BSP as an attached agency of the DECS as distinguished from an
actual line agency of departments that are included in the National Budget. The BSP believes
that an attached agency is different from an agency. Agency, as defined in Section 2(4) of the
Administrative Code, is defined as any of the various units of the Government including a
department, bureau, office, instrumentality, government-owned or controlled corporation or local
government or distinct unit therein.

Under the above definition, the BSP is neither a unit of the Government; a department which
refers to an executive department as created by law (Section 2[7] of the Administrative Code);
nor a bureau which refers to any principal subdivision or unit of any department (Section 2[8],
Administrative Code).[10]
Subsequently, requests for reconsideration of the COA Resolution were also made separately by
Robert P. Valdellon, Regional Scout Director, Western Visayas Region, Iloilo City and Eugenio
F. Capreso, Council Scout Executive of Calbayog City.[11]

In a letter[12] dated July 3, 2000, Director Crescencio S. Sunico, Corporate Audit Officer (CAO)
I of the COA, furnished the BSP with a copy of the Memorandum[13] dated June 20, 2000 of
Atty. Santos M. Alquizalas, the COA General Counsel. In said Memorandum, the COA General
Counsel opined that Republic Act No. 7278 did not supersede the Courts ruling in Boy Scouts of
the Philippines v. National Labor Relations Commission, even though said law eliminated the
substantial government participation in the selection of members of the National Executive
Board of the BSP. The Memorandum further provides:

Analysis of the said case disclosed that the substantial government participation is only one (1)
of the three (3) grounds relied upon by the Court in the resolution of the case. Other
considerations include the character of the BSPs purposes and functions which has a public
aspect and the statutory designation of the BSP as a public corporation. These grounds have not
been deleted by R.A. No. 7278. On the contrary, these were strengthened as evidenced by the
amendment made relative to BSPs purposes stated in Section 3 of R.A. No. 7278.

On the argument that BSP is not appropriately regarded as a government instrumentality and
agency of the government, such has already been answered and clarified. The Supreme Court has
elucidated this matter in the BSP case when it declared that BSP is regarded as, both a
government-controlled corporation with an original charter and as an instrumentality of the
Government. Likewise, it is not disputed that the Administrative Code of 1987 designated the
BSP as one of the attached agencies of DECS. Being an attached agency, however, it does not
change its nature as a government-controlled corporation with original charter and, necessarily,
subject to COA audit jurisdiction. Besides, Section 2(1), Article IX-D of the Constitution
provides that COA shall have the power, authority, and duty to examine, audit and settle all
accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and
property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions,
agencies or instrumentalities, including government-owned or controlled corporations with
original charters.[14]

Based on the Memorandum of the COA General Counsel, Director Sunico wrote:

In view of the points clarified by said Memorandum upholding COA Resolution No. 99-011, we
have to comply with the provisions of the latter, among which is to conduct an annual financial
audit of the Boy Scouts of the Philippines.[15]

In a letter dated November 20, 2000 signed by Director Amorsonia B. Escarda, CAO I, the COA
informed the BSP that a preliminary survey of its organizational structure, operations and
accounting system/records shall be conducted on November 21 to 22, 2000.[16]
Upon the BSPs request, the audit was deferred for thirty (30) days. The BSP then filed a Petition
for Review with Prayer for Preliminary Injunction and/or Temporary Restraining Order before
the COA. This was denied by the COA in its questioned Decision, which held that the BSP is
under its audit jurisdiction. The BSP moved for reconsideration but this was likewise denied
under its questioned Resolution.[17]

This led to the filing by the BSP of this petition for prohibition with preliminary injunction and
temporary restraining order against the COA.

The Issue

As stated earlier, the sole issue to be resolved in this case is whether the BSP falls under the
COAs audit jurisdiction.
The Parties Respective Arguments

The BSP contends that Boy Scouts of the Philippines v. National Labor Relations Commission is
inapplicable for purposes of determining the audit jurisdiction of the COA as the issue therein
was the jurisdiction of the National Labor Relations Commission over a case for illegal dismissal
and unfair labor practice filed by certain BSP employees.[18]

While the BSP concedes that its functions do relate to those that the government might otherwise
completely assume on its own, it avers that this alone was not determinative of the COAs audit
jurisdiction over it. The BSP further avers that the Court in Boy Scouts of the Philippines v.
National Labor Relations Commission simply stated x x x that in respect of functions, the BSP is
akin to a public corporation but this was not synonymous to holding that the BSP is a
government corporation or entity subject to audit by the COA. [19]

The BSP contends that Republic Act No. 7278 introduced crucial amendments to its charter;
hence, the findings of the Court in Boy Scouts of the Philippines v. National Labor Relations
Commission are no longer valid as the government has ceased to play a controlling influence in
it. The BSP claims that the pronouncements of the Court therein must be taken only within the
context of that case; that the Court had categorically found that its assets were acquired from the
Boy Scouts of America and not from the Philippine government, and that its operations are
financed chiefly from membership dues of the Boy Scouts themselves as well as from property
rentals; and that the BSP may correctly be characterized as non-governmental, and hence,
beyond the audit jurisdiction of the COA. It further claims that the designation by the Court of
the BSP as a government agency or instrumentality is mere obiter dictum.[20]

The BSP maintains that the provisions of Republic Act No. 7278 suggest that governance of BSP
has come to be overwhelmingly a private affair or nature, with government participation
restricted to the seat of the Secretary of Education, Culture and Sports.[21] It cites Philippine
Airlines Inc. v. Commission on Audit[22] wherein the Court declared that, PAL, having ceased
to be a government-owned or controlled corporation is no longer under the audit jurisdiction of
the COA.[23] Claiming that the amendments introduced by Republic Act No. 7278 constituted a
supervening event that changed the BSPs corporate identity in the same way that the
governments privatization program changed PALs, the BSP makes the case that the government
no longer has control over it; thus, the COA cannot use the Boy Scouts of the Philippines v.
National Labor Relations Commission as its basis for the exercise of its jurisdiction and the
issuance of COA Resolution No. 99-011.[24] The BSP further claims as follows:

It is not far-fetched, in fact, to concede that BSPs funds and assets are private in character.
Unlike ordinary public corporations, such as provinces, cities, and municipalities, or
government-owned and controlled corporations, such as Land Bank of the Philippines and the
Development Bank of the Philippines, the assets and funds of BSP are not derived from any
government grant. For its operations, BSP is not dependent in any way on any government
appropriation; as a matter of fact, it has not even been included in any appropriations for the
government. To be sure, COA has not alleged, in its Resolution No. 99-011 or in the
Memorandum of its General Counsel, that BSP received, receives or continues to receive assets
and funds from any agency of the government. The foregoing simply point to the private nature
of the funds and assets of petitioner BSP.
xxxx

As stated in petitioners third argument, BSPs assets and funds were never acquired from the
government. Its operations are not in any way financed by the government, as BSP has never
been included in any appropriations act for the government. Neither has the government invested
funds with BSP. BSP, has not been, at any time, a user of government property or funds; nor
have properties of the government been held in trust by BSP. This is precisely the reason why,
until this time, the COA has not attempted to subject BSP to its audit jurisdiction. x x x.[25]

To summarize its other arguments, the BSP contends that it is not a government-owned or
controlled corporation; neither is it an instrumentality, agency, or subdivision of the government.

In its Comment,[26] the COA argues as follows:

1. The BSP is a public corporation created under Commonwealth Act No. 111 dated
October 31, 1936, and whose functions relate to the fostering of public virtues of citizenship and
patriotism and the general improvement of the moral spirit and fiber of the youth. The manner of
creation and the purpose for which the BSP was created indubitably prove that it is a government
agency.
2. Being a government agency, the funds and property owned or held in trust by the BSP
are subject to the audit authority of respondent Commission on Audit pursuant to Section 2 (1),
Article IX-D of the 1987 Constitution.

3. Republic Act No. 7278 did not change the character of the BSP as a government-
owned or controlled corporation and government instrumentality.[27]

The COA maintains that the functions of the BSP that include, among others, the teaching to the
youth of patriotism, courage, self-reliance, and kindred virtues, are undeniably sovereign
functions enshrined under the Constitution and discussed by the Court in Boy Scouts of the
Philippines v. National Labor Relations Commission. The COA contends that any attempt to
classify the BSP as a private corporation would be incomprehensible since no less than the law
which created it had designated it as a public corporation and its statutory mandate embraces
performance of sovereign functions.[28]

The COA claims that the only reason why the BSP employees fell within the scope of the Civil
Service Commission even before the 1987 Constitution was the fact that it was a government-
owned or controlled corporation; that as an attached agency of the Department of Education,
Culture and Sports (DECS), the BSP is an agency of the government; and that the BSP is a
chartered institution under Section 1(12) of the Revised Administrative Code of 1987, embraced
under the term government instrumentality.[29]

The COA concludes that being a government agency, the funds and property owned or held by
the BSP are subject to the audit authority of the COA pursuant to Section 2(1), Article IX (D) of
the 1987 Constitution.

In support of its arguments, the COA cites The Veterans Federation of the Philippines (VFP) v.
Reyes,[30] wherein the Court held that among the reasons why the VFP is a public corporation is
that its charter, Republic Act No. 2640, designates it as one. Furthermore, the COA quotes the
Court as saying in that case:

In several cases, we have dealt with the issue of whether certain specific activities can be
classified as sovereign functions. These cases, which deal with activities not immediately
apparent to be sovereign functions, upheld the public sovereign nature of operations needed
either to promote social justice or to stimulate patriotic sentiments and love of country.

xxxx
Petitioner claims that its funds are not public funds because no budgetary appropriations or
government funds have been released to the VFP directly or indirectly from the DBM, and
because VFP funds come from membership dues and lease rentals earned from administering
government lands reserved for the VFP.

The fact that no budgetary appropriations have been released to the VFP does not prove that it is
a private corporation. The DBM indeed did not see it fit to propose budgetary appropriations to
the VFP, having itself believed that the VFP is a private corporation. If the DBM, however, is
mistaken as to its conclusion regarding the nature of VFP's incorporation, its previous assertions
will not prevent future budgetary appropriations to the VFP. The erroneous application of the
law by public officers does not bar a subsequent correct application of the law.[31] (Citations
omitted.)

The COA points out that the government is not precluded by law from extending financial
support to the BSP and adding to its funds, and that as a government instrumentality which
continues to perform a vital function imbued with public interest and reflective of the
governments policy to stimulate patriotic sentiments and love of country, the BSPs funds from
whatever source are public funds, and can be used solely for public purpose in pursuance of the
provisions of Republic Act No. [7278].[32]

The COA claims that the fact that it has not yet audited the BSPs funds may not bar the
subsequent exercise of its audit jurisdiction.
The BSP filed its Reply[33] on August 29, 2007 maintaining that its statutory designation as a
public corporation and the public character of its purpose and functions are not determinative of
the COAs audit jurisdiction; reiterating its stand that Boy Scouts of the Philippines v. National
Labor Relations Commission is not applicable anymore because the aspect of government
ownership and control has been removed by Republic Act No. 7278; and concluding that the
funds and property that it either owned or held in trust are not public funds and are not subject to
the COAs audit jurisdiction.

Thereafter, considering the BSPs claim that it is a private corporation, this Court, in a
Resolution[34] dated July 20, 2010, required the parties to file, within a period of twenty (20)
days from receipt of said Resolution, their respective comments on the issue of whether
Commonwealth Act No. 111, as amended by Republic Act No. 7278, is constitutional.

In compliance with the Courts resolution, the parties filed their respective Comments.

In its Comment[35] dated October 22, 2010, the COA argues that the constitutionality of
Commonwealth Act No. 111, as amended, is not determinative of the resolution of the present
controversy on the COAs audit jurisdiction over petitioner, and in fact, the controversy may be
resolved on other grounds; thus, the requisites before a judicial inquiry may be made, as set forth
in Commissioner of Internal Revenue v. Court of Tax Appeals,[36] have not been fully met.[37]
Moreover, the COA maintains that behind every law lies the presumption of
constitutionality.[38] The COA likewise argues that contrary to the BSPs position, repeal of a
law by implication is not favored.[39] Lastly, the COA claims that there was no violation of
Section 16, Article XII of the 1987 Constitution with the creation or declaration of the BSP as a
government corporation. Citing Philippine Society for the Prevention of Cruelty to Animals v.
Commission on Audit,[40] the COA further alleges:

The true criterion, therefore, to determine whether a corporation is public or private is found in
the totality of the relation of the corporation to the State. If the corporation is created by the State
as the latters own agency or instrumentality to help it in carrying out its governmental functions,
then that corporation is considered public; otherwise, it is private. x x x.[41]

For its part, in its Comment[42] filed on December 3, 2010, the BSP submits that its charter,
Commonwealth Act No. 111, as amended by Republic Act No. 7278, is constitutional as it does
not violate Section 16, Article XII of the Constitution. The BSP alleges that while [it] is not a
public corporation within the purview of COAs audit jurisdiction, neither is it a private
corporation created by special law falling within the ambit of the constitutional prohibition x x
x.[43] The BSP further alleges:

Petitioners purpose is embodied in Section 3 of C.A. No. 111, as amended by Section 1 of R.A.
No. 7278, thus:
xxxx

A reading of the foregoing provision shows that petitioner was created to advance the interest of
the youth, specifically of young boys, and to mold them into becoming good citizens. Ultimately,
the creation of petitioner redounds to the benefit, not only of those boys, but of the public good
or welfare. Hence, it can be said that petitioners purpose and functions are more of a public
rather than a private character. Petitioner caters to all boys who wish to join the organization
without any distinction. It does not limit its membership to a particular class of boys. Petitioners
members are trained in scoutcraft and taught patriotism, civic consciousness and responsibility,
courage, self-reliance, discipline and kindred virtues, and moral values, preparing them to
become model citizens and outstanding leaders of the country.[44]

The BSP reiterates its stand that the public character of its purpose and functions do not place it
within the ambit of the audit jurisdiction of the COA as it lacks the government ownership or
control that the Constitution requires before an entity may be subject of said jurisdiction.[45] It
avers that it merely stated in its Reply that the withdrawal of government control is akin to
privatization, but it does not necessarily mean that petitioner is a private corporation.[46] The
BSP claims that it has a unique characteristic which neither classifies it as a purely public nor a
purely private corporation;[47] that it is not a quasi-public corporation; and that it may belong to
a different class altogether.[48]

The BSP claims that assuming arguendo that it is a private corporation, its creation is not
contrary to the purpose of Section 16, Article XII of the Constitution; and that the evil sought to
be avoided by said provision is inexistent in the enactment of the BSPs charter,[49] as, (i) it was
not created for any pecuniary purpose; (ii) those who will primarily benefit from its creation are
not its officers but its entire membership consisting of boys being trained in scoutcraft all over
the country; (iii) it caters to all boys who wish to join the organization without any distinction;
and (iv) it does not limit its membership to a particular class or group of boys. Thus, the
enactment of its charter confers no special privilege to particular individuals, families, or groups;
nor does it bring about the danger of granting undue favors to certain groups to the prejudice of
others or of the interest of the country, which are the evils sought to be prevented by the
constitutional provision involved.[50]

Finally, the BSP states that the presumption of constitutionality of a legislative enactment
prevails absent any clear showing of its repugnancy to the Constitution.[51]

The Ruling of the Court

After looking at the legislative history of its amended charter and carefully studying the
applicable laws and the arguments of both parties, we find that the BSP is a public corporation
and its funds are subject to the COAs audit jurisdiction.

The BSP Charter (Commonwealth Act No. 111, approved on October 31, 1936), entitled An Act
to Create a Public Corporation to be Known as the Boy Scouts of the Philippines, and to Define
its Powers and Purposes created the BSP as a public corporation to serve the following public
interest or purpose:
Sec. 3. The purpose of this corporation shall be to promote through organization and cooperation
with other agencies, the ability of boys to do useful things for themselves and others, to train
them in scoutcraft, and to inculcate in them patriotism, civic consciousness and responsibility,
courage, self-reliance, discipline and kindred virtues, and moral values, using the method which
are in common use by boy scouts.

Presidential Decree No. 460, approved on May 17, 1974, amended Commonwealth Act No. 111
and provided substantial changes in the BSP organizational structure. Pertinent provisions are
quoted below:

Section II. Section 5 of the said Act is also amended to read as follows:

The governing body of the said corporation shall consist of a National Executive Board
composed of (a) the President of the Philippines or his representative; (b) the charter and life
members of the Boy Scouts of the Philippines; (c) the Chairman of the Board of Trustees of the
Philippine Scouting Foundation; (d) the Regional Chairman of the Scout Regions of the
Philippines; (e) the Secretary of Education and Culture, the Secretary of Social Welfare, the
Secretary of National Defense, the Secretary of Labor, the Secretary of Finance, the Secretary of
Youth and Sports, and the Secretary of Local Government and Community Development; (f) an
equal number of individuals from the private sector; (g) the National President of the Girl Scouts
of the Philippines; (h) one Scout of Senior age from each Scout Region to represent the boy
membership; and (i) three representatives of the cultural minorities. Except for the Regional
Chairman who shall be elected by the Regional Scout Councils during their annual meetings, and
the Scouts of their respective regions, all members of the National Executive Board shall be
either by appointment or cooption, subject to ratification and confirmation by the Chief Scout,
who shall be the Head of State. Vacancies in the Executive Board shall be filled by a majority
vote of the remaining members, subject to ratification and confirmation by the Chief Scout. The
by-laws may prescribe the number of members of the National Executive Board necessary to
constitute a quorum of the board, which number may be less than a majority of the whole
number of the board. The National Executive Board shall have power to make and to amend the
by-laws, and, by a two-thirds vote of the whole board at a meeting called for this purpose, may
authorize and cause to be executed mortgages and liens upon the property of the corporation.

Subsequently, on March 24, 1992, Republic Act No. 7278 further amended Commonwealth Act
No. 111 by strengthening the volunteer and democratic character of the BSP and reducing
government representation in its governing body, as follows:

Section 1. Sections 2 and 3 of Commonwealth Act. No. 111, as amended, is hereby amended to
read as follows:

"Sec. 2. The said corporation shall have the powers of perpetual succession, to sue and be sued;
to enter into contracts; to acquire, own, lease, convey and dispose of such real and personal
estate, land grants, rights and choses in action as shall be necessary for corporate purposes, and
to accept and receive funds, real and personal property by gift, devise, bequest or other means, to
conduct fund-raising activities; to adopt and use a seal, and the same to alter and destroy; to have
offices and conduct its business and affairs in Metropolitan Manila and in the regions, provinces,
cities, municipalities, and barangays of the Philippines, to make and adopt by-laws, rules and
regulations not inconsistent with this Act and the laws of the Philippines, and generally to do all
such acts and things, including the establishment of regulations for the election of associates and
successors, as may be necessary to carry into effect the provisions of this Act and promote the
purposes of said corporation: Provided, That said corporation shall have no power to issue
certificates of stock or to declare or pay dividends, its objectives and purposes being solely of
benevolent character and not for pecuniary profit of its members.

"Sec. 3. The purpose of this corporation shall be to promote through organization and
cooperation with other agencies, the ability of boys to do useful things for themselves and others,
to train them in scoutcraft, and to inculcate in them patriotism, civic consciousness and
responsibility, courage, self-reliance, discipline and kindred virtues, and moral values, using the
method which are in common use by boy scouts."

Sec. 2. Section 4 of Commonwealth Act No. 111, as amended, is hereby repealed and in lieu
thereof, Section 4 shall read as follows:

"Sec. 4. The President of the Philippines shall be the Chief Scout of the Boy Scouts of the
Philippines."

Sec. 3. Sections 5, 6, 7 and 8 of Commonwealth Act No. 111, as amended, are hereby amended
to read as follows:
"Sec. 5. The governing body of the said corporation shall consist of a National Executive Board,
the members of which shall be Filipino citizens of good moral character. The Board shall be
composed of the following:

"(a) One (1) charter member of the Boy Scouts of the Philippines who shall be elected by the
members of the National Council at its meeting called for this purpose;

"(b) The regional chairmen of the scout regions who shall be elected by the representatives of all
the local scout councils of the region during its meeting called for this purpose: Provided, That a
candidate for regional chairman need not be the chairman of a local scout council;

"(c) The Secretary of Education, Culture and Sports;

"(d) The National President of the Girl Scouts of the Philippines;

"(e) One (1) senior scout, each from Luzon, Visayas and Mindanao areas, to be elected by the
senior scout delegates of the local scout councils to the scout youth forums in their respective
areas, in its meeting called for this purpose, to represent the boy scout membership;

"(f) Twelve (12) regular members to be elected by the members of the National Council in its
meeting called for this purpose;

"(g) At least ten (10) but not more than fifteen (15) additional members from the private sector
who shall be elected by the members of the National Executive Board referred to in the
immediately preceding paragraphs (a), (b), (c), (d), (e) and (f) at the organizational meeting of
the newly reconstituted National Executive Board which shall be held immediately after the
meeting of the National Council wherein the twelve (12) regular members and the one (1) charter
member were elected.

xxxx

"Sec. 8. Any donation or contribution which from time to time may be made to the Boy Scouts
of the Philippines by the Government or any of its subdivisions, branches, offices, agencies or
instrumentalities or by a foreign government or by private, entities and individuals shall be
expended by the National Executive Board in pursuance of this Act.
The BSP as a Public Corporation under Par. 2, Art. 2 of the Civil Code

There are three classes of juridical persons under Article 44 of the Civil Code and the BSP, as
presently constituted under Republic Act No. 7278, falls under the second classification. Article
44 reads:

Art. 44. The following are juridical persons:

(1) The State and its political subdivisions;

(2) Other corporations, institutions and entities for public interest or purpose created by law;
their personality begins as soon as they have been constituted according to law;

(3) Corporations, partnerships and associations for private interest or purpose to which the law
grants a juridical personality, separate and distinct from that of each shareholder, partner or
member. (Emphases supplied.)
The BSP, which is a corporation created for a public interest or purpose, is subject to the law
creating it under Article 45 of the Civil Code, which provides:

Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed by the
laws creating or recognizing them.

Private corporations are regulated by laws of general application on the subject.

Partnerships and associations for private interest or purpose are governed by the provisions of
this Code concerning partnerships. (Emphasis and underscoring supplied.)

The purpose of the BSP as stated in its amended charter shows that it was created in order to
implement a State policy declared in Article II, Section 13 of the Constitution, which reads:

ARTICLE II - DECLARATION OF PRINCIPLES AND STATE POLICIES

Section 13. The State recognizes the vital role of the youth in nation-building and shall promote
and protect their physical, moral, spiritual, intellectual, and social well-being. It shall inculcate in
the youth patriotism and nationalism, and encourage their involvement in public and civic
affairs.

Evidently, the BSP, which was created by a special law to serve a public purpose in pursuit of a
constitutional mandate, comes within the class of public corporations defined by paragraph 2,
Article 44 of the Civil Code and governed by the law which creates it, pursuant to Article 45 of
the same Code.

The BSPs Classification Under the Administrative Code of 1987

The public, rather than private, character of the BSP is recognized by the fact that, along with the
Girl Scouts of the Philippines, it is classified as an attached agency of the DECS under Executive
Order No. 292, or the Administrative Code of 1987, which states:

TITLE VI EDUCATION, CULTURE AND SPORTS

Chapter 8 Attached Agencies

SEC. 20. Attached Agencies. The following agencies are hereby attached to the Department:

xxxx

(12) Boy Scouts of the Philippines;

(13) Girl Scouts of the Philippines.

The administrative relationship of an attached agency to the department is defined in the
Administrative Code of 1987 as follows:

BOOK IV

THE EXECUTIVE BRANCH

Chapter 7 ADMINISTRATIVE RELATIONSHIP

SEC. 38. Definition of Administrative Relationship. Unless otherwise expressly stated in the
Code or in other laws defining the special relationships of particular agencies, administrative
relationships shall be categorized and defined as follows:

xxxx
(3) Attachment. (a) This refers to the lateral relationship between the department or its equivalent
and the attached agency or corporation for purposes of policy and program coordination. The
coordination may be accomplished by having the department represented in the governing board
of the attached agency or corporation, either as chairman or as a member, with or without voting
rights, if this is permitted by the charter; having the attached corporation or agency comply with
a system of periodic reporting which shall reflect the progress of programs and projects; and
having the department or its equivalent provide general policies through its representative in the
board, which shall serve as the framework for the internal policies of the attached corporation or
agency. (Emphasis ours.)

As an attached agency, the BSP enjoys operational autonomy, as long as policy and program
coordination is achieved by having at least one representative of government in its governing
board, which in the case of the BSP is the DECS Secretary. In this sense, the BSP is not under
government control or supervision and control. Still this characteristic does not make the
attached chartered agency a private corporation covered by the constitutional proscription in
question.

Art. XII, Sec. 16 of the Constitution refers to private corporations created by government for
proprietary or economic/business purposes
At the outset, it should be noted that the provision of Section 16 in issue is found in Article XII
of the Constitution, entitled National Economy and Patrimony. Section 1 of Article XII is quoted
as follows:

SECTION 1. The goals of the national economy are a more equitable distribution of
opportunities, income, and wealth; a sustained increase in the amount of goods and services
produced by the nation for the benefit of the people; and an expanding productivity as the key to
raising the quality of life for all, especially the underprivileged.

The State shall promote industrialization and full employment based on sound agricultural
development and agrarian reform, through industries that make full and efficient use of human
and natural resources, and which are competitive in both domestic and foreign markets.
However, the State shall protect Filipino enterprises against unfair foreign competition and trade
practices.

In the pursuit of these goals, all sectors of the economy and all regions of the country shall be
given optimum opportunity to develop. Private enterprises, including corporations, cooperatives,
and similar collective organizations, shall be encouraged to broaden the base of their ownership.
The scope and coverage of Section 16, Article XII of the Constitution can be seen from the
aforementioned declaration of state policies and goals which pertains to national economy and
patrimony and the interests of the people in economic development.

Section 16, Article XII deals with the formation, organization, or regulation of private
corporations,[52] which should be done through a general law enacted by Congress, provides for
an exception, that is: if the corporation is government owned or controlled; its creation is in the
interest of the common good; and it meets the test of economic viability. The rationale behind
Article XII, Section 16 of the 1987 Constitution was explained in Feliciano v. Commission on
Audit,[53] in the following manner:

The Constitution emphatically prohibits the creation of private corporations except by a general
law applicable to all citizens. The purpose of this constitutional provision is to ban private
corporations created by special charters, which historically gave certain individuals, families or
groups special privileges denied to other citizens.[54] (Emphasis added.)

It may be gleaned from the above discussion that Article XII, Section 16 bans the creation of
private corporations by special law. The said constitutional provision should not be construed so
as to prohibit the creation of public corporations or a corporate agency or instrumentality of the
government intended to serve a public interest or purpose, which should not be measured on the
basis of economic viability, but according to the public interest or purpose it serves as envisioned
by paragraph (2), of Article 44 of the Civil Code and the pertinent provisions of the
Administrative Code of 1987.
The BSP is a Public Corporation Not Subject to the Test of Government Ownership or Control
and Economic Viability

The BSP is a public corporation or a government agency or instrumentality with juridical

personality, which does not fall within the constitutional prohibition in Article XII, Section 16,
notwithstanding the amendments to its charter. Not all corporations, which are not government
owned or controlled, are ipso facto to be considered private corporations as there exists another
distinct class of corporations or chartered institutions which are otherwise known as public
corporations. These corporations are treated by law as agencies or instrumentalities of the
government which are not subject to the tests of ownership or control and economic viability but
to different criteria relating to their public purposes/interests or constitutional policies and
objectives and their administrative relationship to the government or any of its Departments or
Offices.

Classification of Corporations Under Section 16, Article XII of the Constitution on National
Economy and Patrimony
The dissenting opinion of Associate Justice Antonio T. Carpio, citing a line of cases, insists that
the Constitution recognizes only two classes of corporations: private corporations under a
general law, and government-owned or controlled corporations created by special charters.

We strongly disagree. Section 16, Article XII should not be construed so as to prohibit Congress
from creating public corporations. In fact, Congress has enacted numerous laws creating public
corporations or government agencies or instrumentalities vested with corporate powers.
Moreover, Section 16, Article XII, which relates to National Economy and Patrimony, could not
have tied the hands of Congress in creating public corporations to serve any of the constitutional
policies or objectives.

In his dissent, Justice Carpio contends that this ponente introduces a totally different species of
corporation, which is neither a private corporation nor a government owned or controlled
corporation and, in so doing, is missing the fact that the BSP, which was created as a non-stock,
non-profit corporation, can only be either a private corporation or a government owned or
controlled corporation.

Note that in Boy Scouts of the Philippines v. National Labor Relations Commission, the BSP,
under its former charter, was regarded as both a government owned or controlled corporation
with original charter and a public corporation. The said case pertinently stated:

While the BSP may be seen to be a mixed type of entity, combining aspects of both public and
private entities, we believe that considering the character of its purposes and its functions, the
statutory designation of the BSP as "a public corporation" and the substantial participation of the
Government in the selection of members of the National Executive Board of the BSP, the BSP,
as presently constituted under its charter, is a government-controlled corporation within the
meaning of Article IX (B) (2) (1) of the Constitution.

We are fortified in this conclusion when we note that the Administrative Code of 1987
designates the BSP as one of the attached agencies of the Department of Education, Culture and
Sports ("DECS"). An "agency of the Government" is defined as referring to any of the various
units of the Government including a department, bureau, office, instrumentality, government-
owned or -controlled corporation, or local government or distinct unit therein. "Government
instrumentality" is in turn defined in the 1987 Administrative Code in the following manner:

Instrumentality - refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational autonomy
usually through a charter. This term includes regulatory agencies, chartered institutions and
government-owned or controlled corporations.

The same Code describes a "chartered institution" in the following terms:

Chartered institution - refers to any agency organized or operating under a special charter, and
vested by law with functions relating to specific constitutional policies or objectives. This term
includes the state universities and colleges, and the monetary authority of the State.
We believe that the BSP is appropriately regarded as "a government instrumentality" under the
1987 Administrative Code.

It thus appears that the BSP may be regarded as both a "government controlled corporation with
an original charter" and as an "instrumentality" of the Government within the meaning of Article
IX (B) (2) (1) of the Constitution. x x x.[55] (Emphases supplied.)

The existence of public or government corporate or juridical entities or chartered institutions by

legislative fiat distinct from private corporations and government owned or controlled
corporation is best exemplified by the 1987 Administrative Code cited above, which we quote in
part:

Sec. 2. General Terms Defined. Unless the specific words of the text, or the context as a whole,
or a particular statute, shall require a different meaning:
xxxx

(10) "Instrumentality" refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. This term includes regulatory agencies, chartered institutions and
government-owned or controlled corporations. 


xxxx

(12) "Chartered institution" refers to any agency organized or operating under a special charter,
and vested by law with functions relating to specific constitutional policies or objectives. This
term includes the state universities and colleges and the monetary authority of the State.

(13) "Government-owned or controlled corporation" refers to any agency organized as a stock or

non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock corporations, to the extent of at least
fifty-one (51) per cent of its capital stock: Provided, That government-owned or controlled
corporations may be further categorized by the Department of the Budget, the Civil Service
Commission, and the Commission on Audit for purposes of the exercise and discharge of their
respective powers, functions and responsibilities with respect to such corporations.
Assuming for the sake of argument that the BSP ceases to be owned or controlled by the
government because of reduction of the number of representatives of the government in the BSP
Board, it does not follow that it also ceases to be a government instrumentality as it still retains
all the characteristics of the latter as an attached agency of the DECS under the Administrative
Code. Vesting corporate powers to an attached agency or instrumentality of the government is
not constitutionally prohibited and is allowed by the above-mentioned provisions of the Civil
Code and the 1987 Administrative Code.

Economic Viability and Ownership and Control Tests Inapplicable to Public Corporations

As presently constituted, the BSP still remains an instrumentality of the national government. It
is a public corporation created by law for a public purpose, attached to the DECS pursuant to its
Charter and the Administrative Code of 1987. It is not a private corporation which is required to
be owned or controlled by the government and be economically viable to justify its existence
under a special law.
The dissent of Justice Carpio also submits that by recognizing a new class of public
corporation(s) created by special charter that will not be subject to the test of economic viability,
the constitutional provision will be circumvented.

However, a review of the Record of the 1986 Constitutional Convention reveals the intent of the
framers of the highest law of our land to distinguish between government corporations
performing governmental functions and corporations involved in business or proprietary
functions:

THE PRESIDENT. Commissioner Foz is recognized.

MR. FOZ. Madam President, I support the proposal to insert ECONOMIC VIABILITY as one of
the grounds for organizing government corporations. x x x.

MR. OPLE. Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the test of
economic performance. We know what happened in the past. If a government corporation loses,
then it makes its claim upon the taxpayers money through new equity infusions from the
government and what is always invoked is the common good. x x x
Therefore, when we insert the phrase ECONOMIC VIABILITY together with the common good,
this becomes a restraint on future enthusiasts for state capitalism to excuse themselves from the
responsibility of meeting the market test so that they become viable. x x x.

xxxx

THE PRESIDENT. Commissioner Quesada is recognized.

MS. QUESADA. Madam President, may we be clarified by the committee on what is meant by
economic viability?

THE PRESIDENT. Please proceed.

MR. MONSOD. Economic viability normally is determined by cost-benefit ratio that takes into
consideration all benefits, including economic external as well as internal benefits. These are
what they call externalities in economics, so that these are not strictly financial criteria.
Economic viability involves what we call economic returns or benefits of the country that are not
quantifiable in financial terms. x x x.

xxxx

MS. QUESADA. So, would this particular formulation now really limit the entry of government
corporations into activities engaged in by corporations?

MR. MONSOD. Yes, because it is also consistent with the economic philosophy that this
Commission approved that there should be minimum government participation and intervention
in the economy.

MS. QUESDA. Sometimes this Commission would just refer to Congress to provide the
particular requirements when the government would get into corporations. But this time around,
we specifically mentioned economic viability. x x x.
MR. VILLEGAS. Commissioner Ople will restate the reason for his introducing that
amendment.

MR. OPLE. I am obliged to repeat what I said earlier in moving for this particular amendment
jointly with Commissioner Foz. During the past three decades, there had been a proliferation of
government corporations, very few of which have succeeded, and many of which are now
earmarked by the Presidential Reorganization Commission for liquidation because they failed the
economic test. x x x.

xxxx

MS. QUESADA. But would not the Commissioner say that the reason why many of the
government-owned or controlled corporations failed to come up with the economic test is due to
the management of these corporations, and not the idea itself of government corporations? It is a
problem of efficiency and effectiveness of management of these corporations which could be
remedied, not by eliminating government corporations or the idea of getting into state-owned
corporations, but improving management which our technocrats should be able to do, given the
training and the experience.

MR. OPLE. That is part of the economic viability, Madam President.

MS. QUESADA. So, is the Commissioner saying then that the Filipinos will benefit more if
these government-controlled corporations were given to private hands, and that there will be
more goods and services that will be affordable and within the reach of the ordinary citizens?

MR. OPLE. Yes. There is nothing here, Madam President, that will prevent the formation of a
government corporation in accordance with a special charter given by Congress. However, we
are raising the standard a little bit so that, in the future, corporations established by the
government will meet the test of the common good but within that framework we should also
build a certain standard of economic viability.

xxxx

THE PRESIDENT. Commissioner Padilla is recognized.

MR. PADILLA. This is an inquiry to the committee. With regard to corporations created by a
special charter for government-owned or controlled corporations, will these be in the pioneer
fields or in places where the private enterprise does not or cannot enter? Or is this so general that
these government corporations can compete with private corporations organized under a general
law?
MR. MONSOD. Madam President, x x x. There are two types of government corporations those
that are involved in performing governmental functions, like garbage disposal, Manila
waterworks, and so on; and those government corporations that are involved in business
functions. As we said earlier, there are two criteria that should be followed for corporations that
want to go into business. First is for government corporations to first prove that they can be
efficient in the areas of their proper functions. This is one of the problems now because they go
into all kinds of activities but are not even efficient in their proper functions. Secondly, they
should not go into activities that the private sector can do better.

MR. PADILLA. There is no question about corporations performing governmental functions or

functions that are impressed with public interest. But the question is with regard to matters that
are covered, perhaps not exhaustively, by private enterprise. It seems that under this provision
the only qualification is economic viability and common good, but shall government, through
government-controlled corporations, compete with private enterprise?

MR. MONSOD. No, Madam President. As we said, the government should not engage in
activities that private enterprise is engaged in and can do better. x x x.[56] (Emphases supplied.)
Thus, the test of economic viability clearly does not apply to public corporations dealing with
governmental functions, to which category the BSP belongs. The discussion above conveys the
constitutional intent not to apply this constitutional ban on the creation of public corporations
where the economic viability test would be irrelevant. The said test would only apply if the
corporation is engaged in some economic activity or business function for the government.

It is undisputed that the BSP performs functions that are impressed with public interest. In fact,
during the consideration of the Senate Bill that eventually became Republic Act No. 7278, which
amended the BSP Charter, one of the bills sponsors, Senator Joey Lina, described the BSP as
follows:

Senator Lina. Yes, I can only think of two organizations involving the masses of our youth, Mr.
President, that should be given this kind of a privilege the Boy Scouts of the Philippines and the
Girl Scouts of the Philippines. Outside of these two groups, I do not think there are other groups
similarly situated.

The Boy Scouts of the Philippines has a long history of providing value formation to our young,
and considering how huge the population of the young people is, at this point in time, and also
considering the importance of having an organization such as this that will inculcate moral
uprightness among the young people, and further considering that the development of these
young people at that tender age of seven to sixteen is vital in the development of the country
producing good citizens, I believe that we can make an exception of the Boy Scouting movement
of the Philippines from this general prohibition against providing tax exemption and
privileges.[57]
Furthermore, this Court cannot agree with the dissenting opinion which equates the changes
introduced by Republic Act No. 7278 to the BSP Charter as clear manifestation of the intent of
Congress to return the BSP to the private sector. It was not the intent of Congress in enacting
Republic Act No. 7278 to give up all interests in this basic youth organization, which has been
its partner in forming responsible citizens for decades.

In fact, as may be seen in the deliberation of the House Bills that eventually resulted to Republic
Act No. 7278, Congress worked closely with the BSP to rejuvenate the organization, to bring it
back to its former glory reached under its original charter, Commonwealth Act No. 111, and to
correct the perceived ills introduced by the amendments to its Charter under Presidential Decree
No. 460. The BSP suffered from low morale and decrease in number because the Secretaries of
the different departments in government who were too busy to attend the meetings of the BSPs
National Executive Board (the Board) sent representatives who, as it turned out, changed from
meeting to meeting. Thus, the Scouting Councils established in the provinces and cities were not
in touch with what was happening on the national level, but they were left to implement what
was decided by the Board.[58]

A portion of the legislators discussion is quoted below to clearly show their intent:

HON. DEL MAR. x x x I need not mention to you the value and the tremendous good that the
Boy Scout Movement has done not only for the youth in particular but for the country in general.
And that is why, if we look around, our past and present national leaders, prominent men in the
various fields of endeavor, public servants in government offices, and civic leaders in the
communities all over the land, and not only in our country but all over the world many if not
most of them have at one time or another been beneficiaries of the Scouting Movement. And so,
it is along this line, Mr. Chairman, that we would like to have the early approval of this measure
if only to pay back what we owe much to the Scouting Movement. Now, going to the meat of the
matter, Mr. Chairman, if I may just the Scouting Movement was enacted into law in October 31,
1936 under Commonwealth Act No. 111. x x x [W]e were acknowledged as the third biggest
scouting organization in the world x x x. And to our mind, Mr. Chairman, this erratic growth and
this decrease in membership [number] is because of the bad policy measures that were
enunciated with the enactment or promulgation by the President before of Presidential Decree
No. 460 which we feel is the culprit of the ills that is flagging the Boy Scout Movement today.
And so, this is specifically what we are attacking, Mr. Chairman, the disenfranchisement of the
National Council in the election of the national board. x x x. And so, this is what we would like
to be appraised of by the officers of the Boy [Scouts] of the Philippines whom we are also
confident, have the best interest of the Boy Scout Movement at heart and it is in this spirit, Mr.
Chairman, that we see no impediment towards working together, the Boy Scout of the
Philippines officers working together with the House of Representatives in coming out with a
measure that will put back the vigor and enthusiasm of the Boy Scout Movement. x x x.[59]
(Emphasis ours.)

The following is another excerpt from the discussion on the House version of the bill, in the
Committee on Government Enterprises:

HON. AQUINO: x x x Well, obviously, the two bills as well as the previous laws that have
created the Boy Scouts of the Philippines did not provide for any direct government support by
way of appropriation from the national budget to support the activities of this organization. The
point here is, and at the same time they have been subjected to a governmental intervention,
which to their mind has been inimical to the objectives and to the institution per se, that is why
they are seeking legislative fiat to restore back the original mandate that they had under
Commonwealth Act 111. Such having been the experience in the hands of government, meaning,
there has been negative interference on their part and inasmuch as their mandate is coming from
a legislative fiat, then shouldnt it be, this rhetorical question, shouldnt it be better for this
organization to seek a mandate from, lets say, the government the Corporation Code of the
Philippines and register with the SEC as non-profit non-stock corporation so that government
intervention could be very very minimal. Maybe thats a rhetorical question, they may or they
may not answer, ano. I dont know what would be the benefit of a charter or a mandate being
provided for by way of legislation versus a registration with the SEC under the Corporation Code
of the Philippines inasmuch as they dont get anything from the government anyway insofar as
direct funding. In fact, the only thing that they got from government was intervention in their
affairs. Maybe we can solicit some commentary comments from the resource persons.
Incidentally, dont take that as an objection, Im not objecting. Im all for the objectives of these
two bills. It just occurred to me that since you have had very bad experience in the hands of
government and you will always be open to such possible intervention even in the future as long
as you have a legislative mandate or your mandate or your charter coming from legislative
action.

xxxx

MR. ESCUDERO: Mr. Chairman, there may be a disadvantage if the Boy Scouts of the
Philippines will be required to register with the SEC. If we are registered with the SEC, there
could be a danger of proliferation of scout organization. Anybody can organize and then register
with the SEC. If there will be a proliferation of this, then the organization will lose control of the
entire organization. Another disadvantage, Mr. Chairman, anybody can file a complaint in the
SEC against the Boy Scouts of the Philippines and the SEC may suspend the operation or freeze
the assets of the organization and hamper the operation of the organization. I dont know, Mr.
Chairman, how you look at it but there could be a danger for anybody filing a complaint against
the organization in the SEC and the SEC might suspend the registration permit of the
organization and we will not be able to operate.
HON. AQUINO: Well, that I think would be a problem that will not be exclusive to corporations
registered with the SEC because even if you are government corporation, court action may be
taken against you in other judicial bodies because the SEC is simply another quasi-judicial body.
But, I think, the first point would be very interesting, the first point that you raised. In effect,
what you are saying is that with the legislative mandate creating your charter, in effect, you have
been given some sort of a franchise with this movement.

MR. ESCUDERO: Yes.

HON. AQUINO: Exclusive franchise of that movement?

MR. ESCUDERO: Yes.

HON. AQUINO: Well, thats very well taken so I will proceed with other issues, Mr. Chairman. x
x x.[60] (Emphases added.)
Therefore, even though the amended BSP charter did away with most of the governmental
presence in the BSP Board, this was done to more strongly promote the BSPs objectives, which
were not supported under Presidential Decree No. 460. The BSP objectives, as pointed out
earlier, are consistent with the public purpose of the promotion of the well-being of the youth,
the future leaders of the country. The amendments were not done with the view of changing the
character of the BSP into a privatized corporation. The BSP remains an agency attached to a
department of the government, the DECS, and it was not at all stripped of its public character.

The ownership and control test is likewise irrelevant for a public corporation like the BSP. To
reiterate, the relationship of the BSP, an attached agency, to the government, through the DECS,
is defined in the Revised Administrative Code of 1987. The BSP meets the minimum statutory
requirement of an attached government agency as the DECS Secretary sits at the BSP Board ex
officio, thus facilitating the policy and program coordination between the BSP and the DECS.

Requisites for Declaration of Unconstitutionality Not Met in this Case

The dissenting opinion of Justice Carpio improperly raised the issue of unconstitutionality of
certain provisions of the BSP Charter. Even if the parties were asked to Comment on the validity
of the BSP charter by the Court, this alone does not comply with the requisites for judicial
review, which were clearly set forth in a recent case:

When questions of constitutional significance are raised, the Court can exercise its power of
judicial review only if the following requisites are present: (1) the existence of an actual and
appropriate case; (2) the existence of personal and substantial interest on the part of the party
raising the constitutional question; (3) recourse to judicial review is made at the earliest
opportunity; and (4) the constitutional question is the lis mota of the case.[61] (Emphasis added.)

Thus, when it comes to the exercise of the power of judicial review, the constitutional issue
should be the very lis mota, or threshold issue, of the case, and that it should be raised by either
of the parties. These requirements would be ignored under the dissents rather overreaching view
of how this case should have been decided. True, it was the Court that asked the parties to
comment, but the Court cannot be the one to raise a constitutional issue. Thus, the Court chooses
to once more exhibit restraint in the exercise of its power to pass upon the validity of a law.

Re: the COAs Jurisdiction

Regarding the COAs jurisdiction over the BSP, Section 8 of its amended charter allows the BSP
to receive contributions or donations from the government. Section 8 reads:

Section 8. Any donation or contribution which from time to time may be made to the Boy Scouts
of the Philippines by the Government or any of its subdivisions, branches, offices, agencies or
instrumentalities shall be expended by the Executive Board in pursuance of this Act.
The sources of funds to maintain the BSP were identified before the House Committee on
Government Enterprises while the bill was being deliberated, and the pertinent portion of the
discussion is quoted below:

MR. ESCUDERO. Yes, Mr. Chairman. The question is the sources of funds of the organization.
First, Mr. Chairman, the Boy Scouts of the Philippines do not receive annual allotment from the
government. The organization has to raise its own funds through fund drives and fund campaigns
or fund raising activities. Aside from this, we have some revenue producing projects in the
organization that gives us funds to support the operation. x x x From time to time, Mr. Chairman,
when we have special activities we request for assistance or financial assistance from
government agencies, from private business and corporations, but this is only during special
activities that the Boy Scouts of the Philippines would conduct during the year. Otherwise, we
have to raise our own funds to support the organization.[62]

The nature of the funds of the BSP and the COAs audit jurisdiction were likewise brought up in
said congressional deliberations, to wit:
HON. AQUINO: x x x Insofar as this organization being a government created organization, in
fact, a government corporation classified as such, are your funds or your finances subjected to
the COA audit?

MR. ESCUDERO: Mr. Chairman, we are not. Our funds is not subjected. We dont fall under the
jurisdiction of the COA.

HON. AQUINO: All right, but before were you?

MR. ESCUDERO: No, Mr. Chairman.

MR. JESUS: May I? As historical backgrounder, Commonwealth Act 111 was written by then
Secretary Jorge Vargas and before and up to the middle of the Martial Law years, the BSP was
receiving a subsidy in the form of an annual a one draw from the Sweepstakes. And, this was the
case also with the Girl Scouts at the Anti-TB, but then this was and the Boy Scouts then because
of this funding partly from government was being subjected to audit in the contributions being
made in the part of the Sweepstakes. But this was removed later during the Martial Law years
with the creation of the Human Settlements Commission. So the situation right now is that the
Boy Scouts does not receive any funding from government, but then in the case of the local
councils and this legislative charter, so to speak, enables the local councils even the national
headquarters in view of the provisions in the existing law to receive donations from the
government or any of its instrumentalities, which would be difficult if the Boy Scouts is
registered as a private corporation with the Securities and Exchange Commission. Government
bodies would be estopped from making donations to the Boy Scouts, which at present is not the
case because there is the Boy Scouts charter, this Commonwealth Act 111 as amended by PD
463.
xxxx

HON. AMATONG: Mr. Chairman, in connection with that.

THE CHAIRMAN: Yeah, Gentleman from Zamboanga.

HON. AMATONG: There is no auditing being made because theres no money put in the
organization, but how about donated funds to this organization? What are the remedies of the
donors of how will they know how their money are being spent?

MR. ESCUDERO: May I answer, Mr. Chairman?

THE CHAIRMAN: Yes, gentleman.

MR. ESCUDERO: The Boy Scouts of the Philippines has an external auditor and by the charter
we are required to submit a financial report at the end of each year to the National Executive
Board. So all the funds donated or otherwise is accounted for at the end of the year by our
external auditor. In this case the SGV.[63]

Historically, therefore, the BSP had been subjected to government audit in so far as public funds
had been infused thereto. However, this practice should not preclude the exercise of the audit
jurisdiction of COA, clearly set forth under the Constitution, which pertinently provides:

Section 2. (1) The Commission on Audit shall have the power, authority, and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses
of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations with original charters and their subsidiaries; and (d) such non-governmental entities
receiving subsidy or equity, directly or indirectly, from or through the Government, which are
required by law of the granting institution to submit to such audit as a condition of subsidy or
equity. x x x. [64]
Since the BSP, under its amended charter, continues to be a public corporation or a government
instrumentality, we come to the inevitable conclusion that it is subject to the exercise by the
COA of its audit jurisdiction in the manner consistent with the provisions of the BSP Charter.

WHEREFORE, premises considered, the instant petition for prohibition is DISMISSED.

SO ORDERED.
EN BANC

DANTE V. LIBAN,

REYNALDO M. BERNARDO,

and SALVADOR M. VIARI,

Petitioners,
- versus -

RICHARD J. GORDON,

Respondent.
G.R. No. 175352

Present:

PUNO, C.J.,

QUISUMBING,

YNARES-SANTIAGO,

CARPIO,

CORONA,

CARPIO MORALES,

CHICO-NAZARIO,

VELASCO, JR.,
NACHURA,

LEONARDO-DE CASTRO,

BRION,

PERALTA, and

BERSAMIN, JJ.

Promulgated:

July 15, 2009

x--------------------------------------------------x
DECISION

CARPIO, J.:

The Case

This is a petition to declare Senator Richard J. Gordon (respondent) as having forfeited his seat
in the Senate.

The Facts

Petitioners Dante V. Liban, Reynaldo M. Bernardo, and Salvador M. Viari (petitioners) filed
with this Court a Petition to Declare Richard J. Gordon as Having Forfeited His Seat in the
Senate. Petitioners are officers of the Board of Directors of the Quezon City Red Cross Chapter
while respondent is Chairman of the Philippine National Red Cross (PNRC) Board of Governors.
During respondents incumbency as a member of the Senate of the Philippines,[1] he was elected
Chairman of the PNRC during the 23 February 2006 meeting of the PNRC Board of Governors.
Petitioners allege that by accepting the chairmanship of the PNRC Board of Governors,
respondent has ceased to be a member of the Senate as provided in Section 13, Article VI of the
Constitution, which reads:

SEC. 13. No Senator or Member of the House of Representatives may hold any other office or
employment in the Government, or any subdivision, agency, or instrumentality thereof, including
government-owned or controlled corporations or their subsidiaries, during his term without
forfeiting his seat. Neither shall he be appointed to any office which may have been created or
the emoluments thereof increased during the term for which he was elected.

Petitioners cite Camporedondo v. NLRC,[2] which held that the PNRC is a government-owned
or controlled corporation. Petitioners claim that in accepting and holding the position of
Chairman of the PNRC Board of Governors, respondent has automatically forfeited his seat in
the Senate, pursuant to Flores v. Drilon,[3] which held that incumbent national legislators lose
their elective posts upon their appointment to another government office.

In his Comment, respondent asserts that petitioners have no standing to file this petition which
appears to be an action for quo warranto, since the petition alleges that respondent committed an
act which, by provision of law, constitutes a ground for forfeiture of his public office. Petitioners
do not claim to be entitled to the Senate office of respondent. Under Section 5, Rule 66 of the
Rules of Civil Procedure, only a person claiming to be entitled to a public office usurped or
unlawfully held by another may bring an action for quo warranto in his own name. If the petition
is one for quo warranto, it is already barred by prescription since under Section 11, Rule 66 of
the Rules of Civil Procedure, the action should be commenced within one year after the cause of
the public officers forfeiture of office. In this case, respondent has been working as a Red Cross
volunteer for the past 40 years. Respondent was already Chairman of the PNRC Board of
Governors when he was elected Senator in May 2004, having been elected Chairman in 2003 and
re-elected in 2005.

Respondent contends that even if the present petition is treated as a taxpayers suit, petitioners
cannot be allowed to raise a constitutional question in the absence of any claim that they suffered
some actual damage or threatened injury as a result of the allegedly illegal act of respondent.
Furthermore, taxpayers are allowed to sue only when there is a claim of illegal disbursement of
public funds, or that public money is being diverted to any improper purpose, or where
petitioners seek to restrain respondent from enforcing an invalid law that results in wastage of
public funds.

Respondent also maintains that if the petition is treated as one for declaratory relief, this Court
would have no jurisdiction since original jurisdiction for declaratory relief lies with the Regional
Trial Court.

Respondent further insists that the PNRC is not a government-owned or controlled corporation
and that the prohibition under Section 13, Article VI of the Constitution does not apply in the
present case since volunteer service to the PNRC is neither an office nor an employment.
In their Reply, petitioners claim that their petition is neither an action for quo warranto nor an
action for declaratory relief. Petitioners maintain that the present petition is a taxpayers suit
questioning the unlawful disbursement of funds, considering that respondent has been drawing
his salaries and other compensation as a Senator even if he is no longer entitled to his office.
Petitioners point out that this Court has jurisdiction over this petition since it involves a legal or
constitutional issue which is of transcendental importance.

The Issues

Petitioners raise the following issues:

1. Whether the Philippine National Red Cross (PNRC) is a government- owned or controlled
corporation;

2. Whether Section 13, Article VI of the Philippine Constitution applies to the case of respondent
who is Chairman of the PNRC and at the same time a Member of the Senate;

3. Whether respondent should be automatically removed as a Senator pursuant to Section 13,

Article VI of the Philippine Constitution; and
4. Whether petitioners may legally institute this petition against respondent.[4]

The substantial issue boils down to whether the office of the PNRC Chairman is a government
office or an office in a government-owned or controlled corporation for purposes of the
prohibition in Section 13, Article VI of the Constitution.

The Courts Ruling

We find the petition without merit.

Petitioners Have No Standing to File this Petition

A careful reading of the petition reveals that it is an action for quo warranto. Section 1, Rule 66
of the Rules of Court provides:

Section 1. Action by Government against individuals. An action for the usurpation of a public
office, position or franchise may be commenced by a verified petition brought in the name of the
Republic of the Philippines against:

(a) A person who usurps, intrudes into, or unlawfully holds or exercises a public office, position
or franchise;

(b) A public officer who does or suffers an act which by provision of law, constitutes a ground
for the forfeiture of his office; or

(c) An association which acts as a corporation within the Philippines without being legally
incorporated or without lawful authority so to act. (Emphasis supplied)

Petitioners allege in their petition that:

4. Respondent became the Chairman of the PNRC when he was elected as such during the First
Regular Luncheon-Meeting of the Board of Governors of the PNRC held on February 23, 2006,
the minutes of which is hereto attached and made integral part hereof as Annex A.

5. Respondent was elected as Chairman of the PNRC Board of Governors, during his
incumbency as a Member of the House of Senate of the Congress of the Philippines, having been
elected as such during the national elections last May 2004.

6. Since his election as Chairman of the PNRC Board of Governors, which position he duly
accepted, respondent has been exercising the powers and discharging the functions and duties of
said office, despite the fact that he is still a senator.

7. It is the respectful submission of the petitioner[s] that by accepting the chairmanship of the
Board of Governors of the PNRC, respondent has ceased to be a Member of the House of Senate
as provided in Section 13, Article VI of the Philippine Constitution, x x x

xxxx

10. It is respectfully submitted that in accepting the position of Chairman of the Board of
Governors of the PNRC on February 23, 2006, respondent has automatically forfeited his seat in
the House of Senate and, therefore, has long ceased to be a Senator, pursuant to the ruling of this
Honorable Court in the case of FLORES, ET AL. VS. DRILON AND GORDON, G.R. No.
104732, x x x

11. Despite the fact that he is no longer a senator, respondent continues to act as such and still
performs the powers, functions and duties of a senator, contrary to the constitution, law and
jurisprudence.
12. Unless restrained, therefore, respondent will continue to falsely act and represent himself as a
senator or member of the House of Senate, collecting the salaries, emoluments and other
compensations, benefits and privileges appertaining and due only to the legitimate senators, to
the damage, great and irreparable injury of the Government and the Filipino people.[5]
(Emphasis supplied)

Thus, petitioners are alleging that by accepting the position of Chairman of the PNRC Board of
Governors, respondent has automatically forfeited his seat in the Senate. In short, petitioners
filed an action for usurpation of public office against respondent, a public officer who allegedly
committed an act which constitutes a ground for the forfeiture of his public office. Clearly, such
an action is for quo warranto, specifically under Section 1(b), Rule 66 of the Rules of Court.

Quo warranto is generally commenced by the Government as the proper party plaintiff.
However, under Section 5, Rule 66 of the Rules of Court, an individual may commence such an
action if he claims to be entitled to the public office allegedly usurped by another, in which case
he can bring the action in his own name. The person instituting quo warranto proceedings in his
own behalf must claim and be able to show that he is entitled to the office in dispute, otherwise
the action may be dismissed at any stage.[6] In the present case, petitioners do not claim to be
entitled to the Senate office of respondent. Clearly, petitioners have no standing to file the
present petition.
Even if the Court disregards the infirmities of the petition and treats it as a taxpayers suit, the
petition would still fail on the merits.

PNRC is a Private Organization Performing Public Functions

On 22 March 1947, President Manuel A. Roxas signed Republic Act No. 95,[7] otherwise known
as the PNRC Charter. The PNRC is a non-profit, donor-funded, voluntary, humanitarian
organization, whose mission is to bring timely, effective, and compassionate humanitarian
assistance for the most vulnerable without consideration of nationality, race, religion, gender,
social status, or political affiliation.[8] The PNRC provides six major services: Blood Services,
Disaster Management, Safety Services, Community Health and Nursing, Social Services and
Voluntary Service.[9]

The Republic of the Philippines, adhering to the Geneva Conventions, established the PNRC as a
voluntary organization for the purpose contemplated in the Geneva Convention of 27 July
1929.[10] The Whereas clauses of the PNRC Charter read:

WHEREAS, there was developed at Geneva, Switzerland, on August 22, 1864, a convention by
which the nations of the world were invited to join together in diminishing, so far lies within
their power, the evils inherent in war;
WHEREAS, more than sixty nations of the world have ratified or adhered to the subsequent
revision of said convention, namely the Convention of Geneva of July 29 [sic], 1929 for the
Amelioration of the Condition of the Wounded and Sick of Armies in the Field (referred to in
this Charter as the Geneva Red Cross Convention);

WHEREAS, the Geneva Red Cross Convention envisages the establishment in each country of a
voluntary organization to assist in caring for the wounded and sick of the armed forces and to
furnish supplies for that purpose;

WHEREAS, the Republic of the Philippines became an independent nation on July 4, 1946 and
proclaimed its adherence to the Geneva Red Cross Convention on February 14, 1947, and by that
action indicated its desire to participate with the nations of the world in mitigating the suffering
caused by war and to establish in the Philippines a voluntary organization for that purpose as
contemplated by the Geneva Red Cross Convention;

WHEREAS, there existed in the Philippines since 1917 a Charter of the American National Red
Cross which must be terminated in view of the independence of the Philippines; and

WHEREAS, the volunteer organizations established in the other countries which have ratified or
adhered to the Geneva Red Cross Convention assist in promoting the health and welfare of their
people in peace and in war, and through their mutual assistance and cooperation directly and
through their international organizations promote better understanding and sympathy among the
peoples of the world. (Emphasis supplied)

The PNRC is a member National Society of the International Red Cross and Red Crescent
Movement (Movement), which is composed of the International Committee of the Red Cross
(ICRC), the International Federation of Red Cross and Red Crescent Societies (International
Federation), and the National Red Cross and Red Crescent Societies (National Societies). The
Movement is united and guided by its seven Fundamental Principles:
1. HUMANITY The International Red Cross and Red Crescent Movement, born of a desire to
bring assistance without discrimination to the wounded on the battlefield, endeavors, in its
international and national capacity, to prevent and alleviate human suffering wherever it may be
found. Its purpose is to protect life and health and to ensure respect for the human being. It
promotes mutual understanding, friendship, cooperation and lasting peace amongst all peoples.

2. IMPARTIALITY It makes no discrimination as to nationality, race, religious beliefs, class or

political opinions. It endeavors to relieve the suffering of individuals, being guided solely by
their needs, and to give priority to the most urgent cases of distress.

3. NEUTRALITY In order to continue to enjoy the confidence of all, the Movement may not
take sides in hostilities or engage at any time in controversies of a political, racial, religious or
ideological nature.

4. INDEPENDENCE The Movement is independent. The National Societies, while auxiliaries in

the humanitarian services of their governments and subject to the laws of their respective
countries, must always maintain their autonomy so that they may be able at all times to act in
accordance with the principles of the Movement.

5. VOLUNTARY SERVICE It is a voluntary relief movement not prompted in any manner by

desire for gain.

6. UNITY There can be only one Red Cross or one Red Crescent Society in any one country. It
must be open to all. It must carry on its humanitarian work throughout its territory.

7. UNIVERSALITY The International Red Cross and Red Crescent Movement, in which all
Societies have equal status and share equal responsibilities and duties in helping each other, is
worldwide. (Emphasis supplied)
The Fundamental Principles provide a universal standard of reference for all members of the
Movement. The PNRC, as a member National Society of the Movement, has the duty to uphold
the Fundamental Principles and ideals of the Movement. In order to be recognized as a National
Society, the PNRC has to be autonomous and must operate in conformity with the Fundamental
Principles of the Movement.[11]

The reason for this autonomy is fundamental. To be accepted by warring belligerents as neutral
workers during international or internal armed conflicts, the PNRC volunteers must not be seen
as belonging to any side of the armed conflict. In the Philippines where there is a communist
insurgency and a Muslim separatist rebellion, the PNRC cannot be seen as government-owned or
controlled, and neither can the PNRC volunteers be identified as government personnel or as
instruments of government policy. Otherwise, the insurgents or separatists will treat PNRC
volunteers as enemies when the volunteers tend to the wounded in the battlefield or the displaced
civilians in conflict areas.

Thus, the PNRC must not only be, but must also be seen to be, autonomous, neutral and
independent in order to conduct its activities in accordance with the Fundamental Principles. The
PNRC must not appear to be an instrument or agency that implements government policy;
otherwise, it cannot merit the trust of all and cannot effectively carry out its mission as a
National Red Cross Society.[12] It is imperative that the PNRC must be autonomous, neutral,
and independent in relation to the State.
To ensure and maintain its autonomy, neutrality, and independence, the PNRC cannot be owned
or controlled by the government. Indeed, the Philippine government does not own the PNRC.
The PNRC does not have government assets and does not receive any appropriation from the
Philippine Congress.[13] The PNRC is financed primarily by contributions from private
individuals and private entities obtained through solicitation campaigns organized by its Board of
Governors, as provided under Section 11 of the PNRC Charter:

SECTION 11. As a national voluntary organization, the Philippine National Red Cross shall be
financed primarily by contributions obtained through solicitation campaigns throughout the year
which shall be organized by the Board of Governors and conducted by the Chapters in their
respective jurisdictions. These fund raising campaigns shall be conducted independently of other
fund drives by other organizations. (Emphasis supplied)

The government does not control the PNRC. Under the PNRC Charter, as amended, only six of
the thirty members of the PNRC Board of Governors are appointed by the President of the
Philippines. Thus, twenty-four members, or four-fifths (4/5), of the PNRC Board of Governors
are not appointed by the President. Section 6 of the PNRC Charter, as amended, provides:

SECTION 6. The governing powers and authority shall be vested in a Board of Governors
composed of thirty members, six of whom shall be appointed by the President of the Philippines,
eighteen shall be elected by chapter delegates in biennial conventions and the remaining six shall
be selected by the twenty-four members of the Board already chosen. x x x.
Thus, of the twenty-four members of the PNRC Board, eighteen are elected by the chapter
delegates of the PNRC, and six are elected by the twenty-four members already chosen a select
group where the private sector members have three-fourths majority. Clearly, an overwhelming
majority of four-fifths of the PNRC Board are elected or chosen by the private sector members of
the PNRC.

The PNRC Board of Governors, which exercises all corporate powers of the PNRC, elects the
PNRC Chairman and all other officers of the PNRC. The incumbent Chairman of PNRC,
respondent Senator Gordon, was elected, as all PNRC Chairmen are elected, by a private sector-
controlled PNRC Board four-fifths of whom are private sector members of the PNRC. The
PNRC Chairman is not appointed by the President or by any subordinate government official.

Under Section 16, Article VII of the Constitution,[14] the President appoints all officials and
employees in the Executive branch whose appointments are vested in the President by the
Constitution or by law. The President also appoints those whose appointments are not otherwise
provided by law. Under this Section 16, the law may also authorize the heads of departments,
agencies, commissions, or boards to appoint officers lower in rank than such heads of
departments, agencies, commissions or boards.[15] In Rufino v. Endriga,[16] the Court
explained appointments under Section 16 in this wise:
Under Section 16, Article VII of the 1987 Constitution, the President appoints three groups of
officers. The first group refers to the heads of the Executive departments, ambassadors, other
public ministers and consuls, officers of the armed forces from the rank of colonel or naval
captain, and other officers whose appointments are vested in the President by the Constitution.
The second group refers to those whom the President may be authorized by law to appoint. The
third group refers to all other officers of the Government whose appointments are not otherwise
provided by law.

Under the same Section 16, there is a fourth group of lower-ranked officers whose appointments
Congress may by law vest in the heads of departments, agencies, commissions, or boards. x x x

xxx

In a department in the Executive branch, the head is the Secretary. The law may not authorize the
Undersecretary, acting as such Undersecretary, to appoint lower-ranked officers in the Executive
department. In an agency, the power is vested in the head of the agency for it would be
preposterous to vest it in the agency itself. In a commission, the head is the chairperson of the
commission. In a board, the head is also the chairperson of the board. In the last three situations,
the law may not also authorize officers other than the heads of the agency, commission, or board
to appoint lower-ranked officers.
xxx

The Constitution authorizes Congress to vest the power to appoint lower-ranked officers
specifically in the heads of the specified offices, and in no other person. The word heads refers to
the chairpersons of the commissions or boards and not to their members, for several reasons.

The President does not appoint the Chairman of the PNRC. Neither does the head of any
department, agency, commission or board appoint the PNRC Chairman. Thus, the PNRC
Chairman is not an official or employee of the Executive branch since his appointment does not
fall under Section 16, Article VII of the Constitution. Certainly, the PNRC Chairman is not an
official or employee of the Judiciary or Legislature. This leads us to the obvious conclusion that
the PNRC Chairman is not an official or employee of the Philippine Government. Not being a
government official or employee, the PNRC Chairman, as such, does not hold a government
office or employment.

Under Section 17, Article VII of the Constitution,[17] the President exercises control over all
government offices in the Executive branch. If an office is legally not under the control of the
President, then such office is not part of the Executive branch. In Rufino v. Endriga,[18] the
Court explained the Presidents power of control over all government offices as follows:
Every government office, entity, or agency must fall under the Executive, Legislative, or Judicial
branches, or must belong to one of the independent constitutional bodies, or must be a quasi-
judicial body or local government unit. Otherwise, such government office, entity, or agency has
no legal and constitutional basis for its existence.

The CCP does not fall under the Legislative or Judicial branches of government. The CCP is also
not one of the independent constitutional bodies. Neither is the CCP a quasi-judicial body nor a
local government unit. Thus, the CCP must fall under the Executive branch. Under the Revised
Administrative Code of 1987, any agency not placed by law or order creating them under any
specific department falls under the Office of the President.

Since the President exercises control over all the executive departments, bureaus, and offices, the
President necessarily exercises control over the CCP which is an office in the Executive branch.
In mandating that the President shall have control of all executive . . . offices, Section 17, Article
VII of the 1987 Constitution does not exempt any executive office one performing executive
functions outside of the independent constitutional bodies from the Presidents power of control.
There is no dispute that the CCP performs executive, and not legislative, judicial, or quasi-
judicial functions.

The Presidents power of control applies to the acts or decisions of all officers in the Executive
branch. This is true whether such officers are appointed by the President or by heads of
departments, agencies, commissions, or boards. The power of control means the power to revise
or reverse the acts or decisions of a subordinate officer involving the exercise of discretion.
In short, the President sits at the apex of the Executive branch, and exercises control of all the
executive departments, bureaus, and offices. There can be no instance under the Constitution
where an officer of the Executive branch is outside the control of the President. The Executive
branch is unitary since there is only one President vested with executive power exercising control
over the entire Executive branch. Any office in the Executive branch that is not under the control
of the President is a lost command whose existence is without any legal or constitutional basis.
(Emphasis supplied)

An overwhelming four-fifths majority of the PNRC Board are private sector individuals elected
to the PNRC Board by the private sector members of the PNRC. The PNRC Board exercises all
corporate powers of the PNRC. The PNRC is controlled by private sector individuals. Decisions
or actions of the PNRC Board are not reviewable by the President. The President cannot reverse
or modify the decisions or actions of the PNRC Board. Neither can the President reverse or
modify the decisions or actions of the PNRC Chairman. It is the PNRC Board that can review,
reverse or modify the decisions or actions of the PNRC Chairman. This proves again that the
office of the PNRC Chairman is a private office, not a government office.

Although the State is often represented in the governing bodies of a National Society, this can be
justified by the need for proper coordination with the public authorities, and the government
representatives may take part in decision-making within a National Society. However, the freely-
elected representatives of a National Societys active members must remain in a large majority in
a National Societys governing bodies.[19]
The PNRC is not government-owned but privately owned. The vast majority of the thousands of
PNRC members are private individuals, including students. Under the PNRC Charter, those who
contribute to the annual fund campaign of the PNRC are entitled to membership in the PNRC for
one year. Thus, any one between 6 and 65 years of age can be a PNRC member for one year
upon contributing P35, P100, P300, P500 or P1,000 for the year.[20] Even foreigners, whether
residents or not, can be members of the PNRC. Section 5 of the PNRC Charter, as amended by
Presidential Decree No. 1264,[21] reads:

SEC. 5. Membership in the Philippine National Red Cross shall be open to the entire population
in the Philippines regardless of citizenship. Any contribution to the Philippine National Red
Cross Annual Fund Campaign shall entitle the contributor to membership for one year and said
contribution shall be deductible in full for taxation purposes.

Thus, the PNRC is a privately owned, privately funded, and privately run charitable
organization. The PNRC is not a government-owned or controlled corporation.

Petitioners anchor their petition on the 1999 case of Camporedondo v. NLRC,[22] which ruled
that the PNRC is a government-owned or controlled corporation. In ruling that the PNRC is a
government-owned or controlled corporation, the simple test used was whether the corporation
was created by its own special charter for the exercise of a public function or by incorporation
under the general corporation law. Since the PNRC was created under a special charter, the
Court then ruled that it is a government corporation. However, the Camporedondo ruling failed
to consider the definition of a government-owned or controlled corporation as provided under
Section 2(13) of the Introductory Provisions of the Administrative Code of 1987:
SEC. 2. General Terms Defined. x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock or

non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities
either wholly, or where applicable as in the case of stock corporations, to the extent of at least
fifty-one (51) percent of its capital stock: Provided, That government-owned or controlled
corporations may be further categorized by the Department of the Budget, the Civil Service
Commission, and the Commission on Audit for purposes of the exercise and discharge of their
respective powers, functions and responsibilities with respect to such corporations.(Boldfacing
and underscoring supplied)

A government-owned or controlled corporation must be owned by the government, and in the

case of a stock corporation, at least a majority of its capital stock must be owned by the
government. In the case of a non-stock corporation, by analogy at least a majority of the
members must be government officials holding such membership by appointment or designation
by the government. Under this criterion, and as discussed earlier, the government does not own
or control PNRC.
The PNRC Charter is Violative of the Constitutional Proscription against the Creation of Private
Corporations by Special Law

The 1935 Constitution, as amended, was in force when the PNRC was created by special charter
on 22 March 1947. Section 7, Article XIV of the 1935 Constitution, as amended, reads:

SEC. 7. The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations, unless such corporations are owned or controlled by the
Government or any subdivision or instrumentality thereof.

The subsequent 1973 and 1987 Constitutions contain similar provisions prohibiting Congress
from creating private corporations except by general law. Section 1 of the PNRC Charter, as
amended, creates the PNRC as a body corporate and politic, thus:

SECTION 1. There is hereby created in the Republic of the Philippines a body corporate and
politic to be the voluntary organization officially designated to assist the Republic of the
Philippines in discharging the obligations set forth in the Geneva Conventions and to perform
such other duties as are inherent upon a National Red Cross Society. The national headquarters
of this Corporation shall be located in Metropolitan Manila. (Emphasis supplied)
In Feliciano v. Commission on Audit,[23] the Court explained the constitutional provision
prohibiting Congress from creating private corporations in this wise:

We begin by explaining the general framework under the fundamental law. The Constitution
recognizes two classes of corporations. The first refers to private corporations created under a
general law. The second refers to government-owned or controlled corporations created by
special charters. Section 16, Article XII of the Constitution provides:

Sec. 16. The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations. Government-owned or controlled corporations may be
created or established by special charters in the interest of the common good and subject to the
test of economic viability.

The Constitution emphatically prohibits the creation of private corporations except by general
law applicable to all citizens. The purpose of this constitutional provision is to ban private
corporations created by special charters, which historically gave certain individuals, families or
groups special privileges denied to other citizens.
In short, Congress cannot enact a law creating a private corporation with a special charter. Such
legislation would be unconstitutional. Private corporations may exist only under a general law. If
the corporation is private, it must necessarily exist under a general law. Stated differently, only
corporations created under a general law can qualify as private corporations. Under existing
laws, the general law is the Corporation Code, except that the Cooperative Code governs the
incorporation of cooperatives.

The Constitution authorizes Congress to create government-owned or controlled corporations

through special charters. Since private corporations cannot have special charters, it follows that
Congress can create corporations with special charters only if such corporations are government-
owned or controlled.[24] (Emphasis supplied)

In Feliciano, the Court held that the Local Water Districts are government-owned or controlled
corporations since they exist by virtue of Presidential Decree No. 198, which constitutes their
special charter. The seed capital assets of the Local Water Districts, such as waterworks and
sewerage facilities, were public property which were managed, operated by or under the control
of the city, municipality or province before the assets were transferred to the Local Water
Districts. The Local Water Districts also receive subsidies and loans from the Local Water
Utilities Administration (LWUA). In fact, under the 2009 General Appropriations Act,[25] the
LWUA has a budget amounting to P400,000,000 for its subsidy requirements.[26] There is no
private capital invested in the Local Water Districts. The capital assets and operating funds of the
Local Water Districts all come from the government, either through transfer of assets, loans,
subsidies or the income from such assets or funds.

The government also controls the Local Water Districts because the municipal or city mayor, or
the provincial governor, appoints all the board directors of the Local Water Districts.
Furthermore, the board directors and other personnel of the Local Water Districts are
government employees subject to civil service laws and anti-graft laws. Clearly, the Local Water
Districts are considered government-owned or controlled corporations not only because of their
creation by special charter but also because the government in fact owns and controls the Local
Water Districts.

Just like the Local Water Districts, the PNRC was created through a special charter. However,
unlike the Local Water Districts, the elements of government ownership and control are clearly
lacking in the PNRC. Thus, although the PNRC is created by a special charter, it cannot be
considered a government-owned or controlled corporation in the absence of the essential
elements of ownership and control by the government. In creating the PNRC as a corporate
entity, Congress was in fact creating a private corporation. However, the constitutional
prohibition against the creation of private corporations by special charters provides no exception
even for non-profit or charitable corporations. Consequently, the PNRC Charter, insofar as it
creates the PNRC as a private corporation and grants it corporate powers,[27] is void for being
unconstitutional. Thus, Sections 1,[28] 2,[29] 3,[30] 4(a),[31] 5,[32] 6,[33] 7,[34] 8,[35] 9,[36]
10,[37] 11,[38] 12,[39] and 13[40] of the PNRC Charter, as amended, are void.
The other provisions[41] of the PNRC Charter remain valid as they can be considered as a
recognition by the State that the unincorporated PNRC is the local National Society of the
International Red Cross and Red Crescent Movement, and thus entitled to the benefits,
exemptions and privileges set forth in the PNRC Charter. The other provisions of the PNRC
Charter implement the Philippine Governments treaty obligations under Article 4(5) of the
Statutes of the International Red Cross and Red Crescent Movement, which provides that to be
recognized as a National Society, the Society must be duly recognized by the legal government
of its country on the basis of the Geneva Conventions and of the national legislation as a
voluntary aid society, auxiliary to the public authorities in the humanitarian field.

In sum, we hold that the office of the PNRC Chairman is not a government office or an office in
a government-owned or controlled corporation for purposes of the prohibition in Section 13,
Article VI of the 1987 Constitution. However, since the PNRC Charter is void insofar as it
creates the PNRC as a private corporation, the PNRC should incorporate under the Corporation
Code and register with the Securities and Exchange Commission if it wants to be a private
corporation. WHEREFORE, we declare that the office of the Chairman of the Philippine
National Red Cross is not a government office or an office in a government-owned or controlled
corporation for purposes of the prohibition in Section 13, Article VI of the 1987 Constitution.
We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10, 11, 12, and 13 of the Charter of the
Philippine National Red Cross, or Republic Act No. 95, as amended by Presidential Decree Nos.
1264 and 1643, are VOID because they create the PNRC as a private corporation or grant it
corporate powers.
SECOND DIVISION

SEVENTH DAY ADVENTIST G.R. No. 150416

CONFERENCE CHURCH OF

SOUTHERN PHILIPPINES, INC.,

and/or represented by MANASSEH

C. ARRANGUEZ, BRIGIDO P.

GULAY, FRANCISCO M. LUCENARA,

DIONICES O. TIPGOS, LORESTO

C. MURILLON, ISRAEL C. NINAL,

GEORGE G. SOMOSOT, JESSIE

T. ORBISO, LORETO PAEL and

JOEL BACUBAS,
Petitioners, Present:

PUNO, J., Chairperson,

SANDOVAL-GUTIERREZ,

- v e r s u s - CORONA,

AZCUNA and

GARCIA, JJ.

NORTHEASTERN MINDANAO

MISSION OF SEVENTH DAY

ADVENTIST, INC., and/or

represented by JOSUE A. LAYON,

WENDELL M. SERRANO, FLORANTE

P. TY and JETHRO CALAHAT

and/or SEVENTH DAY ADVENTIST

CHURCH [OF] NORTHEASTERN

MINDANAO MISSION,*

Respondents. Promulgated:

July 21, 2006

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

DECISION
CORONA, J.:

This petition for review on certiorari assails the Court of Appeals (CA) decision[1] and
resolution[2] in CA-G.R. CV No. 41966 affirming, with modification, the decision of the
Regional Trial Court (RTC) of Bayugan, Agusan del Sur, Branch 7 in Civil Case No. 63.

This case involves a 1,069 sq. m. lot covered by Transfer Certificate of Title (TCT) No. 4468 in
Bayugan, Agusan del Sur originally owned by Felix Cosio and his wife, Felisa Cuysona.

On April 21, 1959, the spouses Cosio donated the land to the South Philippine Union Mission of
Seventh Day Adventist Church of Bayugan Esperanza, Agusan (SPUM-SDA Bayugan).[3] Part
of the deed of donation read:
KNOW ALL MEN BY THESE PRESENTS:

That we Felix Cosio[,] 49 years of age[,] and Felisa Cuysona[,] 40 years of age, [h]usband and
wife, both are citizen[s] of the Philippines, and resident[s] with post office address in the Barrio
of Bayugan, Municipality of Esperanza, Province of Agusan, Philippines, do hereby grant,
convey and forever quit claim by way of Donation or gift unto the South Philippine [Union]
Mission of Seventh Day Adventist Church of Bayugan, Esperanza, Agusan, all the rights, title,
interest, claim and demand both at law and as well in possession as in expectancy of in and to all
the place of land and portion situated in the Barrio of Bayugan, Municipality of Esperanza,
Province of Agusan, Philippines, more particularly and bounded as follows, to wit:

1. a parcel of land for Church Site purposes only.

2. situated [in Barrio Bayugan, Esperanza].

3. Area: 30 meters wide and 30 meters length or 900 square meters.

4. Lot No. 822-Pls-225. Homestead Application No. V-36704, Title No. P-285.

5. Bounded Areas

North by National High Way; East by Bricio Gerona; South by Serapio Abijaron and West by
Feliz Cosio xxx. [4]
The donation was allegedly accepted by one Liberato Rayos, an elder of the Seventh Day
Adventist Church, on behalf of the donee.

Twenty-one years later, however, on February 28, 1980, the same parcel of land was sold by the
spouses Cosio to the Seventh Day Adventist Church of Northeastern Mindanao Mission (SDA-
NEMM).[5] TCT No. 4468 was thereafter issued in the name of SDA-NEMM.[6]

Claiming to be the alleged donees successors-in-interest, petitioners asserted ownership over the
property. This was opposed by respondents who argued that at the time of the donation, SPUM-
SDA Bayugan could not legally be a donee

because, not having been incorporated yet, it had no juridical personality. Neither were
petitioners members of the local church then, hence, the donation could not have been made
particularly to them.

On September 28, 1987, petitioners filed a case, docketed as Civil Case No. 63 (a suit for
cancellation of title, quieting of ownership and possession, declaratory relief and reconveyance
with prayer for preliminary injunction and damages), in the RTC of Bayugan, Agusan del Sur.
After trial, the trial court rendered a decision[7] on November 20, 1992 upholding the sale in
favor of respondents.

On appeal, the CA affirmed the RTC decision but deleted the award of moral damages and
attorneys fees.[8] Petitioners motion for reconsideration was likewise denied. Thus, this petition.

The issue in this petition is simple: should SDA-NEMMs ownership of the lot covered by TCT
No. 4468 be upheld?[9] We answer in the affirmative.

The controversy between petitioners and respondents involves two supposed transfers of the lot
previously owned by the spouses Cosio: (1) a donation to petitioners alleged predecessors-in-
interest in 1959 and (2) a sale to respondents in 1980.

Donation is undeniably one of the modes of acquiring ownership of real property. Likewise,
ownership of a property may be transferred by tradition as a consequence of a sale.

Petitioners contend that the appellate court should not have ruled on the validity of the donation
since it was not among the issues raised on appeal. This is not correct because an appeal
generally opens the entire case for review.

We agree with the appellate court that the alleged donation to petitioners was void.
Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor
of another person who accepts it. The donation could not have been made in favor of an entity
yet inexistent at the time it was made. Nor could it have been accepted as there was yet no one to
accept it.

The deed of donation was not in favor of any informal group of SDA members but a supposed
SPUM-SDA Bayugan (the local church) which, at the time, had neither juridical personality nor
capacity to accept such gift.

Declaring themselves a de facto corporation, petitioners allege that they should benefit from the
donation.

But there are stringent requirements before one can qualify as a de facto corporation:

(a) the existence of a valid law under which it may be incorporated;

(b) an attempt in good faith to incorporate; and

(c) assumption of corporate powers.[10]

While there existed the old Corporation Law (Act 1459),[11] a law under which SPUM-SDA
Bayugan could have been organized, there is no proof that there was an attempt to incorporate at
that time.

The filing of articles of incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation.[12] We have held that an organization not
registered with the Securities and Exchange Commission (SEC) cannot be considered a
corporation in any concept, not even as a corporation de facto.[13] Petitioners themselves
admitted that at the time of the donation, they were not registered with the SEC, nor did they
even attempt to organize[14] to comply with legal requirements.

Corporate existence begins only from the moment a certificate of incorporation is issued. No
such certificate was ever issued to petitioners or their supposed predecessor-in-interest at the
time of the donation. Petitioners obviously could not have claimed succession to an entity that
never came to exist. Neither could the principle of separate juridical personality apply since there
was never any corporation[15] to speak of. And, as already stated, some of the representatives of
petitioner Seventh Day Adventist Conference Church of Southern Philippines, Inc. were not even
members of the local church then, thus, they could not even claim that the donation was
particularly for them.[16]
The de facto doctrine thus effects a compromise between two conflicting public interest[s]the
one opposed to an unauthorized assumption of corporate privileges; the other in favor of doing
justice to the parties and of establishing a general assurance of security in business dealing with
corporations.[17]

Generally, the doctrine exists to protect the public dealing with supposed corporate entities, not
to favor the defective or non-existent corporation.[18]

In view of the foregoing, petitioners arguments anchored on their supposed de facto status hold
no water. We are convinced that there was no donation to petitioners or their supposed
predecessor-in-interest.

On the other hand, there is sufficient basis to affirm the title of SDA-NEMM. The factual
findings of the trial court in this regard were not convincingly disputed. This Court is not a trier
of facts. Only questions of law are the proper subject of a petition for review on certiorari.[19]

Sustaining the validity of respondents title as well as their right of ownership over the property,
the trial court stated:

[W]hen Felix Cosio was shown the Absolute Deed of Sale during the hearing xxx he
acknowledged that the same was his xxx but that it was not his intention to sell the controverted
property because he had previously donated the same lot to the South Philippine Union Mission
of SDA Church of Bayugan-Esperanza. Cosio avouched that had it been his intendment to sell,
he would not have disposed of it for a mere P2,000.00 in two installments but for P50,000.00 or
P60,000.00. According to him, the P2,000.00 was not a consideration of the sale but only a form
of help extended.

A thorough analysis and perusal, nonetheless, of the Deed of Absolute Sale disclosed that it has
the essential requisites of contracts pursuant to xxx Article 1318 of the Civil Code, except that
the consideration of P2,000.00 is somewhat insufficient for a [1,069-square meter] land. Would
then this inadequacy of the consideration render the contract invalid?

Article 1355 of the Civil Code provides:

Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue influence.

No evidence [of fraud, mistake or undue influence] was adduced by [petitioners].

xxx
Well-entrenched is the rule that a Certificate of Title is generally a conclusive evidence of
[ownership] of the land. There is that strong and solid presumption that titles were legally issued
and that they are valid. It is irrevocable and indefeasible and the duty of the Court is to see to it
that the title is maintained and respected unless challenged in a direct proceeding. xxx The title
shall be received as evidence in all the Courts and shall be conclusive as to all matters contained
therein.

[This action was instituted almost seven years after the certificate of title in respondents name
was issued in 1980.][20]

According to Art. 1477 of the Civil Code, the ownership of the thing sold shall be transferred to
the vendee upon the actual or constructive delivery thereof. On this, the noted author Arturo
Tolentino had this to say:

The execution of [a] public instrument xxx transfers the ownership from the vendor to the
vendee who may thereafter exercise the rights of an owner over the same[21]
Here, transfer of ownership from the spouses Cosio to SDA-NEMM was made upon constructive
delivery of the property on February 28, 1980 when the sale was made through a public
instrument.[22] TCT No. 4468 was thereafter issued and it remains in the name of SDA-NEMM.

WHEREFORE, the petition is hereby DENIED.

Costs against petitioners.

SO ORDERED.
EN BANC

MANILA INTERNATIONAL G.R. No. 155650

AIRPORT AUTHORITY,

Petitioner, Present:

PANGANIBAN, C.J.,

PUNO,

QUISUMBING,

YNARES-SANTIAGO,

SANDOVAL-GUTIERREZ,

- versus - CARPIO,

AUSTRIA-MARTINEZ,

CORONA,
CARPIO MORALES,

CALLEJO, SR.,

AZCUNA,

COURT OF APPEALS, CITY OF TINGA,

PARAAQUE, CITY MAYOR OF CHICO-NAZARIO,

PARAAQUE, SANGGUNIANG GARCIA, and

PANGLUNGSOD NG PARAAQUE, VELASCO, JR., JJ.

CITY ASSESSOR OF PARAAQUE,

and CITY TREASURER OF Promulgated:

PARAAQUE,

Respondents. July 20, 2006

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
D E C I S I ON

CARPIO, J.:

The Antecedents

Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino
International Airport (NAIA) Complex in Paraaque City under Executive Order No. 903,
otherwise known as the Revised Charter of the Manila International Airport Authority (MIAA
Charter). Executive Order No. 903 was issued on 21 July 1983 by then President Ferdinand E.
Marcos. Subsequently, Executive Order Nos. 909[1] and 298[2] amended the MIAA Charter.

As operator of the international airport, MIAA administers the land, improvements and
equipment within the NAIA Complex. The MIAA Charter transferred to MIAA approximately
600 hectares of land,[3] including the runways and buildings (Airport Lands and Buildings) then
under the Bureau of Air Transportation.[4] The MIAA Charter further provides that no portion of
the land transferred to MIAA shall be disposed of through sale or any other mode unless
specifically approved by the President of the Philippines.[5]
On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion
No. 061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption
from real estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA
negotiated with respondent City of Paraaque to pay the real estate tax imposed by the City.
MIAA then paid some of the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of
Paraaque for the taxable years 1992 to 2001. MIAAs real estate tax delinquency is broken down
as follows:

TAX DECLARATION

TAXABLE YEAR

TAX DUE

PENALTY
TOTAL

E-016-01370

1992-2001

19,558,160.00

11,201,083.20

30,789,243.20

E-016-01374

1992-2001

111,689,424.90

68,149,479.59

179,838,904.49

E-016-01375

1992-2001
20,276,058.00

12,371,832.00

32,647,890.00

E-016-01376

1992-2001

58,144,028.00

35,477,712.00

93,621,740.00

E-016-01377

1992-2001

18,134,614.65

11,065,188.59
29,199,803.24

E-016-01378

1992-2001

111,107,950.40

67,794,681.59

178,902,631.99

E-016-01379

1992-2001

4,322,340.00

2,637,360.00

6,959,700.00

E-016-01380

1992-2001
7,776,436.00

4,744,944.00

12,521,380.00

*E-016-013-85

1998-2001

6,444,810.00

2,900,164.50

9,344,974.50

*E-016-01387

1998-2001

34,876,800.00

5,694,560.00
50,571,360.00

*E-016-01396

1998-2001

75,240.00

33,858.00

109,098.00

GRAND TOTAL

P392,435,861.95

P232,070,863.47

P 624,506,725.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75
#9476101 for P28,676,480.00

#9476103 for P49,115.00[6]

On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy and
warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Paraaque
threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the
real estate tax delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The
OGCC pointed out that Section 206 of the Local Government Code requires persons exempt
from real estate tax to show proof of exemption. The OGCC opined that Section 21 of the MIAA
Charter is the proof that MIAA is exempt from real estate tax.

On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition
and injunction, with prayer for preliminary injunction or temporary restraining order. The
petition sought to restrain the City of Paraaque from imposing real estate tax on, levying against,
and auctioning for public sale the Airport Lands and Buildings. The petition was docketed as
CA-G.R. SP No. 66878.
On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond
the 60-day reglementary period. The Court of Appeals also denied on 27 September 2002
MIAAs motion for reconsideration and supplemental motion for reconsideration. Hence, MIAA
filed on 5 December 2002 the present petition for review.[7]

Meanwhile, in January 2003, the City of Paraaque posted notices of auction sale at the Barangay
Halls of Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in the public market of
Barangay La Huerta; and in the main lobby of the Paraaque City Hall. The City of Paraaque
published the notices in the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a
newspaper of general circulation in the Philippines. The notices announced the public auction
sale of the Airport Lands and Buildings to the highest bidder on 7 February 2003, 10:00 a.m., at
the Legislative Session Hall Building of Paraaque City.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this
Court an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining
Order. The motion sought to restrain respondents the City of Paraaque, City Mayor of Paraaque,
Sangguniang Panglungsod ng Paraaque, City Treasurer of Paraaque, and the City Assessor of
Paraaque (respondents) from auctioning the Airport Lands and Buildings.

On 7 February 2003, this Court issued a temporary restraining order (TRO) effective
immediately. The Court ordered respondents to cease and desist from selling at public auction
the Airport Lands and Buildings. Respondents received the TRO on the same day that the Court
issued it. However, respondents received the TRO only at 1:25 p.m. or three hours after the
conclusion of the public auction.

On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.
On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the
directive issued during the hearing, MIAA, respondent City of Paraaque, and the Solicitor
General subsequently submitted their respective Memoranda.

MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in
the name of MIAA. However, MIAA points out that it cannot claim ownership over these
properties since the real owner of the Airport Lands and Buildings is the Republic of the
Philippines. The MIAA Charter mandates MIAA to devote the Airport Lands and Buildings for
the benefit of the general public. Since the Airport Lands and Buildings are devoted to public use
and public service, the ownership of these properties remains with the State. The Airport Lands
and Buildings are thus inalienable and are not subject to real estate tax by local governments.

MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under Section
234 of the Local Government Code because the Airport Lands and Buildings are owned by the
Republic. To justify the exemption, MIAA invokes the principle that the government cannot tax
itself. MIAA points out that the reason for tax exemption of public property is that its taxation
would not inure to any public advantage, since in such a case the tax debtor is also the tax
creditor.

Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the
tax exemption privileges of government-owned and-controlled corporations upon the effectivity
of the Local Government Code. Respondents also argue that a basic rule of statutory construction
is that the express mention of one person, thing, or act excludes all others. An international
airport is not among the exceptions mentioned in Section 193 of the Local Government Code.
Thus, respondents assert that MIAA cannot claim that the Airport Lands and Buildings are
exempt from real estate tax.

Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos[8]
where we held that the Local Government Code has withdrawn the exemption from real estate
tax granted to international airports. Respondents further argue that since MIAA has already paid
some of the real estate tax assessments, it is now estopped from claiming that the Airport Lands
and Buildings are exempt from real estate tax.

The Issue

This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws. If so exempt, then the real estate tax assessments
issued by the City of Paraaque, and all proceedings taken pursuant to such assessments, are void.
In such event, the other issues raised in this petition become moot.

The Courts Ruling

We rule that MIAAs Airport Lands and Buildings are exempt from real estate tax imposed by
local governments.

First, MIAA is not a government-owned or controlled corporation but an instrumentality of the

National Government and thus exempt from local taxation. Second, the real properties of MIAA
are owned by the Republic of the Philippines and thus exempt from real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

Respondents argue that MIAA, being a government-owned or controlled corporation, is not

exempt from real estate tax. Respondents claim that the deletion of the phrase any government-
owned or controlled so exempt by its charter in Section 234(e) of the Local Government Code
withdrew the real estate tax exemption of government-owned or controlled corporations. The
deleted phrase appeared in Section 40(a) of the 1974 Real Property Tax Code enumerating the
entities exempt from real estate tax.
There is no dispute that a government-owned or controlled corporation is not exempt from real
estate tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13)
of the Introductory Provisions of the Administrative Code of 1987 defines a government-owned
or controlled corporation as follows:

SEC. 2. General Terms Defined. x x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock or

non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock corporations, to the extent of at least
fifty-one (51) percent of its capital stock: x x x. (Emphasis supplied)

A government-owned or controlled corporation must be organized as a stock or non-stock

corporation. MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or
voting shares. Section 10 of the MIAA Charter[9] provides:
SECTION 10. Capital. The capital of the Authority to be contributed by the National
Government shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos to Ten
Billion (P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways and equipment and such other
properties, movable and immovable[,] which may be contributed by the National Government or
transferred by it from any of its agencies, the valuation of which shall be determined jointly with
the Department of Budget and Management and the Commission on Audit on the date of such
contribution or transfer after making due allowances for depreciation and other deductions taking
into account the loans and other liabilities of the Authority at the time of the takeover of the
assets and other properties;

(b) That the amount of P605 million as of December 31, 1986 representing about seventy
percentum (70%) of the unremitted share of the National Government from 1983 to 1986 to be
remitted to the National Treasury as provided for in Section 11 of E. O. No. 903 as amended,
shall be converted into the equity of the National Government in the Authority. Thereafter, the
Government contribution to the capital of the Authority shall be provided in the General
Appropriations Act.

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.
Section 3 of the Corporation Code[10] defines a stock corporation as one whose capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares dividends x x
x. MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders or
voting shares. Hence, MIAA is not a stock corporation.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as one where no part of its income is
distributable as dividends to its members, trustees or officers. A non-stock corporation must have
members. Even if we assume that the Government is considered as the sole member of MIAA,
this will not make MIAA a non-stock corporation. Non-stock corporations cannot distribute any
part of their income to their members. Section 11 of the MIAA Charter mandates MIAA to remit
20% of its annual gross operating income to the National Treasury.[11] This prevents MIAA
from qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes, like trade, industry, agriculture and like chambers.
MIAA is not organized for any of these purposes. MIAA, a public utility, is organized to operate
an international and domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within the
National Government?
MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference
is that MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government instrumentality as follows:

SEC. 2. General Terms Defined. x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. x x x (Emphasis supplied)

When the law vests in a government instrumentality corporate powers, the instrumentality does
not become a corporation. Unless the government instrumentality is organized as a stock or non-
stock corporation, it remains a government instrumentality exercising not only governmental but
also corporate powers. Thus, MIAA exercises the governmental powers of eminent domain,[12]
police authority[13] and the levying of fees and charges.[14] At the same time, MIAA exercises
all the powers of a corporation under the Corporation Law, insofar as these powers are not
inconsistent with the provisions of this Executive Order.[15]
Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated with
the department framework. The MIAA Charter expressly states that transforming MIAA into a
separate and autonomous body[16] will make its operation more financially viable.[17]

Many government instrumentalities are vested with corporate powers but they do not become
stock or non-stock corporations, which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled corporation. Examples are the
Mactan International Airport Authority, the Philippine Ports Authority, the University of the
Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities exercise
corporate powers but they are not organized as stock or non-stock corporations as required by
Section 2(13) of the Introductory Provisions of the Administrative Code. These government
instrumentalities are sometimes loosely called government corporate entities. However, they are
not government-owned or controlled corporations in the strict sense as understood under the
Administrative Code, which is the governing law defining the legal relationship and status of
government entities.

A government instrumentality like MIAA falls under Section 133(o) of the Local Government
Code, which states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units. (Emphasis and underscoring supplied)

Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While
the 1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power subject to such guidelines and limitations as the
Congress may provide.[18]

When local governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never presumed
and there must be clear language in the law imposing the tax. Any doubt whether a person,
article or activity is taxable is resolved against taxation. This rule applies with greater force when
local governments seek to tax national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government
instrumentality from local taxation, such exemption is construed liberally in favor of the national
government instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:

The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to
reduce the amount of money that has to be handled by government in the course of its operations.
For these reasons, provisions granting exemptions to government agencies may be construed
liberally, in favor of non tax-liability of such agencies.[19]

There is, moreover, no point in national and local governments taxing each other, unless a sound
and compelling policy requires such transfer of public funds from one government pocket to
another.

There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is
when the legislature clearly intended to tax government instrumentalities for the delivery of
essential public services for sound and compelling policy considerations. There must be express
language in the law empowering local governments to tax national government instrumentalities.
Any doubt whether such power exists is resolved against local governments.
Thus, Section 133 of the Local Government Code states that unless otherwise provided in the
Code, local governments cannot tax national government instrumentalities. As this Court held in
Basco v. Philippine Amusements and Gaming Corporation:

The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the
powers vested in the federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the supremacy of the National Government over local governments.

Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power
on the part of the States to touch, in that way (taxation) at least, the instrumentalities of the
United States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political
subdivision can regulate a federal instrumentality in such a way as to prevent it from
consummating its federal responsibilities, or even to seriously burden it in the accomplishment of
them. (Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what
local authorities may perceive to be undesirable activities or enterprise using the power to tax as
a tool for regulation (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the power to destroy (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity
which has the inherent power to wield it. [20]

2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion

The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned
by the State or the Republic of the Philippines. The Civil Code provides:

ARTICLE 419. Property is either of public dominion or of private ownership.

ARTICLE 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)
ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.

ARTICLE 422. Property of public dominion, when no longer intended for public use or for
public service, shall form part of the patrimonial property of the State.

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil
Code, like roads, canals, rivers, torrents, ports and bridges constructed by the State, are owned by
the State. The term ports includes seaports and airports. The MIAA Airport Lands and Buildings
constitute a port constructed by the State. Under Article 420 of the Civil Code, the MIAA
Airport Lands and Buildings are properties of public dominion and thus owned by the State or
the Republic of the Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public
for international and domestic travel and transportation. The fact that the MIAA collects terminal
fees and other charges from the public does not remove the character of the Airport Lands and
Buildings as properties for public use. The operation by the government of a tollway does not
change the character of the road as one for public use. Someone must pay for the maintenance of
the road, either the public indirectly through the taxes they pay the government, or only those
among the public who actually use the road through the toll fees they pay upon using the road.
The tollway system is even a more efficient and equitable manner of taxing the public for the
maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is
of public dominion or not. Article 420 of the Civil Code defines property of public dominion as
one intended for public use. Even if the government collects toll fees, the road is still intended
for public use if anyone can use the road under the same terms and conditions as the rest of the
public. The charging of fees, the limitation on the kind of vehicles that can use the road, the
speed restrictions and other conditions for the use of the road do not affect the public character of
the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection
of such fees does not change the character of MIAA as an airport for public use. Such fees are
often termed users tax. This means taxing those among the public who actually use a public
facility instead of taxing all the public including those who never use the particular public
facility. A users tax is more equitable a principle of taxation mandated in the 1987
Constitution.[21]

The Airport Lands and Buildings of MIAA, which its Charter calls the principal airport of the
Philippines for both international and domestic air traffic,[22] are properties of public dominion
because they are intended for public use. As properties of public dominion, they indisputably
belong to the State or the Republic of the Philippines.
b. Airport Lands and Buildings are Outside the Commerce of Man

The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of
public dominion. As properties of public dominion, the Airport Lands and Buildings are outside
the commerce of man. The Court has ruled repeatedly that properties of public dominion are
outside the commerce of man. As early as 1915, this Court already ruled in Municipality of
Cavite v. Rojas that properties devoted to public use are outside the commerce of man, thus:

According to article 344 of the Civil Code: Property for public use in provinces and in towns
comprises the provincial and town roads, the squares, streets, fountains, and public waters, the
promenades, and public works of general service supported by said towns or provinces.

The said Plaza Soledad being a promenade for public use, the municipal council of Cavite could
not in 1907 withdraw or exclude from public use a portion thereof in order to lease it for the sole
benefit of the defendant Hilaria Rojas. In leasing a portion of said plaza or public place to the
defendant for private use the plaintiff municipality exceeded its authority in the exercise of its
powers by executing a contract over a thing of which it could not dispose, nor is it empowered so
to do.

The Civil Code, article 1271, prescribes that everything which is not outside the commerce of
man may be the object of a contract, and plazas and streets are outside of this commerce, as was
decided by the supreme court of Spain in its decision of February 12, 1895, which says:
Communal things that cannot be sold because they are by their very nature outside of commerce
are those for public use, such as the plazas, streets, common lands, rivers, fountains, etc.
(Emphasis supplied) [23]

Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion are
outside the commerce of man:

xxx Town plazas are properties of public dominion, to be devoted to public use and to be made
available to the public in general. They are outside the commerce of man and cannot be disposed
of or even leased by the municipality to private parties. While in case of war or during an
emergency, town plazas may be occupied temporarily by private individuals, as was done and as
was tolerated by the Municipality of Pozorrubio, when the emergency has ceased, said temporary
occupation or use must also cease, and the town officials should see to it that the town plazas
should ever be kept open to the public and free from encumbrances or illegal private
constructions.[24] (Emphasis supplied)

The Court has also ruled that property of public dominion, being outside the commerce of man,
cannot be the subject of an auction sale.[25]
Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction sale of
any property of public dominion is void for being contrary to public policy. Essential public
services will stop if properties of public dominion are subject to encumbrances, foreclosures and
auction sale. This will happen if the City of Paraaque can foreclose and compel the auction sale
of the 600-hectare runway of the MIAA for non-payment of real estate tax.

Before MIAA can encumber[26] the Airport Lands and Buildings, the President must first
withdraw from public use the Airport Lands and Buildings. Sections 83 and 88 of the Public
Land Law or Commonwealth Act No. 141, which remains to this day the existing general law
governing the classification and disposition of lands of the public domain other than timber and
mineral lands,[27] provide:

SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural Resources,
the President may designate by proclamation any tract or tracts of land of the public domain as
reservations for the use of the Republic of the Philippines or of any of its branches, or of the
inhabitants thereof, in accordance with regulations prescribed for this purposes, or for quasi-
public uses or purposes when the public interest requires it, including reservations for highways,
rights of way for railroads, hydraulic power sites, irrigation systems, communal pastures or
lequas communales, public parks, public quarries, public fishponds, working mens village and
other improvements for the public benefit.

SECTION 88. The tract or tracts of land reserved under the provisions of Section eighty-three
shall be non-alienable and shall not be subject to occupation, entry, sale, lease, or other
disposition until again declared alienable under the provisions of this Act or by proclamation of
the President. (Emphasis and underscoring supplied)
Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings
from public use, these properties remain properties of public dominion and are inalienable. Since
the Airport Lands and Buildings are inalienable in their present status as properties of public
dominion, they are not subject to levy on execution or foreclosure sale. As long as the Airport
Lands and Buildings are reserved for public use, their ownership remains with the State or the
Republic of the Philippines.

The authority of the President to reserve lands of the public domain for public use, and to
withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the
Administrative Code of 1987, which states:

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government. (1) The
President shall have the power to reserve for settlement or public use, and for specific public
purposes, any of the lands of the public domain, the use of which is not otherwise directed by
law. The reserved land shall thereafter remain subject to the specific public purpose indicated
until otherwise provided by law or proclamation;

x x x x. (Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by
law or presidential proclamation from public use, they are properties of public dominion, owned
by the Republic and outside the commerce of man.

c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic.
Section 48, Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA
to hold title to real properties owned by the Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be executed in
behalf of the government by the following:
(1) For property belonging to and titled in the name of the Republic of the Philippines, by the
President, unless the authority therefor is expressly vested by law in another officer.

(2) For property belonging to the Republic of the Philippines but titled in the name of any
political subdivision or of any corporate agency or instrumentality, by the executive head of the
agency or instrumentality. (Emphasis supplied)

In MIAAs case, its status as a mere trustee of the Airport Lands and Buildings is clearer because
even its executive head cannot sign the deed of conveyance on behalf of the Republic. Only the
President of the Republic can sign such deed of conveyance.[28]

d. Transfer to MIAA was Meant to Implement a Reorganization

The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and
Buildings from the Bureau of Air Transportation of the Department of Transportation and
Communications. The MIAA Charter provides:

SECTION 3. Creation of the Manila International Airport Authority. x x x x

The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. The Bureau of
Lands and other appropriate government agencies shall undertake an actual survey of the area
transferred within one year from the promulgation of this Executive Order and the corresponding
title to be issued in the name of the Authority. Any portion thereof shall not be disposed through
sale or through any other mode unless specifically approved by the President of the Philippines.
(Emphasis supplied)

SECTION 22. Transfer of Existing Facilities and Intangible Assets. All existing public airport
facilities, runways, lands, buildings and other property, movable or immovable, belonging to the
Airport, and all assets, powers, rights, interests and privileges belonging to the Bureau of Air
Transportation relating to airport works or air operations, including all equipment which are
necessary for the operation of crash fire and rescue facilities, are hereby transferred to the
Authority. (Emphasis supplied)

SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of Air
Transportation and Transitory Provisions. The Manila International Airport including the Manila
Domestic Airport as a division under the Bureau of Air Transportation is hereby abolished.
x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.

The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport
Lands and Buildings to MIAA, thus:

WHEREAS, the Manila International Airport as the principal airport of the Philippines for both
international and domestic air traffic, is required to provide standards of airport accommodation
and service comparable with the best airports in the world;
WHEREAS, domestic and other terminals, general aviation and other facilities, have to be
upgraded to meet the current and future air traffic and other demands of aviation in Metro
Manila;

WHEREAS, a management and organization study has indicated that the objectives of providing
high standards of accommodation and service within the context of a financially viable
operation, will best be achieved by a separate and autonomous body; and

WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No. 1772,
the President of the Philippines is given continuing authority to reorganize the National
Government, which authority includes the creation of new entities, agencies and
instrumentalities of the Government[.] (Emphasis supplied)

The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA
was not meant to transfer beneficial ownership of these assets from the Republic to MIAA. The
purpose was merely to reorganize a division in the Bureau of Air Transportation into a separate
and autonomous body. The Republic remains the beneficial owner of the Airport Lands and
Buildings. MIAA itself is owned solely by the Republic. No party claims any ownership rights
over MIAAs assets adverse to the Republic.

The MIAA Charter expressly provides that the Airport Lands and Buildings shall not be disposed
through sale or through any other mode unless specifically approved by the President of the
Philippines. This only means that the Republic retained the beneficial ownership of the Airport
Lands and Buildings because under Article 428 of the Civil Code, only the owner has the right to
x x x dispose of a thing. Since MIAA cannot dispose of the Airport Lands and Buildings, MIAA
does not own the Airport Lands and Buildings.

At any time, the President can transfer back to the Republic title to the Airport Lands and
Buildings without the Republic paying MIAA any consideration. Under Section 3 of the MIAA
Charter, the President is the only one who can authorize the sale or disposition of the Airport
Lands and Buildings. This only confirms that the Airport Lands and Buildings belong to the
Republic.

e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any [r]eal property
owned by the Republic of the Philippines. Section 234(a) provides:

SEC. 234. Exemptions from Real Property Tax. The following are exempted from payment of
the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person;

x x x. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the same Code, which prohibits
local governments from imposing [t]axes, fees or charges of any kind on the National
Government, its agencies and instrumentalities x x x. The real properties owned by the Republic
are titled either in the name of the Republic itself or in the name of agencies or instrumentalities
of the National Government. The Administrative Code allows real property owned by the
Republic to be titled in the name of agencies or instrumentalities of the national government.
Such real properties remain owned by the Republic and continue to be exempt from real estate
tax.

The Republic may grant the beneficial use of its real property to an agency or instrumentality of
the national government. This happens when title of the real property is transferred to an agency
or instrumentality even as the Republic remains the owner of the real property. Such
arrangement does not result in the loss of the tax exemption. Section 234(a) of the Local
Government Code states that real property owned by the Republic loses its tax exemption only if
the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.
MIAA, as a government instrumentality, is not a taxable person under Section 133(o) of the
Local Government Code. Thus, even if we assume that the Republic has granted to MIAA the
beneficial use of the Airport Lands and Buildings, such fact does not make these real properties
subject to real estate tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private entities are
not exempt from real estate tax. For example, the land area occupied by hangars that MIAA
leases to private corporations is subject to real estate tax. In such a case, MIAA has granted the
beneficial use of such land area for a consideration to a taxable person and therefore such land
area is subject to real estate tax. In Lung Center of the Philippines v. Quezon City, the Court
ruled:

Accordingly, we hold that the portions of the land leased to private entities as well as those parts
of the hospital leased to private individuals are not exempt from such taxes. On the other hand,
the portions of the land occupied by the hospital and portions of the hospital used for its patients,
whether paying or non-paying, are exempt from real property taxes.[29]

3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of the
Local Government Code of 1991 withdrew the tax exemption of all persons, whether natural or
juridical upon the effectivity of the Code. Section 193 provides:

SEC. 193. Withdrawal of Tax Exemption Privileges Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions are hereby withdrawn upon effectivity of this Code. (Emphasis supplied)

The minority states that MIAA is indisputably a juridical person. The minority argues that since
the Local Government Code withdrew the tax exemption of all juridical persons, then MIAA is
not exempt from real estate tax. Thus, the minority declares:

It is evident from the quoted provisions of the Local Government Code that the withdrawn
exemptions from realty tax cover not just GOCCs, but all persons. To repeat, the provisions lay
down the explicit proposition that the withdrawal of realty tax exemption applies to all persons.
The reference to or the inclusion of GOCCs is only clarificatory or illustrative of the explicit
provision.
The term All persons encompasses the two classes of persons recognized under our laws, natural
and juridical persons. Obviously, MIAA is not a natural person. Thus, the determinative test is
not just whether MIAA is a GOCC, but whether MIAA is a juridical person at all. (Emphasis and
underscoring in the original)

The minority posits that the determinative test whether MIAA is exempt from local taxation is its
status whether MIAA is a juridical person or not. The minority also insists that Sections 193 and
234 may be examined in isolation from Section 133(o) to ascertain MIAAs claim of exemption.

The argument of the minority is fatally flawed. Section 193 of the Local Government Code
expressly withdrew the tax exemption of all juridical persons [u]nless otherwise provided in this
Code. Now, Section 133(o) of the Local Government Code expressly provides otherwise,
specifically prohibiting local governments from imposing any kind of tax on national
government instrumentalities. Section 133(o) states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:

xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)

By express mandate of the Local Government Code, local governments cannot impose any kind
of tax on national government instrumentalities like the MIAA. Local governments are devoid of
power to tax the national government, its agencies and instrumentalities. The taxing powers of
local governments do not extend to the national government, its agencies and instrumentalities,
[u]nless otherwise provided in this Code as stated in the saving clause of Section 133. The saving
clause refers to Section 234(a) on the exception to the exemption from real estate tax of real
property owned by the Republic.

The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons
are subject to tax by local governments. The minority insists that the juridical persons exempt
from local taxation are limited to the three classes of entities specifically enumerated as exempt
in Section 193. Thus, the minority states:

x x x Under Section 193, the exemption is limited to (a) local water districts; (b) cooperatives
duly registered under Republic Act No. 6938; and (c) non-stock and non-profit hospitals and
educational institutions. It would be belaboring the obvious why the MIAA does not fall within
any of the exempt entities under Section 193. (Emphasis supplied)
The minoritys theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national
government, which itself is a juridical person, subject to tax by local governments since the
national government is not included in the enumeration of exempt entities in Section 193. Under
this theory, local governments can impose any kind of local tax, and not only real estate tax, on
the national government.

Under the minoritys theory, many national government instrumentalities with juridical
personalities will also be subject to any kind of local tax, and not only real estate tax. Some of
the national government instrumentalities vested by law with juridical personalities are: Bangko
Sentral ng Pilipinas,[30] Philippine Rice Research Institute,[31] Laguna Lake

Development Authority,[32] Fisheries Development Authority,[33] Bases Conversion

Development Authority,[34] Philippine Ports Authority,[35] Cagayan de Oro Port Authority,[36]
San Fernando Port Authority,[37] Cebu Port Authority,[38] and Philippine National
Railways.[39]

The minoritys theory violates Section 133(o) of the Local Government Code which expressly
prohibits local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) does not distinguish between national government
instrumentalities with or without juridical personalities. Where the law does not distinguish,
courts should not distinguish. Thus, Section 133(o) applies to all national government
instrumentalities, with or without juridical personalities. The determinative test whether MIAA is
exempt from local taxation is not whether MIAA is a juridical person, but whether it is a national
government instrumentality under Section 133(o) of the Local Government Code. Section 133(o)
is the specific provision of law prohibiting local governments from imposing any kind of tax on
the national government, its agencies and instrumentalities.

Section 133 of the Local Government Code starts with the saving clause [u]nless otherwise
provided in this Code. This means that unless the Local Government Code grants an express
authorization, local governments have no power to tax the national government, its agencies and
instrumentalities. Clearly, the rule is local governments have no power to tax the national
government, its agencies and instrumentalities. As an exception to this rule, local governments
may tax the national government, its agencies and instrumentalities only if the Local
Government Code expressly so provides.

The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of
the Code, which makes the national government subject to real estate tax when it gives the
beneficial use of its real properties to a taxable entity. Section 234(a) of the Local Government
Code provides:

SEC. 234. Exemptions from Real Property Tax The following are exempted from payment of the
real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person.

x x x. (Emphasis supplied)

Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The
exception to this exemption is when the government gives the beneficial use of the real property
to a taxable entity.

The exception to the exemption in Section 234(a) is the only instance when the national
government, its agencies and instrumentalities are subject to any kind of tax by local
governments. The exception to the exemption applies only to real estate tax and not to any other
tax. The justification for the exception to the exemption is that the real property, although owned
by the Republic, is not devoted to public use or public service but devoted to the private gain of a
taxable person.

The minority also argues that since Section 133 precedes Section 193 and 234 of the Local
Government Code, the later provisions prevail over Section 133. Thus, the minority asserts:
x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an accepted
rule of construction, in case of conflict the subsequent provisions should prevail. Therefore,
MIAA, as a juridical person, is subject to real property taxes, the general exemptions attaching to
instrumentalities under Section 133(o) of the Local Government Code being qualified by
Sections 193 and 234 of the same law. (Emphasis supplied)

The minority assumes that there is an irreconcilable conflict between Section 133 on one hand,
and Sections 193 and 234 on the other. No one has urged that there is such a conflict, much less
has any one presented a persuasive argument that there is such a conflict. The minoritys
assumption of an irreconcilable conflict in the statutory provisions is an egregious error for two
reasons.

First, there is no conflict whatsoever between Sections 133 and 193 because Section 193
expressly admits its subordination to other provisions of the Code when Section 193 states
[u]nless otherwise provided in this Code. By its own words, Section 193 admits the superiority
of other provisions of the Local Government Code that limit the exercise of the taxing power in
Section 193. When a provision of law grants a power but withholds such power on certain
matters, there is no conflict between the grant of power and the withholding of power. The
grantee of the power simply cannot exercise the power on matters withheld from its power.

Second, Section 133 is entitled Common Limitations on the Taxing Powers of Local
Government Units. Section 133 limits the grant to local governments of the power to tax, and not
merely the exercise of a delegated power to tax. Section 133 states that the taxing powers of local
governments shall not extend to the levy of any kind of tax on the national government, its
agencies and instrumentalities. There is no clearer limitation on the taxing power than this.
Since Section 133 prescribes the common limitations on the taxing powers of local governments,
Section 133 logically prevails over Section 193 which grants local governments such taxing
powers. By their very meaning and purpose, the common limitations on the taxing power prevail
over the grant or exercise of the taxing power. If the taxing power of local governments in
Section 193 prevails over the limitations on such taxing power in Section 133, then local
governments can impose any kind of tax on the national government, its agencies and
instrumentalities a gross absurdity.

Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code pursuant to the
saving clause in Section 133 stating [u]nless otherwise provided in this Code. This exception
which is an exception to the exemption of the Republic from real estate tax imposed by local
governments refers to Section 234(a) of the Code. The exception to the exemption in Section
234(a) subjects real property owned by the Republic, whether titled in the name of the national
government, its agencies or instrumentalities, to real estate tax if the beneficial use of such
property is given to a taxable entity.

The minority also claims that the definition in the Administrative Code of the phrase
government-owned or controlled corporation is not controlling. The minority points out that
Section 2 of the Introductory Provisions of the Administrative Code admits that its definitions
are not controlling when it provides:
SEC. 2. General Terms Defined. Unless the specific words of the text, or the context as a whole,
or a particular statute, shall require a different meaning:

xxxx

The minority then concludes that reliance on the Administrative Code definition is flawed.

The minoritys argument is a non sequitur. True, Section 2 of the Administrative Code recognizes
that a statute may require a different meaning than that defined in the Administrative Code.
However, this does not automatically mean that the definition in the Administrative Code does
not apply to the Local Government Code. Section 2 of the Administrative Code clearly states that
unless the specific words x x x of a particular statute shall require a different meaning, the
definition in Section 2 of the Administrative Code shall apply. Thus, unless there is specific
language in the Local Government Code defining the phrase government-owned or controlled
corporation differently from the definition in the Administrative Code, the definition in the
Administrative Code prevails.

The minority does not point to any provision in the Local Government Code defining the phrase
government-owned or controlled corporation differently from the definition in the
Administrative Code. Indeed, there is none. The Local Government Code is silent on the
definition of the phrase government-owned or controlled corporation. The Administrative Code,
however, expressly defines the phrase government-owned or controlled corporation. The
inescapable conclusion is that the Administrative Code definition of the phrase government-
owned or controlled corporation applies to the Local Government Code.

The third whereas clause of the Administrative Code states that the Code incorporates in a
unified document the major structural, functional and procedural principles and rules of
governance. Thus, the Administrative Code is the governing law defining the status and
relationship of government departments, bureaus, offices, agencies and instrumentalities. Unless
a statute expressly provides for a different status and relationship for a specific government unit
or entity, the provisions of the Administrative Code prevail.

The minority also contends that the phrase government-owned or controlled corporation should
apply only to corporations organized under the Corporation Code, the general incorporation law,
and not to corporations created by special charters. The minority sees no reason why government
corporations with special charters should have a capital stock. Thus, the minority declares:

I submit that the definition of government-owned or controlled corporations under the

Administrative Code refer to those corporations owned by the government or its instrumentalities
which are created not by legislative enactment, but formed and organized under the Corporation
Code through registration with the Securities and Exchange Commission. In short, these are
GOCCs without original charters.
xxxx

It might as well be worth pointing out that there is no point in requiring a capital structure for
GOCCs whose full ownership is limited by its charter to the State or Republic. Such GOCCs are
not empowered to declare dividends or alienate their capital shares.

The contention of the minority is seriously flawed. It is not in accord with the Constitution and
existing legislations. It will also result in gross absurdities.

First, the Administrative Code definition of the phrase government-owned or controlled

corporation does not distinguish between one incorporated under the Corporation Code or under
a special charter. Where the law does not distinguish, courts should not distinguish.

Second, Congress has created through special charters several government-owned corporations
organized as stock corporations. Prime examples are the Land Bank of the Philippines and the
Development Bank of the Philippines. The special charter[40] of the Land Bank of the
Philippines provides:
SECTION 81. Capital. The authorized capital stock of the Bank shall be nine billion pesos,
divided into seven hundred and eighty million common shares with a par value of ten pesos each,
which shall be fully subscribed by the Government, and one hundred and twenty million
preferred shares with a par value of ten pesos each, which shall be issued in accordance with the
provisions of Sections seventy-seven and eighty-three of this Code. (Emphasis supplied)

Likewise, the special charter[41] of the Development Bank of the Philippines provides:

SECTION 7. Authorized Capital Stock Par value. The capital stock of the Bank shall be Five
Billion Pesos to be divided into Fifty Million common shares with par value of P100 per share.
These shares are available for subscription by the National Government. Upon the effectivity of
this Charter, the National Government shall subscribe to Twenty-Five Million common shares of
stock worth Two Billion Five Hundred Million which shall be deemed paid for by the
Government with the net asset values of the Bank remaining after the transfer of assets and
liabilities as provided in Section 30 hereof. (Emphasis supplied)

Other government-owned corporations organized as stock corporations under their special

charters are the Philippine Crop Insurance Corporation,[42] Philippine International Trading
Corporation,[43] and the Philippine National Bank[44] before it was reorganized as a stock
corporation under the Corporation Code. All these government-owned corporations organized
under special charters as stock corporations are subject to real estate tax on real properties owned
by them. To rule that they are not government-owned or controlled corporations because they are
not registered with the Securities and Exchange Commission would remove them from the reach
of Section 234 of the Local Government Code, thus exempting them from real estate tax.

Third, the government-owned or controlled corporations created through special charters are
those that meet the two conditions prescribed in Section 16, Article XII of the Constitution. The
first condition is that the government-owned or controlled corporation must be established for
the common good. The second condition is that the government-owned or controlled corporation
must meet the test of economic viability. Section 16, Article XII of the 1987 Constitution
provides:

SEC. 16. The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations. Government-owned or controlled corporations may be
created or established by special charters in the interest of the common good and subject to the
test of economic viability. (Emphasis and underscoring supplied)

The Constitution expressly authorizes the legislature to create government-owned or controlled

corporations through special charters only if these entities are required to meet the twin
conditions of common good and economic viability. In other words, Congress has no power to
create government-owned or controlled corporations with special charters unless they are made
to comply with the two conditions of common good and economic viability. The test of
economic viability applies only to government-owned or controlled corporations that perform
economic or commercial activities and need to compete in the market place. Being essentially
economic vehicles of the State for the common good meaning for economic development
purposes these government-owned or controlled corporations with special charters are usually
organized as stock corporations just like ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers and performing
governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every
modern State must provide its citizens. These instrumentalities need not be economically viable
since the government may even subsidize their entire operations. These instrumentalities are not
the government-owned or controlled corporations referred to in Section 16, Article XII of the
1987 Constitution.

Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or
public services. However, when the legislature creates through special charters corporations that
perform economic or commercial activities, such entities known as government-owned or
controlled corporations must meet the test of economic viability because they compete in the
market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the
Philippines and similar government-owned or controlled corporations, which derive their income
to meet operating expenses solely from commercial transactions in competition with the private
sector. The intent of the Constitution is to prevent the creation of government-owned or
controlled corporations that cannot survive on their own in the market place and thus merely
drain the public coffers.

Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the test of
economic performance. We know what happened in the past. If a government corporation loses,
then it makes its claim upon the taxpayers money through new equity infusions from the
government and what is always invoked is the common good. That is the reason why this year,
out of a budget of P115 billion for the entire government, about P28 billion of this will go into
equity infusions to support a few government financial institutions. And this is all taxpayers
money which could have been relocated to agrarian reform, to social services like health and
education, to augment the salaries of grossly underpaid public employees. And yet this is all
going down the drain.

Therefore, when we insert the phrase ECONOMIC VIABILITY together with the common good,
this becomes a restraint on future enthusiasts for state capitalism to excuse themselves from the
responsibility of meeting the market test so that they become viable. And so, Madam President, I
reiterate, for the committees consideration and I am glad that I am joined in this proposal by
Commissioner Foz, the insertion of the standard of ECONOMIC VIABILITY OR THE
ECONOMIC TEST, together with the common good.[45]
Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:

The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase in the interest of the common good and subject to the test of
economic viability. The addition includes the ideas that they must show capacity to function
efficiently in business and that they should not go into activities which the private sector can do
better. Moreover, economic viability is more than financial viability but also includes capability
to make profit and generate benefits not quantifiable in financial terms.[46] (Emphasis supplied)

Clearly, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. The State is obligated to render
essential public services regardless of the economic viability of providing such service. The non-
economic viability of rendering such essential public service does not excuse the State from
withholding such essential services from the public.

However, government-owned or controlled corporations with special charters, organized

essentially for economic or commercial objectives, must meet the test of economic viability.
These are the government-owned or controlled corporations that are usually organized under
their special charters as stock corporations, like the Land Bank of the Philippines and the
Development Bank of the Philippines. These are the government-owned or controlled
corporations, along with government-owned or controlled corporations organized under the
Corporation Code, that fall under the definition of government-owned or controlled corporations
in Section 2(10) of the Administrative Code.
The MIAA need not meet the test of economic viability because the legislature did not create
MIAA to compete in the market place. MIAA does not compete in the market place because
there is no competing international airport operated by the private sector. MIAA performs an
essential public service as the primary domestic and international airport of the Philippines. The
operation of an international airport requires the presence of personnel from the following
government agencies:

1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold departure
orders;

2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;

3. The quarantine office of the Department of Health, to enforce health measures against the
spread of infectious diseases into the country;

4. The Department of Agriculture, to enforce measures against the spread of plant and animal
diseases into the country;
5. The Aviation Security Command of the Philippine National Police, to prevent the entry of
terrorists and the escape of criminals, as well as to secure the airport premises from terrorist
attack or seizure;

6. The Air Traffic Office of the Department of Transportation and Communications, to

authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off from, the
airport; and

7. The MIAA, to provide the proper premises such as runway and buildings for the
government personnel, passengers, and airlines, and to manage the airport operations.

All these agencies of government perform government functions essential to the operation of an
international airport.

MIAA performs an essential public service that every modern State must provide its citizens.
MIAA derives its revenues principally from the mandatory fees and charges MIAA imposes on
passengers and airlines. The terminal fees that MIAA charges every passenger are regulatory or
administrative fees[47] and not income from commercial transactions.
MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:

SEC. 2. General Terms Defined. x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. x x x (Emphasis supplied)

The fact alone that MIAA is endowed with corporate powers does not make MIAA a
government-owned or controlled corporation. Without a change in its capital structure, MIAA
remains a government instrumentality under Section 2(10) of the Introductory Provisions of the
Administrative Code. More importantly, as long as MIAA renders essential public services, it
need not comply with the test of economic viability. Thus, MIAA is outside the scope of the
phrase government-owned or controlled corporations under Section 16, Article XII of the 1987
Constitution.

The minority belittles the use in the Local Government Code of the phrase government-owned or
controlled corporation as merely clarificatory or illustrative. This is fatal. The 1987 Constitution
prescribes explicit conditions for the creation of government-owned or controlled corporations.
The Administrative Code defines what constitutes a government-owned or controlled
corporation. To belittle this phrase as clarificatory or illustrative is grave error.

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13)

of the Introductory Provisions of the Administrative Code because it is not organized as a stock
or non-stock corporation. Neither is MIAA a government-owned or controlled corporation under
Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test of
economic viability. MIAA is a government instrumentality vested with corporate powers and
performing essential public services pursuant to Section 2(10) of the Introductory Provisions of
the Administrative Code. As a government instrumentality, MIAA is not subject to any kind of
tax by local governments under Section 133(o) of the Local Government Code. The exception to
the exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity
under the Local Government Code. Such exception applies only if the beneficial use of real
property owned by the Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus
are properties of public dominion. Properties of public dominion are owned by the State or the
Republic. Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)

The term ports x x x constructed by the State includes airports and seaports. The Airport Lands
and Buildings of MIAA are intended for public use, and at the very least intended for public
service. Whether intended for public use or public service, the Airport Lands and Buildings are
properties of public dominion. As properties of public dominion, the Airport Lands and
Buildings are owned by the Republic and thus exempt from real estate tax under Section 234(a)
of the Local Government Code.

4. Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which
governs the legal relation and status of government units, agencies and offices within the entire
government machinery, MIAA is a government instrumentality and not a government-owned or
controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a
government instrumentality is not a taxable person because it is not subject to [t]axes, fees or
charges of any kind by local governments. The only exception is when MIAA leases its real
property to a taxable person as provided in Section 234(a) of the Local Government Code, in
which case the specific real property leased becomes subject to real estate tax. Thus, only
portions of the Airport Lands and Buildings leased to taxable persons like private parties are
subject to real estate tax by the City of Paraaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted
to public use, are properties of public dominion and thus owned by the State or the Republic of
the Philippines. Article 420 specifically mentions ports x x x constructed by the State, which
includes public airports and seaports, as properties of public dominion and owned by the
Republic. As properties of public dominion owned by the Republic, there is no doubt whatsoever
that the Airport Lands and Buildings are expressly exempt from real estate tax under Section
234(a) of the Local Government Code. This Court has also repeatedly ruled that properties of
public dominion are not subject to execution or foreclosure sale.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court
of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We
DECLARE the Airport Lands and Buildings of the Manila International Airport Authority
EXEMPT from the real estate tax imposed by the City of Paraaque. We declare VOID all the real
estate tax assessments, including the final notices of real estate tax delinquencies, issued by the
City of Paraaque on the Airport Lands and Buildings of the Manila International Airport
Authority, except for the portions that the Manila International Airport Authority has leased to
private parties. We also declare VOID the assailed auction sale, and all its effects, of the Airport
Lands and Buildings of the Manila International Airport Authority.
No costs.

SO ORDERED.
FIRST DIVISION

[G.R. No. 119002. October 19, 2000]

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs. HON.
COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION,
respondents.

DECISION

KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its
managing director, wrote a letter to the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former offered its services as a travel
agency to the latter.[1] The offer was accepted.

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to
the South East Asian Games in Kuala Lumpur as well as various other trips to the People's
Republic of China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the
tickets received, the Federation made two partial payments, both in September of 1989, in the
total amount of P176,467.50.[2]

On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand
letter requesting for the amount of P265,894.33.[3] On 30 October 1989, the Federation, through
the Project Gintong Alay, paid the amount of P31,603.00.[4]

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial
payment for the outstanding balance of the Federation.[5] Thereafter, no further payments were
made despite repeated demands.
This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner
sued Henri Kahn in his personal capacity and as President of the Federation and impleaded the
Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid
balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly
guaranteed the said obligation.[6]

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the
Federation owed the amount P207,524.20, representing the unpaid balance for the plane tickets,
he averred that the petitioner has no cause of action against him either in his personal capacity or
in his official capacity as president of the Federation. He maintained that he did not guarantee
payment but merely acted as an agent of the Federation which has a separate and distinct
juridical personality.[7]

On the other hand, the Federation failed to file its answer, hence, was declared in default by the
trial court.[8]

In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared
Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said
ruling, the trial court rationalized:

Defendant Henri Kahn would have been correct in his contentions had it been duly established
that defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor
the defendant Henri Kahn has adduced any evidence proving the corporate existence of the
defendant Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant
Philippine Football Federation is a sports association xxx." This has not been denied by
defendant Henri Kahn in his Answer. Being the President of defendant Federation, its corporate
existence is within the personal knowledge of defendant Henri Kahn. He could have easily
denied specifically the assertion of the plaintiff that it is a mere sports association, if it were a
domestic corporation. But he did not.

xxx
A voluntary unincorporated association, like defendant Federation has no power to enter into, or
to ratify, a contract. The contract entered into by its officers or agents on behalf of such
association is not binding on, or enforceable against it. The officers or agents are themselves
personally liable.

x x x[9]

The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the
principal sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5,
1990, the date the complaint was filed, until the principal obligation is fully liquidated; and
another sum of P15,000.00 for attorney's fees.

The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of
the defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn.[10]

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994,
the respondent court rendered a decision reversing the trial court, the decretal portion of said
decision reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and
SET ASIDE and another one is rendered dismissing the complaint against defendant Henri S.
Kahn.[11]

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the
Federation. It rationalized that since petitioner failed to prove that Henri Kahn guaranteed the
obligation of the Federation, he should not be held liable for the same as said entity has a
separate and distinct personality from its officers.

Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the
Federation be held liable for the unpaid obligation. The same was denied by the appellate court
in its resolution of 8 February 1995, where it stated that:

As to the alternative prayer for the Modification of the Decision by expressly declaring in the
dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid
obligation, it should be remembered that the trial court dismissed the complaint against the
Philippine Football Federation, and the plaintiff did not appeal from this decision. Hence, the
Philippine Football Federation is not a party to this appeal and consequently, no judgment may
be pronounced by this Court against the PFF without violating the due process clause, let alone
the fact that the judgment dismissing the complaint against it, had already become final by virtue
of the plaintiff's failure to appeal therefrom. The alternative prayer is therefore similarly
DENIED.[12]

Petitioner now seeks recourse to this Court and alleges that the respondent court committed the
following assigned errors:[13]

A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER

HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A
CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI
KAHN WAS THE ONE WHO REPRESENTED THE PFF AS HAVING A CORPORATE
PERSONALITY.

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE

RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND
CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL
PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT
PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT
EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR
THE OBLIGATION.

The resolution of the case at bar hinges on the determination of the existence of the Philippine
Football Federation as a juridical person. In the assailed decision, the appellate court recognized
the existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise
known as the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential
Decree No. 604 as the laws from which said Federation derives its existence.

As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the
juridical existence of national sports associations. This may be gleaned from the powers and
functions granted to these associations. Section 14 of R.A. 3135 provides:

SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall
have the following functions, powers and duties:

1. To adopt a constitution and by-laws for their internal organization and government;

2. To raise funds by donations, benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and personal, for the
accomplishment of their purpose;

4. To affiliate with international or regional sports' Associations after due consultation with the
executive committee;

xxx
13. To perform such other acts as may be necessary for the proper accomplishment of their
purposes and not inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports
associations shall have the following functions, powers, and duties:

1. Adopt a Constitution and By-Laws for their internal organization and government which shall
be submitted to the Department and any amendment thereto shall take effect upon approval by
the Department: Provided, however, That no team, school, club, organization, or entity shall be
admitted as a voting member of an association unless 60 per cent of the athletes composing said
team, school, club, organization, or entity are Filipino citizens;

2. Raise funds by donations, benefits, and other means for their purpose subject to the approval
of the Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the
accomplishment of their purpose;

4. Conduct local, interport, and international competitions, other than the Olympic and Asian
Games, for the promotion of their sport;

5. Affiliate with international or regional sports associations after due consultation with the
Department;

xxx

13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly indicate that these
entities may acquire a juridical personality. The power to purchase, sell, lease and encumber
property are acts which may only be done by persons, whether natural or artificial, with juridical
capacity. However, while we agree with the appellate court that national sports associations may
be accorded corporate status, such does not automatically take place by the mere passage of these
laws.

It is a basic postulate that before a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general enabling act. We cannot agree
with the view of the appellate court and the private respondent that the Philippine Football
Federation came into existence upon the passage of these laws. Nowhere can it be found in R.A.
3135 or P.D. 604 any provision creating the Philippine Football Federation. These laws merely
recognized the existence of national sports associations and provided the manner by which these
entities may acquire juridical personality. Section 11 of R.A. 3135 provides:

SEC. 11. National Sports' Association; organization and recognition. - A National Association
shall be organized for each individual sports in the Philippines in the manner hereinafter
provided to constitute the Philippine Amateur Athletic Federation. Applications for recognition
as a National Sports' Association shall be filed with the executive committee together with,
among others, a copy of the constitution and by-laws and a list of the members of the proposed
association, and a filing fee of ten pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that said
association will promote the purposes of this Act and particularly section three thereof. No
application shall be held pending for more than three months after the filing thereof without any
action having been taken thereon by the executive committee. Should the application be rejected,
the reasons for such rejection shall be clearly stated in a written communication to the applicant.
Failure to specify the reasons for the rejection shall not affect the application which shall be
considered as unacted upon: Provided, however, That until the executive committee herein
provided shall have been formed, applications for recognition shall be passed upon by the duly
elected members of the present executive committee of the Philippine Amateur Athletic
Federation. The said executive committee shall be dissolved upon the organization of the
executive committee herein provided: Provided, further, That the functioning executive
committee is charged with the responsibility of seeing to it that the National Sports' Associations
are formed and organized within six months from and after the passage of this Act.
Section 7 of P.D. 604, similarly provides:

SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national

sports association for each individual sport in the Philippines shall be filed with the Department
together with, among others, a copy of the Constitution and By-Laws and a list of the members
of the proposed association.

The Department shall give the recognition applied for if it is satisfied that the national sports
association to be organized will promote the objectives of this Decree and has substantially
complied with the rules and regulations of the Department: Provided, That the Department may
withdraw accreditation or recognition for violation of this Decree and such rules and regulations
formulated by it.

The Department shall supervise the national sports association: Provided, That the latter shall
have exclusive technical control over the development and promotion of the particular sport for
which they are organized.

Clearly the above cited provisions require that before an entity may be considered as a national
sports association, such entity must be recognized by the accrediting organization, the Philippine
Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports
Development under P.D. 604. This fact of recognition, however, Henri Kahn failed to
substantiate. In attempting to prove the juridical existence of the Federation, Henri Kahn
attached to his motion for reconsideration before the trial court a copy of the constitution and by-
laws of the Philippine Football Federation. Unfortunately, the same does not prove that said
Federation has indeed been recognized and accredited by either the Philippine Amateur Athletic
Federation or the Department of Youth and Sports Development. Accordingly, we rule that the
Philippine Football Federation is not a national sports association within the purview of the
aforementioned laws and does not have corporate existence of its own.

Thus being said, it follows that private respondent Henry Kahn should be held liable for the
unpaid obligations of the unincorporated Philippine Football Federation. It is a settled principal
in corporation law that any person acting or purporting to act on behalf of a corporation which
has no valid existence assumes such privileges and becomes personally liable for contract
entered into or for other acts performed as such agent.[14] As president of the Federation, Henri
Kahn is presumed to have known about the corporate existence or non-existence of the
Federation. We cannot subscribe to the position taken by the appellate court that even assuming
that the Federation was defectively incorporated, the petitioner cannot deny the corporate
existence of the Federation because it had contracted and dealt with the Federation in such a
manner as to recognize and in effect admit its existence.[15] The doctrine of corporation by
estoppel is mistakenly applied by the respondent court to the petitioner. The application of the
doctrine applies to a third party only when he tries to escape liability on a contract from which he
has benefited on the irrelevant ground of defective incorporation.[16] In the case at bar, the
petitioner is not trying to escape liability from the contract but rather is the one claiming from the
contract.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the
Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby
REINSTATED.

SO ORDERED.
SECOND DIVISION

G.R. No. 136374 February 9, 2000

FRANCISCA S. BALUYOT, petitioner,

vs.

PAUL E. HOLGANZA and the OFFICE OF THE OMBUDSMAN (VISAYAS) represented by

its Deputy Ombudsman for the Visayas ARTURO C. MOJICA, Director VIRGINIA
PALANCA-SANTIAGO, and Graft Investigation Officer I ANNA MARIE P. MILITANTE,
respondents.

DE LEON, JR., J.:

Before us is a special civil action for certiorari, seeking the reversal of the Orders dated August
21, 1998 and October 28, 1998 issued by the Office of the Ombudsman, which denied
petitioner's motion to dismiss and motion for reconsideration, respectively.1âwphi1.nêt

The facts are:

During a spot audit conducted on March 21, 1977 by a team of auditors from the Philippine
National Red Cross (PNRC) headquarters, a cash shortage of P154,350.13 was discovered in the
funds of its Bohol chapter. The chapter administrator, petitioner Francisca S. Baluyot, was held
accountable for the shortage. Thereafter, on January 8, 1998, private respondent Paul E.
Holganza, in his capacity as a member of the board of directors of the Bohol chapter, filed an
affidavit-complaint1 before the Office of the Ombudsman charging petitioner of malversation
under Article 217 of the Revised Penal Code. The complaint was docketed as OMB-VIS-CRIM-
98-0022. However, upon recommendation by respondent Anna Marie P. Militante, Graft
Investigation Officer I, an administrative docket for dishonesty was also opened against
petitioner; hence, OMB-VIS-ADM-98-0063.2
On February 6, 1998, public respondent issued an Order3 requiring petitioner to file her counter-
affidavit to the charges of malversation and dishonesty within ten days from notice, with a
warning that her failure to comply would be construed as a waiver on her part to refute the
charges, and that the case would be resolved based on the evidence on record. On March 14,
1998, petitioner filed her counter-affidavit,4 raising principally the defense that public
respondent had no jurisdiction over the controversy. She argued that the Ombudsman had
authority only over government-owned or controlled corporations, which the PNRC was not, or
so she claimed.

On August 21, 1998, public respondent issued the first assailed Order5 denying petitioner's
motion to dismiss. It further scheduled a clarificatory hearing on the criminal aspect of the
complaint and a preliminary conference on its administrative aspect on September 2, 1998.
Petitioner received the order on August 26, 1998 and she filed a motion for reconsideration6 the
next day.

On October 28, 1998, public respondent issued the second assailed Order7 denying petitioner's
motion for reconsideration. Hence, this recourse.

We dismiss the petition.

Petitioner contends that the Ombudsman has no jurisdiction over the subject matter of the
controversy since the PNRC is allegedly a private voluntary organization. The following
circumstances, she insists, are indicative of the private character of the organization: (1) the
PNRC does not receive any budgetary support from the government, and that all money given to
it by the latter and its instrumentalities become private funds of the organization; (2) funds for
the payment of personnel's salaries and other emoluments come from yearly fund campaigns,
private contributions and rentals from its properties; and (3) it is not audited by the Commission
on Audit. Petitioner states that the PNRC falls under the International Federation of Red Cross, a
Switzerland-based organization, and that the power to discipline employees accused of
misconduct, malfeasance, or immorality belongs to the PNRC Secretary General by virtue of
Section "G", Article IX of its by-laws.8 She threatens that "to classify the PNRC as a
government-owned or controlled corporation would create a dangerous precedent as it would
lose its neutrality, independence and impartiality . . . .9
Practically the same issue was addressed in Camporedondo v. National Labor Relations
Commission, et. al.,10 where an almost identical set of facts obtained. Petitioner therein was the
administrator of the Surigao del Norte chapter of the PNRC. An audit conducted by a field
auditor revealed a shortage in the chapter funds in the sum of P109,000.00. When required to
restitute the amount of P135,927.78, petitioner therein instead applied for early retirement, which
was denied by the Secretary General of the PNRC. Subsequently, the petitioner filed a complaint
for illegal dismissal and damages against PNRC before the National Labor Relations
Commission. In turn, PNRC moved to dismiss the complaint on the ground of lack of
jurisdiction, averring that PNRC was a government corporation whose employees are embraced
by civil service regulation. The labor arbiter dismissed the complaint, and the Commission
sustained his order. The petitioner assailed the dismissal of his complaint via a petition for
certiorari, contending that the PNRC is a private organization and not a government-owned or
controlled corporation. In dismissing the petition, we ruled thus:

Resolving the issue set out in the opening paragraph of this opinion, we rule that the Philippine
National Red Cross (PNRC) is a government owned and controlled corporation, with an original
charter under Republic Act No. 95, as amended. The test to determine whether a corporation is
government owned or controlled, or private in nature is simple. Is it created by its own charter
for the exercise of a public function, or by incorporation under the general corporation law?
Those with special charters are government corporations subject to its provisions, and its
employees are under the jurisdiction of the Civil Service Commission, and are compulsory
members of the Government Service Insurance System. The PNRC was not "impliedly converted
to a private corporation" simply because its charter was amended to vest in it the authority to
secure loans, be exempted from payment of all duties, taxes, fees and other charges of all kinds
on all importations and purchases for its exclusive use, on donations for its disaster relief work
and other services and in its benefits and fund raising drives, and be allotted one lottery draw a
year by the Philippine Charity Sweepstakes Office for the support of its disaster relief operation
in addition to its existing lottery draws for blood program. Clearly then, public respondent has
jurisdiction over the matter, pursuant to Section 13, of Republic Act No. 6770, otherwise known
as "The Ombudsman Act of 1989", to wit:Sec. 13. Mandate. — The Ombudsman and his
Deputies, as protectors of the people, shall act promptly on complaints filed in any form or
manner against officers or employees of the Government, or of any subdivision, agency or
instrumentality thereof, including government-owned or controlled corporations, and enforce
their administrative, civil and criminal liability in ever case where the evidence warrants in order
to promote efficient service by the Government to the people.11WHEREFORE, the petition for
certiorari is hereby DISMISSED. Costs against petitioner.

SO ORDERED.1âwphi1.nêt
Republic of the Philippines

SUPREME COURT

Baguio City

THIRD DIVISION

G.R. No. 195580 April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND

DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners,

vs.

REDMONT CONSOLIDATED MINES CORP., Respondent.

DECISION

VELASCO, JR., J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and
Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and
McArthur Mining Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision1 and
the February 15, 2011 Resolution of the Court of Appeals (CA).

The Facts

Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a

domestic corporation organized and existing under Philippine laws, took interest in mining and
exploring certain areas of the province of Palawan. After inquiring with the Department of
Environment and Natural Resources (DENR), it learned that the areas where it wanted to
undertake exploration and mining activities where already covered by Mineral Production
Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.

Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed
an application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences
Bureau (MGB), Region IV-B, Office of the Department of Environment and Natural Resources
(DENR).

Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares
in Barangay Sumbiling, Municipality of 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 Corporation (MMC) and, on November 6, 2006,
assigned to petitioner McArthur.2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and
Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an
application for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Through the
said application, the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in
barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC
conveyed, transferred and/or assigned its rights and interests over the MPSA application in favor
of Narra.

Another MPSA application of SMMI was filed with the DENR Region IV-B, 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
and assigned its rights and interest over the said MPSA application to Tesoro.

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 MPSA IV-1-12.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and
Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian
corporation. Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it
was the driving force behind petitioners’ filing of the MPSAs over the areas covered by
applications since it knows that it can only participate in mining activities through corporations
which are deemed Filipino citizens. Redmont argued that given that petitioners’ capital stocks
were mostly owned by MBMI, they were likewise disqualified from engaging in mining
activities through MPSAs, which are reserved only for Filipino citizens.

In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of
Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which provided:

Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether
in singular or plural, shall mean:

xxxx

(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),3 40% of the shares of MMC (which
owns 5,997 shares of McArthur)4 and 40% of the shares of SLMC (which, in turn, owns 5,997
shares of Tesoro),5 the shares of MBMI will 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 Order7
denying the Motion for Reconsideration filed by petitioners.

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of
Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra
separately filed its Notice of Appeal10 and Memorandum of Appeal.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-0912 on
May 2007, while Tesoro’s MPSA application was converted to AFTA-IVB-0813 on May 28,
2007, and Narra’s FTAA was converted to AFTA-IVB-0714 on March 30, 2006.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a
Complaint15 with the Securities and Exchange 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 Complaint16 for injunction 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 Order18 granting 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 Reconsideration19 of the
September 10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for
Reconsideration20 on 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 Complaint21 in Civil Case
No. 08-63379.

On October 6, 2008, the RTC issued an Order22 granting the issuance of 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.24 (emphasis supplied)

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."25 Thus, it concluded that
petitioners 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
Decision26 on April 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."27 The OP, in affirming the 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."28 The Decision further quoted:
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 Resolution30
dated July 6, 2011. Petitioners then filed a Petition 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.31

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."32 Thus, the 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
will serve as a guide "to the bench, the bar and the public."35 Finally, the 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."38 Standing 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."39 On July 6, 2011, the OP issued a 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, 2012,40
wherein they asserted that the 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."41
They also 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.42 (emphasis supplied)

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 supplied)

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the
application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt
prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt is
present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since
their common investor, the 100% Canadian corporation––MBMI, funded them. However,
petitioners also claim that there is "doubt" only when the stockholdings of Filipinos are less than
60%.43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60%
fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only
made an example of an instance where "doubt" as to the ownership of the corporation exists. It
would be ludicrous to limit the application of the said word only to the instances where the
stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a
corporation. The corporations interested in circumventing our laws would clearly strive to have
"60% Filipino Ownership" at face value. It would be senseless for these applying corporations to
state in their respective articles of incorporation that they have less than 60% Filipino
stockholders since the applications will be denied instantly. Thus, various corporate schemes and
layerings are utilized to circumvent the application of the Constitution.

Obviously, the instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To determine,
therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule must be used.

McArthur Mining, Inc.

To establish the actual ownership, interest or participation of MBMI in each of petitioners’

corporate structure, they have to be "grandfathered."
As previously discussed, McArthur acquired its MPSA application from MMC, which acquired
its application from SMMI. McArthur has a capital 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 the following:44

Name Nationality Number of Shares Amount Subscribed Amount Paid

Madridejos Mining

Corporation Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

MBMI Resources, Inc. Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60

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

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

Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

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

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

Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)

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 seem that MBMI is also a major
investor and "controls"45 MBMI and also, similar nominal shareholders were present, i.e.
Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and
Kenneth Cawkell (Cawkell):

Madridejos Mining Corporation

Name Nationality Number of Shares Amount Subscribed Amount Paid

Olympic Mines &

Development
Corp.

Filipino 6,663 PhP 6,663,000.00

PhP 0

MBMI Resources,

Inc.

Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B.

Esguerra

Filipino 1 PhP 1,000.00 PhP 1,000.00

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G.

Hernando

Filipino 1 PhP 1,000.00 PhP 1,000.00

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

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

Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)
Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount
with respect to the number of shares they subscribed to in the corporation, which is quite absurd
since Olympic is the major stockholder in MMC. MBMI’s 2006 Annual Report sheds light on
why Olympic failed to pay any amount with respect to the number of shares it subscribed to. It
states that Olympic entered into joint venture agreements with several Philippine companies,
wherein it holds directly and indirectly a 60% effective equity interest in the Olympic
Properties.46 Quoting the said Annual report:

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.47 (emphasis supplied)

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

Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million
pesos (PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per
share, as demonstrated below:

[[reference =
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name
Nationality

Number of

Shares

Amount

Subscribed

Amount Paid

Sara Marie

Mining, Inc.

Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

MBMI

Resources, Inc.

Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60

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

Fernando B.

Esguerra

Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A.

Agcaoili

Filipino 1 PhP 1,000.00 PhP 1,000.00

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

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

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:

Sara Marie Mining, Inc.

[[reference =
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name

Nationality

Number of

Shares
Amount

Subscribed

Amount Paid

Olympic Mines &

Development

Corp.

Filipino 6,663 PhP 6,663,000.00 PhP 0

MBMI Resources,

Inc.

Canadian 3,331 PhP 3,331,000.00 PhP 2,794,000.00

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B.

Esguerra

Filipino 1 PhP 1,000.00 PhP 1,000.00

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G.

Hernando
Filipino 1 PhP 1,000.00 PhP 1,000.00

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

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

Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00

(emphasis supplied)

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the
glaring similarity between SMMI and MMC’s corporate structure. Again, the presence of
identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar,
Hernando, Mason and Cawkell. The figures under the headings "Nationality," "Number of
Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the amount
paid by MBMI which now reflects the amount of two million seven hundred ninety four
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 2,809,900).

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in

SMMI’s corporate structure, it is clear that 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,
disqualifies it to participate in the exploitation, utilization and development of our natural
resources.

Narra Nickel Mining and Development Corporation

Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA
application, whose corporate structure’s arrangement is similar to that of the first two petitioners
discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which is divided into
ten thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share, shown as
follows:
[[reference =
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name

Nationality

Number of

Shares

Amount

Subscribed

Amount Paid

Patricia Louise

Mining &

Development

Corp.

Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00

MBMI

Resources, Inc.

Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00

Higinio C.

Mendoza, Jr.

Filipino 1 PhP 1,000.00 PhP 1,000.00

Henry E.

Fernandez

Filipino 1 PhP 1,000.00 PhP 1,000.00

Manuel A.

Agcaoili

Filipino 1 PhP 1,000.00 PhP 1,000.00

Ma. Elena A.

Bocalan

Filipino 1 PhP 1,000.00 PhP 1,000.00

Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00

Robert L.

McCurdy

American 1 PhP 1,000.00 PhP 1,000.00

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

Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00

(emphasis supplied)

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is
present in this corporate structure.

Patricia Louise Mining & Development Corporation

Using the grandfather method, we further look and examine PLMDC’s corporate structure:

Name Nationality

Number of Shares

Amount Subscribed Amount Paid

Palawan Alpha South Resources Development Corporation Filipino 6,596 PhP

6,596,000.00 PhP 0

MBMI Resources,

Inc.

Canadian 3,396 PhP 3,396,000.00 PhP 2,796,000.00

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

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

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

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

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

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

Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60

(emphasis supplied)

Yet again, the usual players in petitioners’ corporate structures are 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

The Philippine companies holding the Olympic Property, and the ownership and interests
therein, are as follows:

Olympic- Philippines (the "Olympic Group")

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

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an
effective equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders’
agreement, the Company exercises joint control over the companies in the Olympic Group.

(b) Alpha Group

The Philippine companies holding the Alpha Property, and the ownership interests therein, are as
follows:

Alpha- Philippines (the "Alpha Group")

Patricia Louise Mining Development Inc. ("Patricia") 34.0%

Narra Nickel Mining & Development Corporation (Narra) 60.4%

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 control over the companies in the Alpha Group.48 (emphasis supplied)

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."49 Thus, 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.50 On the other hand, 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.1âwphi1 In the case at bar, the
dispute arose or 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 Batangas55 elucidates:

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.56 Petitioners 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."57 Petitioners stress that there should no 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.1âwphi1 Thus, the question of
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.

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 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."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of
Appeals Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby
AFFIRMED.

SO ORDERED
EN BANC

WILSON P. GAMBOA,

Petitioner,

G.R. No. 176579

Present:

- versus -

FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY JOHN

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 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 EXCHANGE COMMISSION, and
PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE,
Respondents.

CORONA, C.J.,

CARPIO,

VELASCO, JR.,

LEONARDO-DE CASTRO,

BRION,

PERALTA,

BERSAMIN,

DEL CASTILLO,

ABAD,

VILLARAMA, JR.,
PEREZ,

MENDOZA, and

SERENO, JJ.
PABLITO V. SANIDAD and

ARNO V. SANIDAD,

Petitioners-in-Intervention.

Promulgated:
June 28, 2011

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

DECISION

CARPIO, J.:

The Case
This is an original petition for prohibition, injunction, 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 x x 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
xx

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.25 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 Memorandum37 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 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.45 In fact, under the Corporation
Code only preferred or redeemable shares can be deprived of the right to vote.46 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 laws reserving 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),54
which 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 SIP58 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 x corporations 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.
Republic of the Philippines

Supreme Court

Manila

THIRD DIVISION

DONNINA C. HALLEY,

Petitioner,
-versus-

PRINTWELL, INC.,

Respondent.

G.R. No. 157549

Present:

CARPIO MORALES, Chairperson,

BRION,
BERSAMIN,

VILLARAMA, JR., and

SERENO, JJ.

Promulgated:

May 30, 2011

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

DECISION
BERSAMIN, J:

Stockholders of a corporation are liable for the debts of the corporation up to the extent of their
unpaid subscriptions. They cannot invoke the veil of corporate identity as a shield from liability,
because the veil may be lifted to avoid defrauding corporate creditors.

Weaffirm with modification the decisionpromulgated on August 14, 2002,[1]whereby the Court
of Appeals(CA) upheld thedecision of the Regional Trial Court, Branch 71, in Pasig City
(RTC),[2]ordering the defendants (including the petitioner)to pay to Printwell, Inc. (Printwell)
the principal sum of P291,342.76 plus interest.

Antecedents

The petitioner wasan incorporator and original director of Business Media Philippines, Inc.
(BMPI), which, at its incorporation on November 12, 1987,[3]had an authorized capital stock of
P3,000,000.00 divided into 300,000 shares each with a par value of P10.00,of which 75,000 were
initially subscribed, to wit:

Subscriber

No. of shares

Total subscription

Amount paid

Donnina C. Halley

35,000

P 350,000.00

P87,500.00

Roberto V. Cabrera, Jr.

18,000
P 180,000.00

P45,000.00

Albert T. Yu

18,000

P 180,000.00

P45,000.00

Zenaida V. Yu

2,000

P 20,000.00

P5,000.00

Rizalino C. Vineza

2,000

P 20,000.00
P5,000.00

TOTAL

75,000

P750,000.00

P187,500.00

Printwellengaged in commercial and industrial printing.BMPI commissioned Printwell for the

printing of the magazine Philippines, Inc. (together with wrappers and subscription cards) that
BMPI published and sold. For that purpose, Printwell extended 30-day credit accommodations to
BMPI.

In the period from October 11, 1988 until July 12, 1989, BMPI placedwith Printwell several
orders on credit, evidenced byinvoices and delivery receipts totalingP316,342.76.Considering
that BMPI paidonlyP25,000.00,Printwell suedBMPIon January 26, 1990 for the collection of the
unpaid balance of P291,342.76 in the RTC.[4]
On February 8, 1990,Printwell amended thecomplaint in order to implead as defendants all the
original stockholders and incorporators to recover on theirunpaid subscriptions, as follows:[5]

Name

Unpaid Shares

Donnina C. Halley

P 262,500.00

Roberto V. Cabrera, Jr.

P135,000.00

Albert T. Yu

P135,000.00

Zenaida V. Yu
P15,000.00

Rizalino C. Vieza

P15,000.00

TOTAL

P 562,500.00

The defendants filed a consolidated answer,[6]averring that they all had paid their subscriptions
in full; that BMPI had a separate personality from those of its stockholders; thatRizalino C.
Vieza had assigned his fully-paid up sharesto a certain Gerardo R. Jacinto in 1989; andthat the
directors and stockholders of BMPI had resolved to dissolve BMPI during the annual
meetingheld on February 5, 1990.

To prove payment of their subscriptions, the defendantstockholderssubmitted in evidenceBMPI

official receipt (OR) no. 217, OR no. 218, OR no. 220,OR no. 221, OR no. 222, OR no. 223,
andOR no. 227,to wit:
Receipt No.

Date

Name

Amount

217

November 5, 1987

Albert T. Yu

P 45,000.00

218

May 13, 1988

Albert T. Yu

P 135,000.00

220
May 13, 1988

Roberto V. Cabrera, Jr.

P 135,000.00

221

November 5, 1987

Roberto V. Cabrera, Jr.

P 45,000.00

222

November 5, 1987

Zenaida V. Yu

P 5,000.00

223
May 13, 1988

Zenaida V. Yu

P 15,000.00

227

May 13, 1988

Donnina C. Halley

P 262,500.00

In addition, the stockholderssubmitted other documentsin evidence, namely:(a) an audit report

dated March 30, 1989 prepared by Ilagan, Cepillo & Associates (submitted to the SEC and the
BIR);[7](b) BMPIbalance sheet[8] and income statement[9]as of December 31, 1988; (c) BMPI
income tax return for the year 1988 (stamped received by the BIR);[10](d) journal
vouchers;[11](e) cash deposit slips;[12] and(f)Bank of the Philippine Islands (BPI) savings
account passbookin the name of BMPI.[13]
Ruling of the RTC

On November 3, 1993, the RTC rendereda decision in favor of Printwell, rejecting the allegation
of payment in full of the subscriptions in view of an irregularity in the issuance of the ORs and
observingthat the defendants had used BMPIs corporate personality to evade payment and create
injustice, viz:

The claim of individual defendants that they have fully paid their subscriptions to defend[a]nt
corporation, is not worthy of consideration, because:

a) in the case of defendants-spouses Albert and Zenaida Yu, it will be noted that the alleged
payment made on May 13, 1988 amounting to P135,000.00, is covered by Official Receipt No.
218 (Exh. 2), whereas the alleged payment made earlier on November 5, 1987, amounting to
P5,000.00, is covered by Official Receipt No. 222 (Exh. 3). This is cogent proof that said
receipts were belatedly issued just to suit their theory since in the ordinary course of business, a
receipt issued earlier must have serial numbers lower than those issued on a later date. But in the
case at bar, the receipt issued on November 5, 1987 has serial numbers (222) higher than those
issued on a later date (May 13, 1988).
b) The claim that since there was no call by the Board of Directors of defendant corporation
for the payment of unpaid subscriptions will not be a valid excuse to free individual defendants
from liability. Since the individual defendants are members of the Board of Directors of
defendantcorporation, it was within their exclusive power to prevent the fulfillment of the
condition, by simply not making a call for the payment of the unpaid subscriptions. Their
inaction should not work to their benefit and unjust enrichment at the expense of plaintiff.

Assuming arguendo that the individual defendants have paid their unpaid subscriptions, still, it is
very apparent that individual defendants merely used the corporate fiction as a cloak or cover to
create an injustice; hence, the alleged separate personality of defendant corporation should be
disregarded (Tan Boon Bee & Co., Inc. vs. Judge Jarencio, G.R. No. 41337, 30 June 1988).[14]

Applying the trust fund doctrine, the RTC declared the defendant stockholders liable to Printwell
pro rata, thusly:

Defendant Business Media, Inc. is a registered corporation (Exhibits A, A-1 to A-9), and, as
appearing from the Articles of Incorporation, individual defendants have the following unpaid
subscriptions:

Names Unpaid Subscription

Donnina C. Halley P262,500.00

Roberto V. Cabrera, Jr. 135.000.00

Albert T. Yu 135,000.00

Zenaida V. Yu 15,000.00

Rizalino V. Vineza 15,000.00

--------------------

Total P562,500.00

and it is an established doctrine that subscriptions to the capital stock of a corporation constitute
a fund to which creditors have a right to look for satisfaction of their claims (Philippine National
Bank vs. Bitulok Sawmill, Inc., 23 SCRA 1366) and, in fact, a corporation has no legal capacity
to release a subscriber to its capital stock from the obligation to pay for his shares, and any
agreement to this effect is invalid (Velasco vs. Poizat, 37 Phil. 802).

The liability of the individual stockholders in the instant case shall be pro-rated as follows:

Names Amount

Donnina C. Halley P149,955.65

Roberto V. Cabrera, Jr. 77,144.55

Albert T. Yu 77,144.55

Zenaida V. Yu 8,579.00

Rizalino V. Vineza 8,579.00

------------------

Total P321,342.75[15]

The RTC disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants,

ordering defendants to pay to plaintiff the amount of P291,342.76, as principal, with interest
thereon at 20% per annum, from date of default, until fully paid, plus P30,000.00 as attorneys
fees, plus costs of suit.
Defendants counterclaims are ordered dismissed for lack of merit.

SO ORDERED.[16]

Ruling of the CA

All the defendants, except BMPI, appealed.

Spouses Donnina and Simon Halley, andRizalinoVieza defined the following errors committed
by the RTC, as follows:

I.
THE TRIAL COURT ERRED IN HOLDING APPELLANTS-STOCKHOLDERS LIABLE
FOR THE LIABILITIES OF THE DEFENDANT CORPORATION.

II.

ASSUMING ARGUENDO THAT APPELLANTS MAY BE LIABLE TO THE EXTENT OF

THEIR UNPAID SUBSCRIPTION OF SHARES OF STOCK, IF ANY, THE TRIAL COURT
NONETHELESS ERRED IN NOT FINDING THAT APPELLANTS-STOCKHOLDERS
HAVE, AT THE TIME THE SUIT WAS FILED, NO SUCH UNPAID SUBSCRIPTIONS.

On their part, Spouses Albert and Zenaida Yu averred:

I.

THE RTC ERRED IN REFUSING TO GIVE CREDENCE AND WEIGHT TO

DEFENDANTS-APPELLANTS SPOUSES ALBERT AND ZENAIDA YUS EXHIBITS 2
AND 3 DESPITE THE UNREBUTTED TESTIMONY THEREON BY APPELLANT ALBERT
YU AND THE ABSENCE OF PROOF CONTROVERTING THEM.

II.
THE RTC ERRED IN HOLDING DEFENDANTS-APPELLANTS SPOUSES ALBERT AND
ZENAIDA YU PERSONALLY LIABLE FOR THE CONTRACTUAL OBLIGATION OF
BUSINESS MEDIA PHILS., INC. DESPITE FULL PAYMENT BY SAID DEFENDANTS-
APPELLANTS OF THEIR RESPECTIVE SUBSCRIPTIONS TO THE CAPITAL STOCK OF
BUSINESS MEDIA PHILS., INC.

Roberto V. Cabrera, Jr. argued:

I.

IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO APPLY THE

DOCTRINE OF PIERCING THE VEIL OF CORPORATE PERSONALITY IN ABSENCE OF
ANY SHOWING OF EXTRA-ORDINARY CIRCUMSTANCES THAT WOULD JUSTIFY
RESORT THERETO.

II.

IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO RULE THAT

INDIVIDUAL DEFENDANTS ARE LIABLE TO PAY THE PLAINTIFF-APPELLEES
CLAIM BASED ON THEIR RESPECTIVE SUBSCRIPTION. NOTWITHSTANDING
OVERWHELMING EVIDENCE SHOWING FULL SETTLEMENT OF SUBSCRIBED
CAPITAL BY THE INDIVIDUAL DEFENDANTS.
On August 14, 2002, the CA affirmed the RTC, holding that the defendants resort to the
corporate personality would createan injustice becausePrintwell would thereby be at a loss
against whom it would assert the right to collect, viz:

Settled is the rule that when the veil of corporate fiction is used as a means of perpetrating fraud
or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, the achievements or perfection of 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 (First Philippine International Bank vs. Court of Appeals, 252 SCRA
259). Moreover, under this doctrine, 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 obligations or to
justify wrong (Claparols vs. CIR, 65 SCRA 613).

In the case at bench, it is undisputed that BMPI made several orders on credit from appellee
PRINTWELL involving the printing of business magazines, wrappers and subscription cards, in
the total amount of P291,342.76 (Record pp. 3-5, Annex A) which facts were never denied by
appellants stockholders that they owe appellee the amount of P291,342.76. The said goods were
delivered to and received by BMPI but it failed to pay its overdue account to appellee as well as
the interest thereon, at the rate of 20% per annum until fully paid. It was also during this time
that appellants stockholders were in charge of the operation of BMPI despite the fact that they
were not able to pay their unpaid subscriptions to BMPI yet greatly benefited from said
transactions. In view of the unpaid subscriptions, BMPI failed to pay appellee of its liability,
hence appellee in order to protect its right can collect from the appellants stockholders regarding
their unpaid subscriptions. To deny appellee from recovering from appellants would place
appellee in a limbo on where to assert their right to collect from BMPI since the stockholders
who are appellants herein are availing the defense of corporate fiction to evade payment of its
obligations.[17]

Further, the CA concurred with the RTC on theapplicability of thetrust fund doctrine, under
which corporate debtors might look to the unpaid subscriptions for the satisfaction of unpaid
corporate debts, stating thus:

It is an established doctrine that subscription to the capital stock of a corporation constitute a

fund to which creditors have a right to look up to for satisfaction of their claims, and that the
assignee in insolvency can maintain an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts (PNB vs. Bitulok Sawmill, 23 SCRA 1366).

Premised on the above-doctrine, an inference could be made that the funds, which consists of the
payment of subscriptions of the stockholders, is where the creditors can claim monetary
considerations for the satisfaction of their claims. If these funds which ought to be fully
subscribed by the stockholders were not paid or remain an unpaid subscription of the corporation
then the creditors have no other recourse to collect from the corporation of its liability. Such
occurrence was evident in the case at bar wherein the appellants as stockholders failed to fully
pay their unpaid subscriptions, which left the creditors helpless in collecting their claim due to
insufficiency of funds of the corporation. Likewise, the claim of appellants that they already paid
the unpaid subscriptions could not be given weight because said payment did not reflect in the
Articles of Incorporations of BMPI that the unpaid subscriptions were fully paid by the
appellants stockholders. For it is a rule that a stockholder may be sued directly by creditors to the
extent of their unpaid subscriptions to the corporation (Keller vs. COB Marketing, 141 SCRA
86).

Moreover, a corporation has no power to release a subscription or its capital stock, without
valuable consideration for such releases, and as against creditors, a reduction of the capital stock
can take place only in the manner and under the conditions prescribed by the statute or the
charter or the Articles of Incorporation. (PNB vs. Bitulok Sawmill, 23 SCRA 1366).[18]

The CAdeclared thatthe inconsistency in the issuance of the ORs rendered the claim of full
payment of the subscriptions to the capital stock unworthy of consideration; andheld that the veil
of corporate fiction could be pierced when it was used as a shield to perpetrate a fraud or to
confuse legitimate issues, to wit:

Finally, appellants SPS YU, argued that the fact of full payment for the unpaid subscriptions was
incontrovertibly established by competent testimonial and documentary evidence, namely
Exhibits 1, 2, 3 & 4, which were never disputed by appellee, clearly shows that they should not
be held liable for payment of the said unpaid subscriptions of BMPI.

The reliance is misplaced.

We are hereby reproducing the contents of the above-mentioned exhibits, to wit:

Exh: 1 YU Official Receipt No. 217 dated November 5, 1987 amounting to P45,000.00 allegedly
representing the initial payment of subscriptions of stockholder Albert Yu.

Exh: 2 YU Official Receipt No. 218 dated May 13, 1988 amounting to P135,000.00 allegedly
representing full payment of balance of subscriptions of stockholder Albert Yu. (Record p. 352).

Exh: 3 YU Official Receipt No. 222 dated November 5, 1987 amounting to P5,000.00 allegedly
representing the initial payment of subscriptions of stockholder Zenaida Yu.

Exh: 4 YU Official Receipt No. 223 dated May 13, 1988 amounting to P15,000.00 allegedly
representing the full payment of balance of subscriptions of stockholder Zenaida Yu. (Record p.
353).

Based on the above exhibits, we are in accord with the lower courts findings that the claim of the
individual appellants that they fully paid their subscription to the defendant BMPI is not worthy
of consideration, because, in the case of appellants SPS. YU, there is an inconsistency regarding
the issuance of the official receipt since the alleged payment made on May 13, 1988 amounting
to P135,000.00 was covered by Official Receipt No. 218 (Record, p. 352), whereas the alleged
payment made earlier on November 5, 1987 amounting to P5,000.00 is covered by Official
Receipt No. 222 (Record, p. 353). Such issuance is a clear indication that said receipts were
belatedly issued just to suit their claim that they have fully paid the unpaid subscriptions since in
the ordinary course of business, a receipt is issued earlier must have serial numbers lower than
those issued on a later date. But in the case at bar, the receipt issued on November 5, 1987 had a
serial number (222) higher than those issued on May 13, 1988 (218). And even assuming
arguendo that the individual appellants have paid their unpaid subscriptions, still, it is very
apparent that the veil of corporate fiction may be pierced when made as a shield to perpetuate
fraud and/or confuse legitimate issues. (Jacinto vs. Court of Appeals, 198 SCRA 211).[19]

Spouses Halley and Vieza moved for a reconsideration, but the CA denied their motion for
reconsideration.

Issues

Only Donnina Halley has come to the Court to seek a further review, positing the following for
our consideration and resolution, to wit:
I.

THE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE DECISION THAT DID
NOTSTATE THE FACTS AND THE LAW UPON WHICH THE JUDGMENT WAS BASED
BUT MERELY COPIED THE CONTENTS OF RESPONDENTS MEMORANDUM
ADOPTING THE SAME AS THE REASON FOR THE DECISION

II.

THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE REGIONAL

TRIAL COURT WHICH ESSENTIALLY ALLOWED THE PIERCING OF THE VEIL OF
CORPORATE FICTION

III.

THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE TRUST FUND

DOCTRINE WHEN THE GROUNDS THEREFOR HAVE NOT BEEN SATISFIED.
On the first error, the petitioner contends that the RTC lifted verbatim from the memorandum of
Printwell; and submits that the RTCthereby violatedthe requirement imposed in Section 14,
Article VIII of the Constitution[20] as well as in Section 1,Rule 36 of the Rules of Court,[21]to
the effect that a judgment or final order of a court should state clearly and distinctly the facts and
the law on which it is based. The petitioner claims that the RTCs violation indicated that the
RTC did not analyze the case before rendering its decision, thus denying her the opportunity to
analyze the decision; andthat a suspicion of partiality arose from the fact that the RTC decision
was but a replica of Printwells memorandum.She cites Francisco v. Permskul,[22] in which the
Court has stated that the reason underlying the constitutional requirement, that every decision
should clearly and distinctly state the facts and the law on which it is based, is to inform the
reader of how the court has reached its decision and thereby give the losing party an opportunity
to study and analyze the decision and enable such party to appropriately assign the errors
committed therein on appeal.

On the second and third errors, the petitioner maintains that the CA and the RTC erroneously
pierced the veil of corporate fiction despite the absence of cogent proof showing that she, as
stockholder of BMPI, had any hand in transacting with Printwell; thatthe CA and the RTC failed
to appreciate the evidence that she had fully paid her subscriptions; and the CA and the
RTCwrongly relied on the articles of incorporation in determining the current list of unpaid
subscriptions despite the articles of incorporationbeing at best reflectiveonly of the pre-
incorporation status of BMPI.

As her submissions indicate, the petitioner assails the decisions of the CA on: (a) the propriety of
disregarding the separate personalities of BMPI and its stockholdersby piercing the thin veil that
separated them; and (b) the application of the trust fund doctrine.
Ruling

The petition for review fails.

The RTC did not violate

the Constitution and the Rules of Court

The contention of the petitioner, that the RTC merely copied the memorandum of Printwell in
writing its decision, and did not analyze the records on its own, thereby manifesting a bias in
favor of Printwell, is unfounded.
It is noted that the petition for review merely generally alleges that starting from its page 5, the
decision of the RTC copied verbatim the allegations of herein Respondents in its Memorandum
before the said court, as if the Memorandum was the draft of the Decision of the Regional Trial
Court of Pasig,[23]but fails to specify either the portions allegedly lifted verbatim from the
memorandum, or why she regards the decision as copied. The omission renders thepetition for
review insufficient to support her contention, considering that the mere similarityin language or
thought between Printwells memorandum and the trial courts decisiondid not necessarily justify
the conclusion that the RTC simply lifted verbatim or copied from thememorandum.

It is to be observed in this connection that a trial or appellate judge may occasionally viewa
partys memorandum or brief as worthy of due consideration either entirely or partly. When he
does so, the judgemay adopt and incorporatein his adjudicationthe memorandum or the parts of it
he deems suitable,and yet not be guilty of the accusation of lifting or copying from the
memorandum.[24] This isbecause ofthe avowed objective of the memorandum to contribute in
the proper illumination and correct determination of the controversy.Nor is there anything
untoward in the congruence of ideas and views about the legal issues between himself and the
party drafting the memorandum.The frequency of similarities in argumentation, phraseology,
expression, and citation of authorities between the decisions of the courts and the memoranda of
the parties, which may be great or small, can be fairly attributable tothe adherence by our courts
of law and the legal profession to widely knownor universally accepted precedents set in earlier
judicial actions with identical factual milieus or posing related judicial dilemmas.

We also do not agree with the petitioner that the RTCs manner of writing the
decisiondeprivedher ofthe opportunity to analyze its decisionas to be able to assign errors on
appeal. The contrary appears, considering that she was able to impute and assignerrors to the
RTCthat she extensively discussed in her appeal in the CA, indicating her thorough analysis
ofthe decision of the RTC.
Our own readingof the trial courts decision persuasively shows that the RTC did comply with the
requirements regarding the content and the manner of writing a decision prescribed in the
Constitution and the Rules of Court. The decision of the RTC contained clear and distinct
findings of facts, and stated the applicablelaw and jurisprudence, fully explaining why the
defendants were being held liable to the plaintiff. In short, the reader was at once informed of the
factual and legal reasons for the ultimate result.

II

Corporate personality not to be used to foster injustice

Printwell impleaded the petitioner and the other stockholders of BMPI for two reasons, namely:
(a) to reach the unpaid subscriptions because it appeared that such subscriptions were the
remaining visible assets of BMPI; and (b) to avoid multiplicity of suits.[25]

The petitionersubmits that she had no participation in the transaction between BMPI and
Printwell;that BMPI acted on its own; and that shehad no hand in persuading BMPI to renege on
its obligation to pay. Hence, she should not be personally liable.
We rule against the petitioners submission.

Although a corporation has a personality separate and distinct from those of its stockholders,
directors, or officers,[26]such separate and distinct personality is merely a fiction created by law
for the sake of convenience and to promote the ends of justice.[27]The corporate personality may
be disregarded, and the individuals composing the corporation will be treated as individuals, if
the corporate entity is being used as a cloak or cover for fraud or illegality;as a justification for a
wrong; as an alter ego, an adjunct, or a business conduit for the sole benefit of the
stockholders.[28] As a general rule, a corporation is looked upon as a legal entity, unless and
until sufficient reason to the contrary appears. Thus,the courts always presume good faith, andfor
that reason accord prime importance to the separate personality of the corporation, disregarding
the corporate personality only after the wrongdoing is first clearly and convincingly
established.[29]It thus behooves the courts to be careful in assessing the milieu where the
piercing of the corporate veil shall be done.[30]

Although nowhere in Printwells amended complaint or in the testimonies Printwell offered can it
be read or inferred from that the petitioner was instrumental in persuading BMPI to renege onits
obligation to pay; or that sheinduced Printwell to extend the credit accommodation by
misrepresenting the solvency of BMPI toPrintwell, her personal liability, together with that of
her co-defendants, remainedbecause the CA found her and the other defendant stockholders to be
in charge of the operations of BMPI at the time the unpaid obligation was transacted and
incurred, to wit:

In the case at bench, it is undisputed that BMPI made several orders on credit from appellee
PRINTWELL involving the printing of business magazines, wrappers and subscription cards, in
the total amount of P291,342.76 (Record pp. 3-5, Annex A) which facts were never denied by
appellants stockholders that they owe(d) appellee the amount of P291,342.76. The said goods
were delivered to and received by BMPI but it failed to pay its overdue account to appellee as
well as the interest thereon, at the rate of 20% per annum until fully paid. It was also during this
time that appellants stockholders were in charge of the operation of BMPI despite the fact that
they were not able to pay their unpaid subscriptions to BMPI yet greatly benefited from said
transactions. In view of the unpaid subscriptions, BMPI failed to pay appellee of its liability,
hence appellee in order to protect its right can collect from the appellants stockholders regarding
their unpaid subscriptions. To deny appellee from recovering from appellants would place
appellee in a limbo on where to assert their right to collect from BMPI since the stockholders
who are appellants herein are availing the defense of corporate fiction to evade payment of its
obligations.[31]

It follows, therefore, that whether or not the petitioner persuaded BMPI to renege on its
obligations to pay, and whether or not she induced Printwell to transact with BMPI were not
gooddefensesin the suit.

III

Unpaid creditor may satisfy its claim from

unpaid subscriptions;stockholders must

prove full payment oftheir subscriptions

Both the RTC and the CA applied the trust fund doctrineagainst the defendant stockholders,
including the petitioner.

The petitionerargues, however,that the trust fund doctrinewas inapplicablebecause she had
already fully paid her subscriptions to the capital stock of BMPI. She thus insiststhat both lower
courts erred in disregarding the evidence on the complete payment of the subscription, like
receipts, income tax returns, and relevant financial statements.

The petitioners argumentis devoid of substance.

The trust fund doctrineenunciates a

xxx rule that the property of a corporation is a trust fund for the payment of creditors, but such
property can be called a trust fund only by way of analogy or metaphor. As between the
corporation itself and its creditors it is a simple debtor, and as between its creditors and
stockholders its assets are in equity a fund for the payment of its debts.[32]
The trust fund doctrine, first enunciated in the American case of Wood v. Dummer,[33]was
adopted in our jurisdiction in Philippine Trust Co. v. Rivera,[34]where thisCourt declared that:

It is established doctrine that subscriptions to the capital of a corporation constitute a fund to

which creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets
for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802) xxx[35]

We clarify that the trust fund doctrineis not limited to reaching the stockholders unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only
the capital stock, but also other property and assets generally regarded in equity as a trust fund
for the payment of corporate debts.[36]All assets and property belonging to the corporation held
in trust for the benefit of creditors thatwere distributed or in the possession of the stockholders,
regardless of full paymentof their subscriptions, may be reached by the creditor in satisfaction of
its claim.

Also, under the trust fund doctrine,a corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation of paying for his shares, in whole or in
part,[37] without a valuable consideration,[38] or fraudulently, to the prejudice of
creditors.[39]The creditor is allowed to maintain an action upon any unpaid subscriptions and
thereby steps into the shoes of the corporation for the satisfaction of its debt.[40]To make out a
prima facie case in a suit against stockholders of an insolvent corporation to compel them to
contribute to the payment of its debts by making good unpaid balances upon their subscriptions,
it is only necessary to establish that thestockholders have not in good faith paid the par value of
the stocks of the corporation.[41]

The petitionerposits that the finding of irregularity attending the issuance of the receipts (ORs)
issued to the other stockholders/subscribers should not affect her becauseher receipt did not
suffer similar irregularity.

Notwithstanding that the RTC and the CA did not find any irregularity in the OR issued in her
favor,we still cannot sustain the petitioners defense of full payment of her subscription.

In civil cases, theparty who pleads payment has the burden of proving it, that even where the
plaintiff must allege nonpayment, the general rule is that the burden rests on the defendant to
prove payment, rather than on the plaintiff to prove nonpayment. In other words, the debtor
bears the burden of showing with legal certainty that the obligation has been discharged by
payment.[42]

Apparently, the petitioner failed to discharge her burden.

A receipt is the written acknowledgment of the fact of payment in money or other settlement
between the seller and the buyer of goods, thedebtor or thecreditor, or theperson rendering
services, and theclient or thecustomer.[43]Althougha receipt is the best evidence of the fact of
payment, it isnot conclusive, but merely presumptive;nor is it exclusive evidence,considering
thatparole evidence may also establishthe fact of payment.[44]

The petitioners ORNo. 227,presentedto prove the payment of the balance of her subscription,
indicated that her supposed payment had beenmade by means of a check. Thus, to discharge
theburden to prove payment of her subscription, she had to adduce evidence satisfactorily
proving that her payment by check wasregardedas payment under the law.

Paymentis defined as the delivery of money.[45]Yet, because a check is not money and only
substitutes for money, the delivery of a check does not operate as payment and does not
discharge the obligation under a judgment.[46] The delivery of a bill of exchange only produces
the fact of payment when the bill has been encashed.[47]The following passage fromBank of
Philippine Islands v. Royeca[48]is enlightening:

Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a
substitute for money and not money, the delivery of such an instrument does not, by itself,
operate as payment. Mere delivery of checks does not discharge the obligation under a judgment.
The obligation is not extinguished and remains suspended until the payment by commercial
document is actually realized.
To establish their defense, the respondents therefore had to present proof, not only that they
delivered the checks to the petitioner, but also that the checks were encashed. The respondents
failed to do so. Had the checks been actually encashed, the respondents could have easily
produced the cancelled checks as evidence to prove the same. Instead, they merely averred that
they believed in good faith that the checks were encashed because they were not notified of the
dishonor of the checks and three years had already lapsed since they issued the checks.

Because of this failure of the respondents to present sufficient proof of payment, it was no longer
necessary for the petitioner to prove non-payment, particularly proof that the checks were
dishonored. The burden of evidence is shifted only if the party upon whom it is lodged was able
to adduce preponderant evidence to prove its claim.

Ostensibly, therefore, the petitioners mere submission of the receipt issued in exchange of the
check did not satisfactorily establish her allegation of full payment of her subscription. Indeed,
she could not even inform the trial court about the identity of her drawee bank,[49]and about
whether the check was cleared and its amount paid to BMPI.[50]In fact, she did not present the
check itself.

Theincome tax return (ITR) and statement of assets and liabilities of BMPI, albeit presented, had
no bearing on the issue of payment of the subscription because they did not by themselves prove
payment. ITRsestablish ataxpayers liability for taxes or a taxpayers claim for refund. In the same
manner, the deposit slips and entries in the passbook issued in the name of BMPI were hardly
relevant due to their not reflecting the alleged payments.
It is notable, too, that the petitioner and her co-stockholders did not support their allegation of
complete payment of their respective subscriptions with the stock and transfer book of BMPI.
Indeed, books and records of a corporation (including the stock and transfer book) are admissible
in evidence in favor of or against the corporation and its members to prove the corporate acts, its
financial status and other matters (like the status of the stockholders), and are ordinarily the best
evidence of corporate acts and proceedings.[51]Specifically, a stock and transfer book is
necessary as a measure of precaution, expediency, and convenience because it provides the only
certain and accurate method of establishing the various corporate acts and transactions and of
showing the ownership of stock and like matters.[52]That she tendered no explanation why the
stock and transfer book was not presented warrants the inference that the book did not reflect the
actual payment of her subscription.

Nor did the petitioner present any certificate of stock issued by BMPI to her. Such a certificate
covering her subscription might have been a reliable evidence of full payment of the
subscriptions, considering that under Section 65 of the Corporation Code a certificate of stock
issues only to a subscriber who has fully paid his subscription. The lack of any explanation for
the absence of a stock certificate in her favor likewise warrants an unfavorable inference on the
issue of payment.

Lastly, the petitioner maintains that both lower courts erred in relying on the articles of
incorporationas proof of the liabilities of the stockholders subscribing to BMPIs stocks, averring
that the articles of incorporationdid not reflect the latest subscription status of BMPI.
Although the articles of incorporation may possibly reflect only the pre-incorporation status of a
corporation, the lower courts reliance on that document to determine whether the original
subscribersalready fully paid their subscriptions or not was neither unwarranted nor erroneous.
As earlier explained, the burden of establishing the fact of full payment belonged not to Printwell
even if it was the plaintiff, but to the stockholders like the petitioner who, as the defendants,
averredfull payment of their subscriptions as a defense. Their failure to substantiate their
averment of full payment, as well as their failure to counter the reliance on the recitals found in
the articles of incorporation simply meant their failure or inability to satisfactorily prove their
defense of full payment of the subscriptions.

To reiterate, the petitionerwas liablepursuant to the trust fund doctrine for the corporate
obligation of BMPI by virtue of her subscription being still unpaid. Printwell, as BMPIs
creditor,had a right to reachher unpaid subscription in satisfaction of its claim.

IV

Liability of stockholders for corporate debts isup

to the extentof their unpaid subscription

The RTC declared the stockholders pro rata liable for the debt(based on the proportion to their
shares in the capital stock of BMPI); and held the petitionerpersonally liable onlyin the amount
of P149,955.65.

We do not agree. The RTC lacked the legal and factual support for its prorating the liability.
Hence, we need to modify the extent of the petitioners personal liability to Printwell. The
prevailing rule is that a stockholder is personally liable for the financial obligations of the
corporation to the extent of his unpaid subscription.[53]In view ofthe petitioners unpaid
subscription being worth P262,500.00, shewas liable up to that amount.

Interest is also imposable on the unpaid obligation. Absent any stipulation, interest is fixed at
12% per annum from the date the amended complaint was filed on February 8, 1990 until the
obligation (i.e., to the extent of the petitioners personal liability of P262,500.00) is fully paid.[54]

Lastly, we find no basis togrant attorneys fees, the award for which must be supported by
findings of fact and of law as provided under Article 2208 of the Civil Code[55]incorporated in
the body of decision of the trial court. The absence of the requisite findings from the RTC
decision warrants the deletion of the attorneys fees.

ACCORDINGLY, we deny the petition for review on certiorari;and affirm with modification the
decision promulgated on August 14, 2002by ordering the petitionerto pay to Printwell, Inc. the
sum of P262,500.00, plus interest of 12% per annum to be computed from February 8, 1990 until
full payment.

The petitioner shall paycost of suit in this appeal.

SO ORDERED.
SECOND DIVISION

RYUICHI YAMAMOTO,

Petitioner,

- versus -
NISHINO LEATHER INDUSTRIES, INC. and IKUO NISHINO,

Respondents.

G.R. No. 150283

Present:

QUISUMBING,* J., Chairperson,

CARPIO MORALES,**

TINGA,

VELASCO, JR., and

BRION, JJ.
Promulgated:

April 16, 2008

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 29th, 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 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 may not thus be retrieved without the authority of the NLII Board of Directors;[15] and that
petitioners argument that Nishino and Yamamoto cannot hide behind the shield of corporate
fiction does not lie,[16] nor does petitioners invocation of the doctrine of promissory
estoppel.[17] At the same time, the Court of Appeals found no ground to support respondents
Counterclaim.[18]

The Court of Appeals having denied[19] his Motion for Reconsideration,[20] Yamamoto filed
the present petition,[21] faulting the Court of Appeals

A.
x x x IN HOLDING THAT THE VEIL OF CORPORATE FICTION SHOULD NOT BE
PIERCED IN THE CASE AT BAR.

B.

x x x IN HOLDING THAT THE DOCTRINE OF PROMISSORY ESTOPPEL DOES NOT

APPLY TO THE CASE AT BAR.

C.

x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE FOR ATTORNEYS

FEES.[22]
The resolution of the petition hinges, in the main, on whether the advice in the letter of Atty.
Doce that Yamamoto may retrieve the machineries and equipment, which admittedly were part
of his investment, bound the corporation. The Court holds in the negative.

Indeed, without a Board Resolution authorizing respondent Nishino to act for and in behalf of the
corporation, he cannot bind the latter. Under the Corporation Law, unless otherwise provided,
corporate powers are exercised by the Board of Directors.[23]

Urging this Court to pierce the veil of corporate fiction, Yamamoto argues, viz:

During the negotiations, the issue as to the ownership of the Machiner[ies] never came up.
Neither did the issue on the proper procedure to be taken to execute the complete take-over of
the Company come up since Ikuo, Yoshinobu, and Yamamoto were the owners thereof, the
presence of other stockholders being only for the purpose of complying with the minimum
requirements of the law.

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.

FIRST DIVISION

[G.R. No. 143312. August 12, 2005]

RICARDO S. SILVERIO, JR., ESSES DEVELOPMENT CORPORATION, and TRI-STAR

FARMS, INC., petitioners, vs. FILIPINO BUSINESS CONSULTANTS, INC., respondent.

DECISION

CARPIO, J.:

The Case

Before us is a petition for review of the Order of the Regional Trial Court, Fourth Judicial
Region, Branch XI, Balayan, Batangas (RTC Balayan) dated 26 May 2000.[1] The order
suspended the enforcement of the writ of possession that the RTC Balayan had previously issued
in favor of petitioners Ricardo S. Silverio, Jr. (Silverio, Jr.), Esses Development Corporation
(Esses) and Tri-Star Farms, Inc. (Tri-Star). Filipino Business Consultants, Inc. (FBCI), now
Filipino Vastland Company, Inc. sought to suspend the writ of possession on the ground of a
supervening event. FBCI claimed that it had just acquired all the stocks of Esses and Tri-Star. As
the new owner of Esses and Tri-Star, FBCI asserted its right of possession to the disputed
property. Petitioners Silverio, Jr., Esses and Tri-Star question the RTC Balayans suspension of
the writ of possession and its jurisdiction to hold hearings on the supervening event.

The Antecedent Facts

The parties are wrangling over possession of a 62 hectare-land in Calatagan, Batangas

(Calatagan Property). Silverio, Jr. is the President of Esses and Tri-Star. Esses and Tri-Star were
in possession of the Calatagan Property, covered by TCT No. T-55200 and registered in the
names of Esses and Tri-Star.
On 22 September 1995, Esses and Tri-Star executed a Deed of Sale with Assumption of
Mortgage in favor of FBCI. Esses and Tri-Star failed to redeem the Calatagan Property.

On 27 May 1997, FBCI filed a Petition for Consolidation of Title of the Calatagan Property with
the RTC Balayan.[2]

FBCI obtained a judgment by default. Subsequently, TCT No. T-55200 in the names of Esses
and Tri-Star was cancelled and TCT No. T-77656 was issued in FBCIs name. On 20 April 1998,
the RTC Balayan issued a writ of possession in FBCIs favor. FBCI then entered the Calatagan
Property.

When Silverio, Jr., Esses and Tri-Star learned of the judgment by default and writ of possession,
they filed a petition for relief from judgment and the recall of the writ of possession. Silverio, Jr.,
Esses and Tri-Star alleged that the judgment by default is void because the RTC Balayan did not
acquire jurisdiction over them. FBCI allegedly forged the service of summons on them.

On 28 December 1998, the RTC Balayan nullified and set aside the judgment by default and the
writ of possession. The RTC Balayan found that the summons and the complaint were not served
on Silverio, Jr., Esses and Tri-Star. The RTC Balayan directed the service of summons anew on
Silverio, Jr., Esses and Tri-Star.

The RTC Balayan denied FBCIs motion for reconsideration of the order. FBCI then filed a
petition for certiorari with the Court of Appeals questioning the RTC Balayans 28 December
1998 Order.[3] On 28 April 2000, the Court of Appeals denied FBCIs petition. The Court of
Appeals also denied FBCIs motion for reconsideration. On 13 August 2001, the Supreme Court
denied FBCIs petition.

On 14 April 1999, the RTC Balayan modified its 28 December 1998 Order by upholding FBCIs
possession of the Calatagan Property. The RTC Balayan ruled that FBCI could not be deprived
of possession of the Calatagan Property because FBCI made substantial improvements on it.
Possession could revert to Silverio, Jr., Esses and Tri-Star only if they reimburse FBCI. The RTC
Balayan gave Silverio, Jr., Esses and Tri-Star 15 days to file their responsive pleadings.

Silverio, Jr., Esses and Tri-Star moved for the partial reconsideration of the 14 April 1999 Order.
Silverio, Jr., Esses and Tri-Star argued that since the judgment by default was nullified, they
should be restored to their possession of the Calatagan Property. FBCI did not file any opposition
to the motion.

On 9 November 1999, the RTC Balayan reversed its 14 April 1999 Order by holding that
Silverio, Jr., Esses and Tri-Star had no duty to reimburse FBCI. The RTC Balayan pointed out
that FBCI offered no evidence to substantiate its claim for expenses. The 9 November 1999
Order also restored possession of the Calatagan Property to Silverio, Jr., Esses and Tri-Star
pursuant to Rule 39, Section 5 of the 1997 Rules of Civil Procedure. This provision provides for
restitution in case of reversal of an executed judgment. On 7 January 2000, the RTC Balayan
denied FBCIs motion for reconsideration.

On 8 May 2000, the RTC Balayan issued the writ of possession to Silverio, Jr., Esses and Tri-
Star.

On 12 May 2000, FBCI filed with the RTC Balayan a Manifestation and Motion to Recall Writ
of Possession on the ground that the decision of the Court of Appeals in CA-G.R. SP No. 56924
was not yet final and FBCIs motion for reconsideration was still pending. The RTC Balayan set
the hearing on 26 May 2000.

On 23 May 2000, FBCI filed with the RTC Balayan an Urgent Ex-Parte Motion to Suspend
Enforcement of Writ of Possession. FBCI pointed out that it is now the new owner of Esses and
Tri-Star having purchased the substantial and controlling shares of stocks[4] of the two
corporations.

On the 26 May 2000 hearing, FBCI reiterated its claim of a supervening event, its ownership of
Esses and Tri-Star. FBCI informed the RTC Balayan that a new board of directors for Esses and
Tri-Star had been convened following the resignation of the members of the board of directors.
The previous actions of the former board of directors have been abandoned and the services of
Atty. Vicente B. Chuidian, the counsel of petitioners Silverio, Jr., Esses and Tri-Star, have been
terminated.

On the same day, the RTC Balayan issued the order suspending the writ of possession it had
earlier issued to Silverio, Jr., Esses and Tri-Star. The RTC Balayan reasoned that it would violate
the law on forum shopping if it executed the writ while FBCIs motion for reconsideration of the
Court of Appeals decision and urgent motion to suspend the issuance of the writ of possession
remained pending with the Court of Appeals. The RTC Balayan noted that because of FBCIs
strong resistance, Silverio, Jr., Esses and Tri-Star have still to take possession of the Calatagan
Property. More than ten days had already passed from the time that the RTC Balayan had issued
the writ of possession. FBCI had barricaded the Calatagan Property, threatening bloodshed if
possession will be taken away from it. The RTC Balayan believed that if it would not restrain
Silverio, Jr., Esses and Tri-Star from taking possession of the Calatagan Property, a violent
confrontation between the parties might erupt as reported in the Tempo newspaper in its 26 May
2000 issue. Without issuing a restraining order, the RTC Balayan suspended the writ by
requesting the counsel of Silverio, Jr., Esses and Tri-Star to allow the court to study the
voluminous records of the case, which are to be presented at the hearing on 16 June 2000. The
hearing would determine the existence of a supervening event.

On 15 June 2000, the RTC Balayan issued an Order cancelling the 16 June 2000 hearing so that
the Court of Appeals could resolve the issue regarding the existence of a supervening event.
However, the RTC Balayan declared that the suspension of the writ of possession would be lifted
on 17 June 2000.

On 8 August 2000, Silverio, Jr., Esses and Tri-Star filed a complaint for annulment of contracts
with damages with the Regional Trial Court of Las Pias City, Branch 275 (RTC Las Pias).[5]

Issues

Silverio, Jr., Esses and Tri-Star argue that:

I
An ex parte motion cannot legally constitute an initiatory basis for the RTC Balayan to conduct
additional hearings in order to validate certain new allegations. Neither can said ex parte motion
be the basis for the suspension of a writ of possession being implemented.

II

When the RTC Balayan suspended the writ of possession, it was barred from hearing intra-
corporate disputes. And though Congress has now amended our law on the matter, the RTC still
cannot proceed because of due process and res judicata reasons.

III

A final and executory judgment cannot be enjoined except by an appropriate petition for relief, a
direct attack in another action or a collateral act in another action.

IV

Respondent FBCI is asking for a suspension of the writ of possession while at the same time
threatening violence if the writ of possession were to be implemented. The RTC Balayan had no
lawful basis to suspend the writ under these admitted circumstances.

Respondent has not directly answered petitioners legal theory. The petition is founded on
admitted facts upon which relief is sought under Rule 45. Respondent has altered these facts
presenting its so called counterstatements of facts and issues which involve questions of fact that
are still litis pendentia at the RTC Balayan. And which even involve an attempt to vary res
judicata.
VI

Contrary to respondents claims, that the RTC order of 15 June 2000 has rendered this case moot
and academic quite on the contrary said order calls upon the Supreme Court to decide whether or
not, the RTC Balayan may continue to conduct its hearings on suspending the writ of possession.

VII

Respondents theory that an order suspending a writ of possession is interlocutory in nature, and
therefore inappealable, is not supported by jurisprudence.

VIII

Respondents views on when suspending a writ of execution is appropriate would make the
exception as rule. And respondents reliance on Flores vs. CA, et al. is totally misplaced. In the
Flores case, the party being dispossessed was a judgment creditor, who was admitted by the
adverse party to be the owner.

IX

The question of jus possessionis on the Calatagan Property is already res judicata while the
question of jus possidendi is still under litis pendentia. For that reason, respondent has lost all his
legal options in retaining the property procured under a faked service of summons.

Respondents arguments in his 11-06-01 Memo on (a) forum shopping, (b) petitioners lack of
capacity to sue, (c) service of summons already served (d) no intra-corporate dispute and (e) the
relief herein preempted by events are ratiocinations of miniscule weight, meriting only the
slightest comment.[6]

FBCI raises the following issues:

1. Whether the present case has been rendered moot and academic by the Order of the RTC
Balayan dated 15 June 2000 and the filing of an action with the Regional Trial Court of Las Pias
City;

2. Whether the present appeal should be dismissed on the ground of forum shopping;

3. Whether the RTC Balayan had the authority to suspend enforcement of the writ of possession
and to conduct hearings on a new set of facts;

4. Whether the present case involves an intra-corporate controversy;

5. Whether appeal by certiorari under Rule 45 is the proper remedy under the given facts of the
case.[7]

The Ruling of the Court

The petition has merit.

Procedural Issues

Before resolving the threshold issue, which is the existence of a supervening event, we first
address the following procedural issues: (1) whether appeal is the proper remedy against an order
suspending the execution of a writ of possession; (2) whether the issue of possession was mooted
by the 15 June 2000 Order of the RTC Balayan; and (3) whether the filing of a civil case with the
RTC Las Pias constitutes forum shopping.

First, interlocutory orders are those that determine incidental matters that do not touch on the
merits of the case or put an end to the proceedings.[8] The proper remedy to question an
improvident interlocutory order is a petition for certiorari under Rule 65, not Rule 45.[9] A
petition for review under Rule 45 is the proper mode of redress to question final judgments.[10]

An order staying the execution of the writ of possession is an interlocutory order.[11] Clearly,
this order cannot be appealed. A petition for certiorari was therefore the correct remedy.
Moreover, Silverio, Jr., Esses and Tri-Star pointed out that the RTC Balayan acted on an ex-parte
motion to suspend the writ of possession, which is a litigious matter, without complying with the
rules on notice and hearing. Silverio, Jr., Esses and Tri-Star also assail the RTC Balayans
impending move to accept FBCIs evidence on its subsequent ownership of Esses and Tri-Star. In
effect, Silverio, Jr., Esses and Tri-Star accuse the RTC Balayan of acting without or in excess of
jurisdiction or with grave abuse of discretion, which is within the ambit of certiorari.

However, in the exercise of our judicial discretion, we will treat the appeal as a petition under
Rule 65.[12] Technical rules must be suspended whenever the purposes of justice warrant it,
such as in this case where substantial and important issues await resolution.

Second, the RTC Balayans 15 June 2000 Order lifting the suspension of the writ of possession
was issued to correct its action on FBCIs ex-parte motion, which did not have the required notice
and hearing. This issue has thus become a fait accompli. However, while the 15 June 2000 Order
is supposed to have mooted the suspension of the execution of the writ of possession by lifting
the suspension on 17 June 2000, Silverio, Jr., Esses and Tri-Star claim that the writ has not been
executed in their favor. Thus, the issues in this petition are far from being moot. Also, the
existence of a supervening event is another issue that must be resolved since the RTC Balayan
had instead submitted to the higher courts the resolution of this issue.

Third, Silverio, Jr., Esses and Tri-Star are not guilty of forum shopping for filing another action
against FBCI with the RTC Las Pias during the pendency of this case with the RTC Balayan.
Forum shopping consists of filing multiple suits involving the same parties for the same cause of
action, either simultaneously or successively, to obtain a favorable judgment.[13]
The parties and cause of action in the present case before the RTC Balayan and in the case before
the RTC Las Pias are different. The present case was filed by FBCI against Silverio, Jr., Esses
and Tri-Star for the consolidation of title over the Calatagan Property. On the other hand, the
case before the RTC Las Pias was filed by Silverio, Jr., Esses and Tri-Star against FBCI and
other defendants for the annulment of contract with damages, tort and culpa aquiliana (civil
fraud).

In its complaint before the RTC Las Pias, Silverio, Jr., Esses and Tri-Star informed the court that
there is a pending case with the RTC Balayan over the Calatagan Property.[14] Silverio, Jr.,
Esses and Tri-Star made it clear in the complaint that the case before the RTC Las Pias will focus
on the Makati Tuscany property and any reference to the Calatagan Property is meant to serve
only as proof or evidence of the plan, system, scheme, habit, etc., lurking behind defendants
interlocking acts constituting interlocking tort and interlocking fraud.[15] Clearly, FBCIs claim
of forum shopping against Silverio, Jr., Esses and Tri-Star has no basis.

No Supervening Event in this Case

FBCI took possession of the Calatagan Property after the RTC Balayan rendered a judgment by
default in FBCIs favor. The judgment by default was nullified after the RTC Balayan found out
that the service of summons on Silverio, Jr., Esses and Tri-Star was procured fraudulently. The
RTC Balayan thus recalled the writ of possession it had issued to FBCI. Silverio, Jr., Esses and
Tri-Star were served anew with summons. The RTC Balayan restored possession of the
Calatagan Property to Silverio, Jr., Esses and Tri-Star as restitution resulting from the annulment
of the judgment by default. The order restoring possession of the Calatagan Property to Silverio,
Jr., Esses and Tri-Star has attained finality. This case then proceeded to pre-trial.

FBCI has resisted the enforcement of the writ of possession by barricading the Calatagan
Property and threatening violence if its possession of the property is taken away from it. To
avoid bloodshed, as FBCI also claimed that Silverio, Jr. had armed civilians threatening to shoot
FBCIs representatives,[16] the RTC Balayan momentarily suspended the execution of the writ.
The RTC Balayan also had to rule on FBCIs claim of a supervening event that would allegedly
make the execution of the writ absurd,[17] as FBCI alleges it now owns the controlling interest
in Esses and Tri-Star. The RTC Balayan lifted the suspension of the writ but it cancelled the
hearings on the supervening event to give way to the Court of Appeals action on this issue. The
RTC Balayan decided to await the appellate courts resolution because it did not want to violate
the rule against forum shopping.

Silverio, Jr., Esses and Tri-Star argue that the RTC Balayan has no power to conduct hearings on
the supervening event because res judicata has set in on the issue. They also contend that the
supervening event is an intra-corporate controversy that is within the jurisdiction of the
Securities and Exchange Commission, not the trial court. Silverio, Jr., Esses and Tri-Star point
out that despite the lifting of the suspension RTC Balayan has still to execute the writ of
possession in their favor. On the other hand, FBCI maintains that its acquisition of Esses and Tri-
Star is a supervening event, which the RTC Balayan could hear and is sufficient ground to stay
the execution of the writ of possession.

We rule in favor of Silverio, Jr., Esses and Tri-Star.

The court may stay immediate execution of a judgment when supervening events, occurring
subsequent to the judgment, bring about a material change in the situation of the parties.[18] To
justify the stay of immediate execution, the supervening events must have a direct effect on the
matter already litigated and settled.[19] Or, the supervening events must create a substantial
change in the rights or relations of the parties which would render execution of a final judgment
unjust, impossible or inequitable making it imperative to stay immediate execution in the interest
of justice.[20]

In this case, there is no judgment on the merits, only a judgment on a technicality. Even then, the
judgment of default rendered in FBCIs favor was voided because the RTC Balayan did not
acquire jurisdiction over Silverio, Jr., Esses and Tri-Star due to a fraudulent service of summons.
The case for consolidation of title, from which this petition stemmed, is in fact still being
litigated before the RTC Balayan.

The issuance of the writ of possession in favor of Silverio, Jr., Esses and Tri-Star is also not a
judgment on the merits.[21] A writ of possession is an order whereby the sheriff is commanded
to place a person in possession of real or personal property. [22] The issuance of the writ of
possession to Silverio, Jr., Esses and Tri-Star is but an order of restitution a consequence of the
nullification of the judgment by default. The order of restitution placed the parties in the situation
prior to the RTC Balayans rendition of the void judgment by default. Title to the Calatagan
Property is still in the names of Esses and Tri-Star. Possession of the Calatagan Property must
revert to Esses and Tri-Star as legal owners of the property.

However, with the reinstitution of the case for consolidation of title with the RTC Balayan,
possession of the Calatagan Property is now subject to the outcome of the case. Nonetheless,
while this case is still under litigation it is only in the pre-trial stage Esses and Tri-Star in whose
names the Calatagan Property is titled and in whose favor the order of restitution was issued, are
the ones entitled to possession of the property.

We do not agree with Silverio, Jr., Esses and Tri-Stars assertion that the RTC Balayan has no
power to conduct a hearing on the existence of a supervening event because of res judicata. Res
judicata does not set in where the court is without jurisdiction over the subject or person, and
therefore, the judgment is a nullity[23] such as the judgment by default in this case. The order
that voided the judgment by default and the order of restitution merely recognized the nullity of
the judgment by default. The orders did not adjudicate on the merits of the case. Since res
judicata had not set in, the case was tried anew upon the proper service of summons on Silverio,
Jr., Esses and Tri-Star.

Moreover, it is the court issuing the writ of possession that has control and supervision over its
processes.[24] The RTC Balayan can therefore hear the evidence on the existence of a
supervening event, provided the subject matter is within the jurisdiction of the court, as this
could affect the execution of the writ of possession.

We are, therefore, dismayed with the RTC Balayans referral of the existence of the supervening
event to the higher courts. Courts must not shirk from their duty to rule on an issue. The duty of
the appellate or higher courts is to review the findings and rulings of the lower courts, not to
issue advisories. Courts must execute its processes and should not succumb to threats by any of
the parties to resort to violence in case of such enforcement. Had the RTC Balayan immediately
passed upon FBCIs allegation of a supervening event, it would have been apparent that this claim
is without merit. The RTC Balayan should have then enforced posthaste the writ of possession in
Silverio, Jr., Esses and Tri-Stars favor.

FBCIs acquisition of the substantial and controlling shares of stocks[25] of Esses and Tri-Star
does not create a substantial change in the rights or relations of the parties that would entitle
FBCI to possession of the Calatagan Property, a corporate property of Esses and Tri-Star. Esses
and Tri-Star, just like FBCI, are corporations. A corporation has a personality distinct from that
of its stockholders. As early as the case of Stockholders of F. Guanzon and Sons, Inc. v. Register
of Deeds of Manila,[26] the Court explained the principle of separate juridical personality in this
wise:

A corporation is a juridical person distinct from the members composing it. Properties registered
in the name of the corporation are owned by it as an entity separate and distinct from its
members. While shares of stock constitute personal property, they do not represent property of
the corporation. The corporation has property of its own which consists chiefly of real estate
(Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A
share of stock only typifies an aliquot part of the corporation's property, or the right to share in
its proceeds to that extent when distributed according to law and equity (Hall & Faley v.
Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is not the owner of any part of the
capital of the corporation (Bradley v. Bauder, 36 Ohio St., 28). Nor is he entitled to the
possession of any definite portion of its property or assets (Gottfried v. Miller, 104 U.S., 521;
Jones v. Davis, 35 Ohio St., 474). The stockholder is not a co-owner or tenant in common of the
corporate property (Harton v. Hohnston, 166 Ala., 317, 51 So., 992). Thus, FBCIs alleged
controlling shareholdings in Esses and Tri-Star merely represent a proportionate or aliquot
interest in the properties of the two corporations. Such controlling shareholdings do not vest
FBCI with any legal right or title to any of Esses and Tri-Stars corporate properties. As a
stockholder, FBCI has an interest in Esses and Tri-Stars corporate properties that is only
equitable or beneficial in nature. Even assuming that FBCI is the controlling shareholder of
Esses and Tri-Star, it does not legally make it the owner of the Calatagan Property, which is
legally owned by Esses and Tri-Star as distinct juridical persons. As such, FBCI is not entitled to
the possession of any definite portion of the Calatagan Property or any of Esses and Tri-Stars
properties or assets. FBCI is not a co-owner or tenant in common of the Calatagan Property or
any of Esses and Tri-Stars corporate properties. We see no reason why the execution of the writ
of possession has been long delayed. Possession of the Calatagan Property must be restored to
Esses and Tri-Star through their representative, Silverio, Jr. There is no proof on record that
Silverio, Jr. has ceased to be the representative of Esses and Tri-Star in this case.

WHEREFORE, we GRANT the petition. The Regional Trial Court, Branch XI, Balayan,
Batangas is ordered to immediately execute the writ of possession in Civil Case No. 3356 in
favor of Esses Development Corporation and Tri-Star Farms, Inc. through their representative,
Ricardo S. Silverio, Jr. No costs.

SO ORDERED.
Republic of the Philippines

SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 194062 June 17, 2013

REPUBLIC GAS CORPORATION, ARNEL U. TY, MARI ANTONETTE N. TY, ORLANDO

REYES, FERRER SUAZO and ALVIN U. TV, Petitioners,

vs.

PETRON CORPORATION, PILIPINAS SHELL PETROLEUM CORPORATION, and SHELL

INTERNATIONAL PETROLEUM COMPANY LIMITED, Respondents.

DECISION

PERALTA, J.:

This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court filed by
petitioners seeking the reversal of the Decision1 dated July 2, 2010, and Resolution2 dated
October 11, 2010 of the Court of Appeals (CA) in CA-G.R. SP No. 106385.

Stripped of non-essentials, the facts of the case, as summarized by the CA, are as follows:

Petitioners Petron Corporation ("Petron" for brevity) and Pilipinas Shell Petroleum Corporation
("Shell" for brevity) are two of the largest bulk suppliers and producers of LPG in the
Philippines. Petron is the registered owner in the Philippines of the trademarks GASUL and
GASUL cylinders used for its LGP products. It is the sole entity in the Philippines authorized to
allow refillers and distributors to refill, use, sell, and distribute GASUL LPG containers,
products and its trademarks.

Pilipinas Shell, on the other hand, is the authorized user in the Philippines of the tradename,
trademarks, symbols or designs of its principal, Shell International Petroleum Company Limited,
including the marks SHELLANE and SHELL device in connection with the production, sale and
distribution of SHELLANE LPGs. It is the only corporation in the Philippines authorized to
allow refillers and distributors to refill, use, sell and distribute SHELLANE LGP containers and
products. Private respondents, on the other hand, are the directors and officers of Republic Gas
Corporation ("REGASCO" for brevity), an entity duly licensed to engage in, conduct and carry
on, the business of refilling, buying, selling, distributing and marketing at wholesale and retail of
Liquefied Petroleum Gas ("LPG").

LPG Dealers Associations, such as the Shellane Dealers Association, Inc., Petron Gasul Dealers
Association, Inc. and Totalgaz Dealers Association, received reports that certain entities were
engaged in the unauthorized refilling, sale and distribution of LPG cylinders bearing the
registered tradenames and trademarks of the petitioners. As a consequence, on February 5, 2004,
Genesis Adarlo (hereinafter referred to as Adarlo), on behalf of the aforementioned dealers
associations, filed a letter-complaint in the National Bureau of Investigation ("NBI") regarding
the alleged illegal trading of petroleum products and/or underdelivery or underfilling in the sale
of LPG products.

Acting on the said letter-complaint, NBI Senior Agent Marvin E. De Jemil (hereinafter referred
to as "De Jemil") was assigned to verify and confirm the allegations contained in the letter-
complaint. An investigation was thereafter conducted, particularly within the areas of Caloocan,
Malabon, Novaliches and Valenzuela, which showed that several persons and/or establishments,
including REGASCO, were suspected of having violated provisions of Batas Pambansa Blg. 33
(B.P. 33). The surveillance revealed that REGASCO LPG Refilling Plant in Malabon was
engaged in the refilling and sale of LPG cylinders bearing the registered marks of the petitioners
without authority from the latter. Based on its General Information Sheet filed in the Securities
and Exchange Commission, REGASCO’s members of its Board of Directors are: (1) Arnel U.
Ty – President, (2) Marie Antoinette Ty – Treasurer, (3) Orlando Reyes – Corporate Secretary,
(4) Ferrer Suazo and (5) Alvin Ty (hereinafter referred to collectively as private respondents).
De Jemil, with other NBI operatives, then conducted a test-buy operation on February 19, 2004
with the former and a confidential asset going undercover. They brought with them four (4)
empty LPG cylinders bearing the trademarks of SHELLANE and GASUL and included the same
with the purchase of J&S, a REGASCO’s regular customer. Inside REGASCO’s refilling plant,
they witnessed that REGASCO’s employees carried the empty LPG cylinders to a refilling
station and refilled the LPG empty cylinders. Money was then given as payment for the refilling
of the J&S’s empty cylinders which included the four LPG cylinders brought in by De Jemil and
his companion. Cash Invoice No. 191391 dated February 19, 2004 was issued as evidence for the
consideration paid.

After leaving the premises of REGASCO LPG Refilling Plant in Malabon, De Jemil and the
other NBI operatives proceeded to the NBI headquarters for the proper marking of the LPG
cylinders. The LPG cylinders refilled by REGASCO were likewise found later to be
underrefilled.

Thus, on March 5, 2004, De Jemil applied for the issuance of search warrants in the Regional
Trial Court, Branch 24, in the City of Manila against the private respondents and/or occupants of
REGASCO LPG Refilling Plant located at Asucena Street, Longos, Malabon, Metro Manila for
alleged violation of Section 2 (c), in relation to Section 4, of B.P. 33, as amended by PD 1865. In
his sworn affidavit attached to the applications for search warrants, Agent De Jemil alleged as
follows:

"x x x.

"4. Respondent’s REGASCO LPG Refilling Plant-Malabon is not one of those entities
authorized to refill LPG cylinders bearing the marks of PSPC, Petron and Total Philippines
Corporation. A Certification dated February 6, 2004 confirming such fact, together with its
supporting documents, are attached as Annex "E" hereof.

6. For several days in the month of February 2004, the other NBI operatives and I conducted
surveillance and investigation on respondents’ REGASCO LPG refilling Plant-Malabon. Our
surveillance and investigation revealed that respondents’ REGASCO LPG Refilling Plant-
Malabon is engaged in the refilling and sale of LPG cylinders bearing the marks of Shell
International, PSPC and Petron.
x x x.

8. The confidential asset and I, together with the other operatives of the NBI, put together a test-
buy operation. On February 19, 2004, I, together with the confidential asset, went undercover
and executed our testbuy operation. Both the confidential assets and I brought with us four (4)
empty LPG cylinders branded as Shellane and Gasul. x x x in order to have a successful test buy,
we decided to "ride-on" our purchases with the purchase of Gasul and Shellane LPG by J & S,
one of REGASCO’s regular customers.

9. We proceeded to the location of respondents’ REGASCO LPG Refilling Plant-Malabon and

asked from an employee of REGASCO inside the refilling plant for refill of the empty LPG
cylinders that we have brought along, together with the LPG cylinders brought by J & S. The
REGASCO employee, with some assistance from other employees, carried the empty LPG
cylinders to a refilling station and we witnessed the actual refilling of our empty LPG cylinders.

10. Since the REGASCO employees were under the impression that we were together with J &
S, they made the necessary refilling of our empty LPG cylinders alongside the LPG cylinders
brought by J & S. When we requested for a receipt, the REGASCO employees naturally counted
our LPG cylinders together with the LPG cylinders brought by J & S for refilling. Hence, the
amount stated in Cash Invoice No. 191391 dated February 19, 2004, equivalent to Sixteen
Thousand Two Hundred Eighty-Six and 40/100 (Php16,286.40), necessarily included the amount
for the refilling of our four (4) empty LPG cylinders. x x x.

11. After we accomplished the purchase of the illegally refilled LPG cylinders from respondents’
REGASCO LPG Refilling Plant-Malabon, we left its premises bringing with us the said LPG
cylinders. Immediately, we proceeded to our headquarters and made the proper markings of the
illegally refilled LPG cylinders purchased from respondents’ REGASCO LPG Refilling Plant-
Malabon by indicating therein where and when they were purchased. Since REGASCO is not an
authorized refiller, the four (4) LPG cylinders illegally refilled by respondents’ REGASCO LPG
Refilling Plant-Malabon, were without any seals, and when weighed, were underrefilled.
Photographs of the LPG cylinders illegally refilled from respondents’ REGASCO LPG Refilling
Plant-Malabon are attached as Annex "G" hereof. x x x."
After conducting a personal examination under oath of Agent De Jemil and his witness, Joel
Cruz, and upon reviewing their sworn affidavits and other attached documents, Judge Antonio
M. Eugenio, Presiding Judge of the RTC, Branch 24, in the City of Manila found probable cause
and correspondingly issued Search Warrants Nos. 04-5049 and 04-5050.

Upon the issuance of the said search warrants, Special Investigator Edgardo C. Kawada and
other NBI operatives immediately proceeded to the REGASCO LPG Refilling Station in
Malabon and served the search warrants on the private respondents. After searching the premises
of REGASCO, they were able to seize several empty and filled Shellane and Gasul cylinders as
well as other allied paraphernalia.

Subsequently, on January 28, 2005, the NBI lodged a complaint in the Department of Justice
against the private respondents for alleged violations of Sections 155 and 168 of Republic Act
(RA) No. 8293, otherwise known as the Intellectual Property Code of the Philippines.

On January 15, 2006, Assistant City Prosecutor Armando C. Velasco recommended the
dismissal of the complaint. The prosecutor found that there was no proof introduced by the
petitioners that would show that private respondent REGASCO was engaged in selling
petitioner’s products or that it imitated and reproduced the registered trademarks of the
petitioners. He further held that he saw no deception on the part of REGASCO in the conduct of
its business of refilling and marketing LPG. The Resolution issued by Assistant City Prosecutor
Velasco reads as follows in its dispositive portion:

"WHEREFORE, foregoing considered, the undersigned finds the evidence against the
respondents to be insufficient to form a well-founded belief that they have probably committed
violations of Republic Act No. 9293. The DISMISSAL of this case is hereby respectfully
recommended for insufficiency of evidence."

On appeal, the Secretary of the Department of Justice affirmed the prosecutor’s dismissal of the
complaint in a Resolution dated September 18, 2008, reasoning therein that:

"x x x, the empty Shellane and Gasul LPG cylinders were brought by the NBI agent specifically
for refilling. Refilling the same empty cylinders is by no means an offense in itself – it being the
legitimate business of Regasco to engage in the refilling and marketing of liquefied petroleum
gas. In other words, the empty cylinders were merely filled by the employees of Regasco
because they were brought precisely for that purpose. They did not pass off the goods as those of
complainants’ as no other act was done other than to refill them in the normal course of its
business.

"In some instances, the empty cylinders were merely swapped by customers for those which are
already filled. In this case, the end-users know fully well that the contents of their cylinders are
not those produced by complainants. And the reason is quite simple – it is an independent
refilling station.

"At any rate, it is settled doctrine that a corporation has a personality separate and distinct from
its stockholders as in the case of herein respondents. To sustain the present allegations, the acts
complained of must be shown to have been committed by respondents in their individual
capacity by clear and convincing evidence. There being none, the complaint must necessarily
fail. As it were, some of the respondents are even gainfully employed in other business pursuits.
x x x."3

Dispensing with the filing of a motion for reconsideration, respondents sought recourse to the
CA through a petition for certiorari.

In a Decision dated July 2, 2010, the CA granted respondents’ certiorari petition. The fallo states:

WHEREFORE, in view of the foregoing premises, the petition filed in this case is hereby
GRANTED. The assailed Resolution dated September 18, 2008 of the Department of Justice in
I.S. No. 2005-055 is hereby REVERSED and SET ASIDE.

SO ORDERED.4

Petitioners then filed a motion for reconsideration. However, the same was denied by the CA in a
Resolution dated October 11, 2010.
Accordingly, petitioners filed the instant Petition for Review on Certiorari raising the following
issues for our resolution:

Whether the Petition for Certiorari filed by RESPONDENTS should have been denied outright.

Whether sufficient evidence was presented to prove that the crimes of Trademark Infringement
and Unfair Competition as defined and penalized in Section 155 and Section 168 in relation to
Section 170 of Republic Act No. 8293 (The Intellectual Property Code of the Philippines) had
been committed.

Whether probable cause exists to hold INDIVIDUAL PETITIONERS liable for the offense
charged.5

Let us discuss the issues in seriatim.

Anent the first issue, the general rule is that a motion for reconsideration is a condition sine qua
non before a certiorari petition may lie, its purpose being to grant an opportunity for the court a
quo to correct any error attributed to it by re-examination of the legal and factual circumstances
of the case.6

However, this rule is not absolute as jurisprudence has laid down several recognized exceptions
permitting a resort to the special civil action for certiorari without first filing a motion for
reconsideration, viz.:

(a) Where the order is a patent nullity, as where the court a quo has no jurisdiction;

(b) Where the questions raised in the certiorari proceedings have been duly raised and passed
upon by the lower court, or are the same as those raised and passed upon in the lower court.
(c) Where there is an urgent necessity for the resolution of the question and any further delay
would prejudice the interests of the Government or of the petitioner or the subject matter of the
petition is perishable;

(d) Where, under the circumstances, a motion for reconsideration would be useless;

(e) Where petitioner was deprived of due process and there is extreme urgency for relief;

(f) Where, in a criminal case, relief from an order of arrest is urgent and the granting of such
relief by the trial court is improbable;

(g) Where the proceedings in the lower court are a nullity for lack of due process;

(h) Where the proceeding was ex parte or in which the petitioner had no opportunity to object;
and,

(i) Where the issue raised is one purely of law or public interest is involved.7

In the present case, the filing of a motion for reconsideration may already be dispensed with
considering that the questions raised in this petition are the same as those that have already been
squarely argued and passed upon by the Secretary of Justice in her assailed resolution.

Apropos the second and third issues, the same may be simplified to one core issue: whether
probable cause exists to hold petitioners liable for the crimes of trademark infringement and
unfair competition as defined and penalized under Sections 155 and 168, in relation to Section
170 of Republic Act (R.A.) No. 8293.
Section 155 of R.A. No. 8293 identifies the acts constituting trademark infringement as follows:

Section 155. Remedies; Infringement. – Any person who shall, without the consent of the owner
of the registered mark:

155.1 Use in commerce any reproduction, counterfeit, copy or colorable imitation of a registered
mark of the same container or a dominant feature thereof in connection with the sale, offering for
sale, distribution, advertising of any goods or services including other preparatory steps
necessary to carry out the sale of any goods or services on or in connection with which such use
is likely to cause confusion, or to cause mistake, or to deceive; or

155.2 Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature
thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs,
prints, packages, wrappers, receptacles or advertisements intended to be used in commerce upon
or in connection with the sale, offering for sale, distribution, or advertising of goods or services
on or in connection with which such use is likely to cause confusion, or to cause mistake, or to
deceive, shall be liable in a civil action for infringement by the registrant for the remedies
hereinafter set forth: Provided, That the infringement takes place at the moment any of the acts
stated in Subsection 155.1 or this subsection are committed regardless of whether there is actual
sale of goods or services using the infringing material.8

From the foregoing provision, the Court in a very similar case, made it categorically clear that
the mere unauthorized use of a container bearing a registered trademark in connection with the
sale, distribution or advertising of goods or services which is likely to cause confusion, mistake
or deception among the buyers or consumers can be considered as trademark infringement.9

Here, petitioners have actually committed trademark infringement when they refilled, without
the respondents’ consent, the LPG containers bearing the registered marks of the respondents. As
noted by respondents, petitioners’ acts will inevitably confuse the consuming public, since they
have no way of knowing that the gas contained in the LPG tanks bearing respondents’ marks is
in reality not the latter’s LPG product after the same had been illegally refilled. The public will
then be led to believe that petitioners are authorized refillers and distributors of respondents’
LPG products, considering that they are accepting empty containers of respondents and refilling
them for resale.
As to the charge of unfair competition, Section 168.3, in relation to Section 170, of R.A. No.
8293 describes the acts constituting unfair competition as follows:

Section 168. Unfair Competition, Rights, Regulations and Remedies. x x x.

168.3 In particular, and without in any way limiting the scope of protection against unfair
competition, the following shall be deemed guilty of unfair competition:

(a) Any person, who is selling his goods and gives them the general appearance of goods of
another manufacturer or dealer, either as to the goods themselves or in the wrapping of the
packages in which they are contained, or the devices or words thereon, or in any other feature of
their appearance, which would be likely to influence purchasers to believe that the goods offered
are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or who
otherwise clothes the goods with such appearance as shall deceive the public and defraud another
of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor
engaged in selling such goods with a like purpose;

xxxx

Section 170. Penalties. Independent of the civil and administrative sanctions imposed by law, a
criminal penalty of imprisonment from two (2) years to five (5) years and a fine ranging from
Fifty thousand pesos (₱50,000) to Two hundred thousand pesos (₱200,000), shall be imposed on
any person who is found guilty of committing any of the acts mentioned in Section 155, Section
168 and Subsection 169.1.

From jurisprudence, unfair competition has been defined as the passing off (or palming off) or
attempting to pass off upon the public of the goods or business of one person as the goods or
business of another with the end and probable effect of deceiving the public.10
Passing off (or palming off) takes place where the defendant, by imitative devices on the general
appearance of the goods, misleads prospective purchasers into buying his merchandise under the
impression that they are buying that of his competitors. Thus, the defendant gives his goods the
general appearance of the goods of his competitor with the intention of deceiving the public that
the goods are those of his competitor.11

In the present case, respondents pertinently observed that by refilling and selling LPG cylinders
bearing their registered marks, petitioners are selling goods by giving them the general
appearance of goods of another manufacturer. What's more, the CA correctly pointed out that
there is a showing that the consumers may be misled into believing that the LPGs contained in
the cylinders bearing the marks "GASUL" and "SHELLANE" are those goods or products of the
petitioners when, in fact, they are not. Obviously, the mere use of those LPG cylinders bearing
the trademarks "GASUL" and "SHELLANE" will give the LPGs sold by REGASCO the general
appearance of the products of the petitioners. In sum, this Court finds that there is sufficient
evidence to warrant the prosecution of petitioners for trademark infringement and unfair
competition, considering that petitioner Republic Gas Corporation, being a corporation,
possesses a personality separate and distinct from the person of its officers, directors and
stockholders.12 Petitioners, being corporate officers and/or directors, through whose act, default
or omission the corporation commits a crime, may themselves be individually held answerable
for the crime.13 Veritably, the CA appropriately pointed out that petitioners, being in direct
control and supervision in the management and conduct of the affairs of the corporation, must
have known or are aware that the corporation is engaged in the act of refilling LPG cylinders
bearing the marks of the respondents without authority or consent from the latter which, under
the circumstances, could probably constitute the crimes of trademark infringement and unfair
competition. The existence of the corporate entity does not shield from prosecution the corporate
agent who knowingly and intentionally caused the corporation to commit a crime. Thus,
petitioners cannot hide behind the cloak of the separate corporate personality of the corporation
to escape criminal liability. A corporate officer cannot protect himself behind a corporation
where he is the actual, present and efficient actor.14

WHEREFORE, premises considered, the petition is hereby DENIED and the Decision dated July
2, 2010 and Resolution dated October 11, 2010 of the Court of Appeals in CA-G.R. SP No.
106385 are AFFIRMED.

SO ORDERED.
SECOND DIVISION

MANUEL C. ESPIRITU, JR., AUDIE G.R. No. 170891

LLONA, FREIDA F. ESPIRITU,

CARLO F. ESPIRITU, RAFAEL F.

ESPIRITU, ROLANDO M. MIRABUNA,

HERMILYN A. MIRABUNA, KIM

ROLAND A. MIRABUNA, KAYE

ANN A. MIRABUNA, KEN RYAN A.

MIRABUNA, JUANITO P. DE

CASTRO, GERONIMA A. ALMONITE

and MANUEL C. DEE, who are the

officers and directors of BICOL GAS

REFILLING PLANT CORPORATION,

Petitioners, Present:

Carpio, J., Chairperson,

- versus - Leonardo-De Castro,

Brion,

Del Castillo, and

Abad, JJ.

PETRON CORPORATION and

CARMEN J. DOLOIRAS, doing

business under the name KRISTINA Promulgated:

PATRICIA ENTERPRISES,
Respondents. November 24, 2009

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

DECISION

ABAD, J.:

This case is about the offense or offenses that arise from the reloading of the liquefied petroleum
gas cylinder container of one brand with the liquefied petroleum gas of another brand.

The Facts and the Case

Respondent Petron Corporation (Petron) sold and distributed liquefied petroleum gas (LPG) in
cylinder tanks that carried its trademark Gasul.[1] Respondent Carmen J. Doloiras owned and
operated Kristina Patricia Enterprises (KPE), the exclusive distributor of Gasul LPGs in the
whole of Sorsogon.[2] Jose Nelson Doloiras (Jose) served as KPEs manager.

Bicol Gas Refilling Plant Corporation (Bicol Gas) was also in the business of selling and
distributing LPGs in Sorsogon but theirs carried the trademark Bicol Savers Gas. Petitioner
Audie Llona managed Bicol Gas.

In the course of trade and competition, any given distributor of LPGs at times acquired
possession of LPG cylinder tanks belonging to other distributors operating in the same area.
They called these captured cylinders. According to Jose, KPEs manager, in April 2001 Bicol Gas
agreed with KPE for the swapping of captured cylinders since one distributor could not refill
captured cylinders with its own brand of LPG. At one time, in the course of implementing this
arrangement, KPEs Jose visited the Bicol Gas refilling plant. While there, he noticed several
Gasul tanks in Bicol Gas possession. He requested a swap but Audie Llona of Bicol Gas replied
that he first needed to ask the permission of the Bicol Gas owners. That permission was given
and they had a swap involving around 30 Gasul tanks held by Bicol Gas in exchange for assorted
tanks held by KPE.

KPEs Jose noticed, however, that Bicol Gas still had a number of Gasul tanks in its yard. He
offered to make a swap for these but Llona declined, saying the Bicol Gas owners wanted to send
those tanks to Batangas. Later Bicol Gas told Jose that it had no more Gasul tanks left in its
possession. Jose observed on almost a daily basis, however, that Bicol Gas trucks which plied the
streets of the province carried a load of Gasul tanks. He noted that KPEs volume of sales
dropped significantly from June to July 2001.

On August 4, 2001 KPEs Jose saw a particular Bicol Gas truck on the Maharlika Highway.
While the truck carried mostly Bicol Savers LPG tanks, it had on it one unsealed 50-kg Gasul
tank and one 50-kg Shellane tank. Jose followed the truck and when it stopped at a store, he
asked the driver, Jun Leorena, and the Bicol Gas sales representative, Jerome Misal, about the
Gasul tank in their truck. They said it was empty but, when Jose turned open its valve, he noted
that it was not. Misal and Leorena then admitted that the Gasul and Shellane tanks on their truck
belonged to a customer who had them filled up by Bicol Gas. Misal then mentioned that his
manager was a certain Rolly Mirabena.

Because of the above incident, KPE filed a complaint[3] for violations of Republic Act (R.A.)
623 (illegally filling up registered cylinder tanks), as amended, and Sections 155 (infringement
of trade marks) and 169.1 (unfair competition) of the Intellectual Property Code (R.A. 8293).
The complaint charged the following: Jerome Misal, Jun Leorena, Rolly Mirabena, Audie Llona,
and several John and Jane Does, described as the directors, officers, and stockholders of Bicol
Gas. These directors, officers, and stockholders were eventually identified during the preliminary
investigation.

Subsequently, the provincial prosecutor ruled that there was probable cause only for violation of
R.A. 623 (unlawfully filling up registered tanks) and that only the four Bicol Gas employees,
Mirabena, Misal, Leorena, and petitioner Llona, could be charged. The charge against the other
petitioners who were the stockholders and directors of the company was dismissed.
Dissatisfied, Petron and KPE filed a petition for review with the Office of the Regional State
Prosecutor, Region V, which initially denied the petition but partially granted it on motion for
reconsideration. The Office of the Regional State Prosecutor ordered the filing of additional
informations against the four employees of Bicol Gas for unfair competition. It ruled, however,
that no case for trademark infringement was present. The Secretary of Justice denied the appeal
of Petron and KPE and their motion for reconsideration.

Undaunted, Petron and KPE filed a special civil action for certiorari with the Court of Appeals[4]
but the Bicol Gas employees and stockholders concerned opposed it, assailing the inadequacy in
its certificate of non-forum shopping, given that only Atty. Joel Angelo C. Cruz signed it on
behalf of Petron. In its Decision[5] dated October 17, 2005, the Court of Appeals ruled, however,
that Atty. Cruzs certification constituted sufficient compliance. As to the substantive aspect of
the case, the Court of Appeals reversed the Secretary of Justices ruling. It held that unfair
competition does not necessarily absorb trademark infringement. Consequently, the court
ordered the filing of additional charges of trademark infringement against the concerned Bicol
Gas employees as well.

Since the Bicol Gas employees presumably acted under the direct order and control of its
owners, the Court of Appeals also ordered the inclusion of the stockholders of Bicol Gas in the
various charges, bringing to 16 the number of persons to be charged, now including petitioners
Manuel C. Espiritu, Jr., Freida F. Espiritu, Carlo F. Espiritu, Rafael F. Espiritu, Rolando M.
Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna, Kaye Ann A. Mirabuna, Ken Ryan
A. Mirabuna, Juanito P. de Castro, Geronima A. Almonite, and Manuel C. Dee (together with
Audie Llona), collectively, petitioners Espiritu, et al. The court denied the motion for
reconsideration of these employees and stockholders in its Resolution dated January 6, 2006,
hence, the present petition for review[6] before this Court.
The Issues Presented

The petition presents the following issues:

1. Whether or not the certificate of non-forum shopping that accompanied the petition filed with
the Court of Appeals, signed only by Atty. Cruz on behalf of Petron, complied with what the
rules require;

2. Whether or not the facts of the case warranted the filing of charges against the Bicol Gas
people for:

a) Filling up the LPG tanks registered to another manufacturer without the latters consent in
violation of R.A. 623, as amended;
b) Trademark infringement consisting in Bicol Gas use of a trademark that is confusingly similar
to Petrons registered Gasul trademark in violation of section 155 also of R.A. 8293; and

c) Unfair competition consisting in passing off Bicol Gas-produced LPGs for Petron-produced
Gasul LPG in violation of Section 168.3 of R.A. 8293.

The Courts Rulings

First. Petitioners Espiritu, et al. point out that the certificate of non-forum shopping that
respondents KPE and Petron attached to the petition they filed with the Court of Appeals was
inadequate, having been signed only by Petron, through Atty. Cruz.

But, while procedural requirements such as that of submittal of a certificate of non-forum

shopping cannot be totally disregarded, they may be deemed substantially complied with under
justifiable circumstances.[7] One of these circumstances is where the petitioners filed a
collective action in which they share a common interest in its subject matter or raise a common
cause of action. In such a case, the certification by one of the petitioners may be deemed
sufficient.[8]
Here, KPE and Petron shared a common cause of action against petitioners Espiritu, et al.,
namely, the violation of their proprietary rights with respect to the use of Gasul tanks and
trademark. Furthermore, Atty. Cruz said in his certification that he was executing it for and on
behalf of the Corporation, and co-petitioner Carmen J. Doloiras.[9] Thus, the object of the
requirement to ensure that a party takes no recourse to multiple forums was substantially
achieved. Besides, the failure of KPE to sign the certificate of non-forum shopping does not
render the petition defective with respect to Petron which signed it through Atty. Cruz.[10] The
Court of Appeals, therefore, acted correctly in giving due course to the petition before it.

Second. The Court of Appeals held that under the facts of the case, there is probable cause that
petitioners Espiritu, et al. committed all three crimes: (a) illegally filling up an LPG tank
registered to Petron without the latters consent in violation of R.A. 623, as amended; (b)
trademark infringement which consists in Bicol Gas use of a trademark that is confusingly
similar to Petrons registered Gasul trademark in violation of Section 155 of R.A. 8293; and (c)
unfair competition which consists in petitioners Espiritu, et al. passing off Bicol Gas-produced
LPGs for Petron-produced Gasul LPG in violation of Section 168.3 of R.A. 8293.

Here, the complaint adduced at the preliminary investigation shows that the one 50-kg Petron
Gasul LPG tank found on the Bicol Gas truck belonged to [a Bicol Gas] customer who had the
same filled up by BICOL GAS.[11] In other words, the customer had that one Gasul LPG tank
brought to Bicol Gas for refilling and the latter obliged.

R.A. 623, as amended,[12] punishes any person who, without the written consent of the
manufacturer or seller of gases contained in duly registered steel cylinders or tanks, fills the steel
cylinder or tank, for the purpose of sale, disposal or trafficking, other than the purpose for which
the manufacturer or seller registered the same. This was what happened in this case, assuming
the allegations of KPEs manager to be true. Bicol Gas employees filled up with their firms gas
the tank registered to Petron and bearing its mark without the latters written authority.
Consequently, they may be prosecuted for that offense.

But, as for the crime of trademark infringement, Section 155 of R.A. 8293 (in relation to Section
170[13]) provides that it is committed by any person who shall, without the consent of the owner
of the registered mark:

1. Use in commerce any reproduction, counterfeit, copy or colorable imitation of a registered

mark or the same container or a dominant feature thereof in connection with the sale, offering for
sale, distribution, advertising of any goods or services including other preparatory steps
necessary to carry out the sale of any goods or services on or in connection with which such use
is likely to cause confusion, or to cause mistake, or to deceive; or

2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature

thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs,
prints, packages, wrappers, receptacles or advertisements intended to be used in commerce upon
or in connection with the sale, offering for sale, distribution, or advertising of goods or services
on or in connection with which such use is likely to cause confusion, or to cause mistake, or to
deceive.
KPE and Petron have to show that the alleged infringer, the responsible officers and staff of
Bicol Gas, used Petrons Gasul trademark or a confusingly similar trademark on Bicol Gas tanks
with intent to deceive the public and defraud its competitor as to what it is selling.[14] Examples
of this would be the acts of an underground shoe manufacturer in Malabon producing Nike
branded rubber shoes or the acts of a local shirt company with no connection to La Coste,
producing and selling shirts that bear the stitched logos of an open-jawed alligator.

Here, however, the allegations in the complaint do not show that Bicol Gas painted on its own
tanks Petrons Gasul trademark or a confusingly similar version of the same to deceive its
customers and cheat Petron. Indeed, in this case, the one tank bearing the mark of Petron Gasul
found in a truck full of Bicol Gas tanks was a genuine Petron Gasul tank, more of a captured
cylinder belonging to competition. No proof has been shown that Bicol Gas has gone into the
business of distributing imitation Petron Gasul LPGs.

As to the charge of unfair competition, Section 168.3 (a) of R.A. 8293 (also in relation to Section
170) describes the acts constituting the offense as follows:

168.3. In particular, and without in any way limiting the scope of protection against unfair
competition, the following shall be deemed guilty of unfair competition:

(a) Any person, who is selling his goods and gives them the general appearance of goods of
another manufacturer or dealer, either as to the goods themselves or in the wrapping of the
packages in which they are contained, or the devices or words thereon, or in any other feature of
their appearance, which would be likely to influence purchasers to believe that the goods offered
are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or who
otherwise clothes the goods with such appearance as shall deceive the public and defraud another
of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor
engaged in selling such goods with a like purpose;

Essentially, what the law punishes is the act of giving ones goods the general appearance of the
goods of another, which would likely mislead the buyer into believing that such goods belong to
the latter. Examples of this would be the act of manufacturing or selling shirts bearing the logo of
an alligator, similar in design to the open-jawed alligator in La Coste shirts, except that the jaw
of the alligator in the former is closed, or the act of a producer or seller of tea bags with red tags
showing the shadow of a black dog when his competitor is producing or selling popular tea bags
with red tags showing the shadow of a black cat.

Here, there is no showing that Bicol Gas has been giving its LPG tanks the general appearance of
the tanks of Petrons Gasul. As already stated, the truckfull of Bicol Gas tanks that the KPE
manager arrested on a road in Sorsogon just happened to have mixed up with them one authentic
Gasul tank that belonged to Petron.

The only point left is the question of the liability of the stockholders and members of the board
of directors of Bicol Gas with respect to the charge of unlawfully filling up a steel cylinder or
tank that belonged to Petron. The Court of Appeals ruled that they should be charged along with
the Bicol Gas employees who were pointed to as directly involved in overt acts constituting the
offense.
Bicol Gas is a corporation. As such, it is an entity separate and distinct from the persons of its
officers, directors, and stockholders. It has been held, however, that corporate officers or
employees, through whose act, default or omission the corporation commits a crime, may
themselves be individually held answerable for the crime.[15]

Jose claimed in his affidavit that, when he negotiated the swapping of captured cylinders with
Bicol Gas, its manager, petitioner Audie Llona, claimed that he would be consulting with the
owners of Bicol Gas about it. Subsequently, Bicol Gas declined the offer to swap cylinders for
the reason that the owners wanted to send their captured cylinders to Batangas. The Court of
Appeals seized on this as evidence that the employees of Bicol Gas acted under the direct orders
of its owners and that the owners of Bicol Gas have full control of the operations of the
business.[16]

The owners of a corporate organization are its stockholders and they are to be distinguished from
its directors and officers. The petitioners here, with the exception of Audie Llona, are being
charged in their capacities as stockholders of Bicol Gas. But the Court of Appeals forgets that in
a corporation, the management of its business is generally vested in its board of directors, not its
stockholders.[17] Stockholders are basically investors in a corporation. They do not have a hand
in running the day-to-day business operations of the corporation unless they are at the same time
directors or officers of the corporation. Before a stockholder may be held criminally liable for
acts committed by the corporation, therefore, it must be shown that he had knowledge of the
criminal act committed in the name of the corporation and that he took part in the same or gave
his consent to its commission, whether by action or inaction.
The finding of the Court of Appeals that the employees could not have committed the crimes
without the consent, [abetment], permission, or participation of the owners of Bicol Gas[18] is a
sweeping speculation especially since, as demonstrated above, what was involved was just one
Petron Gasul tank found in a truck filled with Bicol Gas tanks. Although the KPE manager heard
petitioner Llona say that he was going to consult the owners of Bicol Gas regarding the offer to
swap additional captured cylinders, no indication was given as to which Bicol Gas stockholders
Llona consulted. It would be unfair to charge all the stockholders involved, some of whom were
proved to be minors.[19] No evidence was presented establishing the names of the stockholders
who were charged with running the operations of Bicol Gas. The complaint even failed to allege
who among the stockholders sat in the board of directors of the company or served as its officers.

The Court of Appeals of course specifically mentioned petitioner stockholder Manuel C.

Espiritu, Jr. as the registered owner of the truck that the KPE manager brought to the police for
investigation because that truck carried a tank of Petron Gasul. But the act that R.A. 623
punishes is the unlawful filling up of registered tanks of another. It does not punish the act of
transporting such tanks. And the complaint did not allege that the truck owner connived with
those responsible for filling up that Gasul tank with Bicol Gas LPG.

WHEREFORE, the Court REVERSES and SETS ASIDE the Decision of the Court of Appeals
in CA-G.R. SP 87711 dated October 17, 2005 as well as its Resolution dated January 6, 2006,
the Resolutions of the Secretary of Justice dated March 11, 2004 and August 31, 2004, and the
Order of the Office of the Regional State Prosecutor, Region V, dated February 19, 2003. The
Court REINSTATES the Resolution of the Office of the Provincial Prosecutor of Sorsogon in
I.S. 2001-9231 (inadvertently referred in the Resolution itself as I.S. 2001-9234), dated February
26, 2002. The names of petitioners Manuel C. Espiritu, Jr., Freida F. Espititu, Carlo F. Espiritu,
Rafael F. Espiritu, Rolando M. Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna,
Kaye Ann A. Mirabuna, Ken Ryan A. Mirabuna, Juanito P. De Castro, Geronima A. Almonite
and Manuel C. Dee are ORDERED excluded from the charge.

SO ORDERED.
Republic of the Philippines

Supreme Court

Manila

FIRST DIVISION

GOLD LINE TOURS, INC.,

Petitioner,

-versus-
HEIRS OF MARIA CONCEPCION LACSA,

Respondents.

G.R. No. 159108

Present:

LEONARDO-DE CASTRO,

Acting Chairperson,

BERSAMIN,
DEL CASTILLO,

VILLARAMA, JR., and

PERLAS-BERNABE, JJ.

Promulgated:

June 18, 2012

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

DECISION

BERSAMIN, J.:
The veil of corporate existence of a corporation is a fiction of law that should not defeat the ends
of justice.

Petitioner seeks to reverse the decision promulgated on October 30, 2002[1] and the resolution
promulgated on June 25, 2003,[2] whereby the Court of Appeals (CA) upheld the orders issued
on August 2, 2001[3] and October 22, 2001[4] by the Regional Trial Court (RTC), Branch 51, in
Sorsogon in Civil Case No. 93-5917 entitled Heirs of Concepcion Lacsa, represented by Teodoro
Lacsa v. Travel & Tours Advisers, Inc., et al. authorizing the implementation of the writ of
execution against petitioner despite its protestation of being a separate and different corporate
personality from Travel & Tours Advisers, Inc. (defendant in Civil Case No. 93-5917).

In the orders assailed in the CA, the RTC declared petitioner and Travel & Tours Advisers, Inc.
to be one and the same entity, and ruled that the levy of petitioners property to satisfy the final
and executory decision rendered on June 30, 1997 against Travel & Tours Advisers, Inc. in Civil
Case No. 93-5917[5] was valid even if petitioner had not been impleaded as a party.

Antecedents
On August 2, 1993, Ma. Concepcion Lacsa (Concepcion) and her sister, Miriam Lacsa (Miriam),
boarded a Goldline passenger bus with Plate No. NXM-105 owned and operated by Travel
&Tours Advisers, Inc. They were enroute from Sorsogon to Cubao, Quezon City.[6] At the time,
Concepcion, having just obtained her degree of Bachelor of Science in Nursing at the Ago
Medical and Educational Center, was proceeding to Manila to take the nursing licensure board
examination.[7] Upon reaching the highway at Barangay San Agustin in Pili, Camarines Sur, the
Goldline bus, driven by Rene Abania (Abania), collided with a passenger jeepney with Plate No.
EAV-313 coming from the opposite direction and driven by Alejandro Belbis.[8] As a result, a
metal part of the jeepney was detached and struck Concepcion in the chest, causing her instant
death.[9]

On August 23, 1993, Concepcions heirs, represented by Teodoro Lacsa, instituted in the RTC a
suit against Travel & Tours Advisers Inc. and Abania to recover damages arising from breach of
contract of carriage.[10] The complaint, docketed as Civil Case No. 93-5917 and entitled Heirs
of Concepcion Lacsa, represented by Teodoro Lacsa v. Travel & Tours Advisers, Inc. (Goldline)
and Rene Abania, alleged that the collision was due to the reckless and imprudent manner by
which Abania had driven the Goldline bus.[11]

In support of the complaint, Miriam testified that Abania had been occasionally looking up at the
video monitor installed in the front portion of the Goldline bus despite driving his bus at a fast
speed;[12] that in Barangay San Agustin, the Goldline bus had collided with a service jeepney
coming from the opposite direction while in the process of overtaking another bus;[13] that the
impact had caused the angle bar of the jeepney to detach and to go through the windshield of the
bus directly into the chest of Concepcion who had then been seated behind the drivers seat;[14]
that concerned bystanders had hailed another bus to rush Concepcion to the Ago Foundation
Hospital in Naga City because the Goldline bus employees and her co-passengers had ignored
Miriams cries for help;[15] and that Concepcion was pronounced dead upon arrival at the
hospital.[16]
To refute the plaintiffs allegations, the defendants presented SPO1 Pedro Corporal of the
Philippine National Police Station in Pili, Camarines Sur, and William Cheng, the operator of the
Goldline bus.[17] SPO1 Corporal opined that based on his investigation report, the driver of the
jeepney had been at fault for failing to observe precautionary measures to avoid the collision;[18]
and suggested that criminal and civil charges should be brought against the operator and driver
of the jeepney.[19] On his part, Cheng attested that he had exercised the required diligence in the
selection and supervision of his employees; and that he had been engaged in the transportation
business since 1980 with the use of a total of 60 units of Goldline buses, employing about 100
employees (including drivers, conductors, maintenance personnel, and mechanics);[20] that as a
condition for regular employment, applicant drivers had undergone a one-month training period
and a six-month probationary period during which they had gotten acquainted with Goldlines
driving practices and demeanor;[21] that the employees had come under constant supervision,
rendering improbable the claim that Abania, who was a regular employee, had been glancing at
the video monitor while driving the bus;[22] that the incident causing Concepcions death was the
first serious incident his (Cheng) transportation business had encountered, because the rest had
been only minor traffic accidents;[23] and that immediately upon being informed of the accident,
he had instructed his personnel to contact the family of Concepcion.[24]

The defendants blamed the death of Concepcion to the recklessness of Bilbes as the driver of the
jeepney, and of its operator, Salvador Romano;[25] and that they had consequently brought a
third-party complaint against the latter.[26]

After trial, the RTC rendered its decision dated June 30, 1997, disposing:
ACCORDINGLY, judgment is hereby rendered:

(1) Finding the plaintiffs entitled to damages for the death of Ma. Concepcion Lacsa in violation
of the contract of carriage;

(2) Ordering defendant Travel & Tours Advisers, Inc. (Goldline) to pay plaintiffs:

a. P30,000.00 expenses for the wake;

b. P 6,000.00 funeral expenses;

c. P50,000.00 for the death of Ma. Concepcion Lacsa;

d. P150,000.00 for moral damages;

e. P20,000.00 for exemplary damages;

f. P8,000.00 for attorneys fees;

g. P2,000.00 for litigation expenses;

h. Costs of suit.

(3) Ordering the dismissal of the case against Rene Abania;

(4) Ordering the dismissal of the third-party complaint.

SO ORDERED.[27]

The RTC found that a contract of carriage had been forged between Travel & Tours Advisers,
Inc. and Concepcion as soon as she had boarded the Goldline bus as a paying passenger; that
Travel & Tours Advisers, Inc. had then become duty-bound to safely transport her as its
passenger to her destination; that due to Travel & Tours Advisers, Inc.s inability to perform its
duty, Article 1786 of the Civil Code created against it the disputable presumption that it had been
at fault or had been negligent in the performance of its obligations towards the passenger; that
Travel & Tours Advisers, Inc. failed to disprove the presumption of negligence; and that a rigid
selection of employees was not sufficient to exempt Travel & Tours Advisers, Inc. from the
obligation of exercising extraordinary diligence to ensure that its passenger was carried safely to
her destination.

Aggrieved, the defendants appealed to the CA.

On June 11, 1998,[28] the CA dismissed the appeal for failure of the defendants to pay the
docket and other lawful fees within the required period as provided in Rule 41, Section 4 of the
Rules of Court (1997). The dismissal became final, and entry of judgment was made on July 17,
1998.[29]
Thereafter, the plaintiffs moved for the issuance of a writ of execution to implement the decision
dated June 30, 1997.[30] The RTC granted their motion on January 31, 2000,[31] and issued the
writ of execution on February 24, 2000.[32]

On May 10, 2000, the sheriff implementing the writ of execution rendered a Sheriffs Partial
Return,[33] certifying that the writ of execution had been personally served and a copy of it had
been duly tendered to Travel & Tours Advisers, Inc. or William Cheng, through his secretary,
Grace Miranda, and that Cheng had failed to settle the judgment amount despite promising to do
so. Accordingly, a tourist bus bearing Plate No. NWW-883 was levied pursuant to the writ of
execution.

The plaintiffs moved to cite Cheng in contempt of court for failure to obey a lawful writ of the
RTC.[34] Cheng filed his opposition.[35] Acting on the motion to cite Cheng in contempt of
court, the RTC directed the plaintiffs to file a verified petition for indirect contempt on February
19, 2001.[36]

On April 20, 2001, petitioner submitted a so-called verified third party claim,[37] claiming that
the tourist bus bearing Plate No. NWW-883 be returned to petitioner because it was the owner;
that petitioner had not been made a party to Civil Case No. 93-5917; and that petitioner was a
corporation entirely different from Travel & Tours Advisers, Inc., the defendant in Civil Case
No. 93-5917.
It is notable that petitioners Articles of Incorporation was amended on November 8, 1993,[38]
shortly after the filing of Civil Case No. 93-5917 against Travel & Tours Advisers, Inc.

Respondents opposed petitioners verified third-party claim on the following grounds, namely: (a)
the third-party claim did not comply with the required notice of hearing as required by Rule 15,
Sections 4 and 5 of the Rules of Court; (b) Travel & Tours Advisers, Inc. and petitioner were
identical entities and were both operated and managed by the same person, William Cheng; and
(c) petitioner was attempting to defraud its creditors respondents herein hence, the doctrine of
piercing the veil of corporate entity was squarely applicable.[39]

On August 2, 2001, the RTC dismissed petitioners verified third-party claim, observing that the
identity of Travel & Tours Adivsers, Inc. could not be divorced from that of petitioner
considering that Cheng had claimed to be the operator as well as the
President/Manager/incorporator of both entities; and that Travel & Tours Advisers, Inc. had been
known in Sorsogon as Goldline.[40]

Petitioner moved for reconsideration,[41] but the RTC denied the motion on October 22,
2001.[42]

Thence, petitioner initiated a special civil action for certiorari in the CA,[43] asserting:
THE RESPONDENT HONORABLE RTC JUDGE HAD ACTED WITHOUT JURISDICTION
OR COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF
JURISDICTION IN ISSUING THE: (A) ORDER DATED 2 AUGUST 2001, COPY OF
WHICH IS HERETO ATTACHED AS ANNEX A, DISMISSING HEREIN PETITIONERS
THIRD PARTY CLAIM; AND (B) ORDER DATED 22 OCTOBER 2001, COPY OF WHICH
IS HERETO ATTACHED AS ANNEX B DENYING SAID PETITIONERS MOTION FOR
RECONSIDERATION; AND THAT THERE IS NO APPEAL, OR ANY PLAIN, SPEEDY
AND ADEQUATE REMEDY AVAILABLE TO SAID PETITIONER.

On October 30, 2002, the CA promulgated its decision dismissing the petition for certiorari,[44]
holding as follows:

The petition lacks merit.

As stated in the decision supra, William Ching disclosed during the trial of the case that
defendant Travel & Tours Advisers, Inc. (Goldline), of which he is an officer, is operating sixty
(60) units of Goldline buses. That the Goldline buses are used in the operations of defendant
company is obvious from Mr. Chengs admission. The Amended Articles of Incorporation of
Gold Line Tours, Inc. disclose that the following persons are the original incorporators thereof:
Antonio O. Ching, Maribel Lim Ching, witness William Ching, Anita Dy Ching and Zosimo
Ching. (Rollo, pp. 105-106) We see no reason why defendant company would be using Goldline
buses in its operations unless the two companies are actually one and the same.

Moreover, the name Goldline was added to defendants name in the Complaint. There was no
objection from William Ching who could have raised the defense that Gold Line Tours, Inc. was
in no way liable or involved. Indeed, it appears to this Court that rather than Travel & Tours
Advisers, Inc., it is Gold Line Tours, Inc., which should have been named party defendant.

Be that as it may, We concur in the trial courts finding that the two companies are actually one
and the same, hence the levy of the bus in question was proper.

WHEREFORE, for lack of merit, the petition is DISMISSED and the assailed Orders are
AFFIRMED.

SO ORDERED.
Petitioner filed a motion for reconsideration,[45] which the CA denied on June 25, 2003.[46]

Hence, this appeal, in which petitioner faults the CA for holding that the RTC did not act without
jurisdiction or grave abuse of discretion in finding that petitioner and Travel & Tours Advisers,
Inc., the defendant in Civil Case No. 5917, were one and same entity, and for sustaining the
propriety of the levy of the tourist bus with Plate No. NWW-883 in satisfaction of the writ of
execution. [47]

In the meantime, respondents filed in the RTC a motion to direct the sheriff to implement the
writ of execution in view of the non-issuance of any restraining order either by this Court or the
CA.[48] On February 23, 2007, the RTC granted the motion and directed the sheriff to sell the
Goldline tourist bus with Plate No. NWW-883 through a public auction.[49]

Issue

Did the CA rightly find and conclude that the RTC did not gravely abuse its discretion in
denying petitioners verified third-party claim?

Ruling
We find no reason to reverse the assailed CA decision.

In the order dated August 2, 2001, the RTC rendered its justification for rejecting the third-party
claim of petitioner in the following manner:

xxx

The main contention of Third Party Claimant is that it is the owner of the Bus and therefore, it
should not be seized by the sheriff because the same does not belong to the defendant Travel &
Tours Advises, Inc. (GOLDLINE) as the third party claimant and defendant are two separate
corporation with separate juridical personalities. Upon the other hand, this Court had scrutinized
the documents submitted by the Third party Claimant and found out that William Ching who
claimed to be the operator of the Travel & Tours Advisers, Inc. (GOLDLINE) is also the
President/Manager and incorporator of the Third Party Claimant Goldline Tours Inc. and he is
joined by his co-incorporators who are Ching and Dy thereby this Court could only say that these
two corporations are one and the same corporations. This is of judicial knowledge that since
Travel & Tours Advisers, Inc. came to Sorsogon it has been known as GOLDLINE.

This Court is not persuaded by the proposition of the third party claimant that a corporation has
an existence separate and/or distinct from its members insofar as this case at bar is concerned, for
the reason that whenever necessary for the interest of the public or for the protection of
enforcement of their rights, the notion of legal entity should not and is not to be used to defeat
public convenience, justify wrong, protect fraud or defend crime.

Apposite to the case at bar is the case of Palacio vs. Fely Transportation Co., L-15121, May 31,
1962, 5 SCRA 1011 where the Supreme Court held:

Where the main purpose in forming the corporation was to evade ones subsidiary liability for
damages in a criminal case, the corporation may not be heard to say that it has a personality
separate and distinct from its members, because to allow it to do so would be to sanction the use
of fiction of corporate entity as a shield to further an end subversive of justice (La Campana
Coffee Factory, et al. v. Kaisahan ng mga Manggagawa, etc., et al., L-5677, May 25, 1953). The
Supreme Court can even substitute the real party in interest in place of the defendant corporation
in order to avoid multiplicity of suits and thereby save the parties unnecessary expenses and
delay. (Alfonso vs. Villamor, 16 Phil. 315).

This is what the third party claimant wants to do including the defendant in this case, to use the
separate and distinct personality of the two corporation as a shield to further an end subversive of
justice by avoiding the execution of a final judgment of the court.[50]
As we see it, the RTC had sufficient factual basis to find that petitioner and Travel and Tours
Advisers, Inc. were one and the same entity, specifically: (a) documents submitted by petitioner
in the RTC showing that William Cheng, who claimed to be the operator of Travel and Tours
Advisers, Inc., was also the President/Manager and an incorporator of the petitioner; and (b)
Travel and Tours Advisers, Inc. had been known in Sorsogon as Goldline. On its part, the CA
cogently observed:

As stated in the (RTC) decision supra, William Ching disclosed during the trial of the case that
defendant Travel & Tours Advisers, Inc. (Goldline), of which he is an officer, is operating sixty
(60) units of Goldline buses. That the Goldline buses are used in the operations of

defendant company is obvious from Mr. Chengs admission. The Amended Articles of
Incorporation of Gold Line Tours, Inc. disclose that the following persons are the original
incorporators thereof: Antonio O. Ching, Maribel Lim Ching, witness William Ching, Anita Dy
Ching and Zosimo Ching. (Rollo, pp. 105-108) We see no reason why defendant company would
be using Goldline buses in its operations unless the two companies are actually one and the
same.

Moreover, the name Goldline was added to defendants name in the Complaint. There was no
objection from William Ching who could have raised the defense that Gold Line Tours, Inc. was
in no way liable or involved. Indeed it appears to this Court that rather than Travel & Tours
Advisers, Inc. it is Gold Line Tours, Inc., which should have been named party defendant.
Be that as it may, We concur in the trial courts finding that the two companies are actually one
and the same, hence the levy of the bus in question was proper.[51]

The RTC thus rightly ruled that petitioner might not be shielded from liability under the final
judgment through the use of the doctrine of separate corporate identity. Truly, this fiction of law
could not be employed to defeat the ends of justice.

But petitioner continues to challenge the RTC orders by insisting that the evidence to establish
its identity with Travel and Tours Advisers, Inc. was insufficient.

We cannot agree with petitioner. As already stated, there was sufficient evidence that petitioner
and Travel and Tours Advisers, Inc. were one and the same entity. Moreover, we remind that a
petition for the writ of certiorari neither deals with errors of judgment nor extends to a mistake in
the appreciation of the contending parties evidence or in the evaluation of their relative
weight.[52] It is timely to remind that the petitioner in a special civil action for certiorari
commenced against a trial court that has jurisdiction over the proceedings bears the burden to
demonstrate not merely reversible error, but grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of the respondent trial court in issuing the impugned order.[53]
The term grave abuse of discretion is defined as a capricious and whimsical exercise of judgment
so patent and gross as to amount to an evasion of a positive duty or a virtual refusal to perform a
duty enjoined by law, as where the power is exercised in an arbitrary and despotic manner
because of passion or hostility.[54] Mere abuse of discretion is not enough; it must be grave.[55]
Yet, here, petitioner did not discharge its burden because it failed to demonstrate that the CA
erred in holding that the RTC had not committed grave abuse of discretion. A review of the
records shows, indeed, that the RTC correctly rejected petitioners third-party claim. Hence, the
rejection did not come within the domain of the writ of certioraris limiting requirement of excess
or lack of jurisdiction.[56]

WHEREFORE, the Court DENIES the petition for review on certiorari, and AFFIRMS the
decision promulgated by the Court of Appeals on October 30, 2002. Costs of suit to be paid by
petitioner.

SO ORDERED.
Republic of the Philippines

Supreme Court

Manila

SECOND DIVISION

VIVIAN T. RAMIREZ, ALBERTO B. DIGNO, DANILO M. CASQUITE, JUMADIYA A.

KADIL, FAUJIA SALIH, ANTONIO FABIAN, ROMEL DANAG, GINA PANTASAN,
ARTHUR MATUGAS, VIRGILIA OSARIO, ORLANDO EBRADA, ROSANA CABATO,
WILFREDO LUNA, LILIA BARREDO, ISABEL ALBERTO, NORA BONIAO, PILAR
OSARIO, LYDIA ESLIT, AMMAN SALI, AKMAD AKIL, ROGELIO LAZARO, ISABEL
CONCILLADO, MARLON ABIAL, HERMOCILLO NAPALCRUZ, WALTER BUHIAN,
ELISEO AMATORIO, JOSE CASTRO, JAMIL LAGBAY, MA. EVELYN SANTOS,
LEDENIA T. BARON, ELSA AMATORIO, SARAH F. BUCOY, EXPEDITO L. RELUYA,
ARNULFO ALFARO, EDGARDO F. BORGONIA, DANILO R. MANINGO, ABDUSAID H.
DAMBONG, LORINDA M. MUTIA, DOMINADOR DEL ROSARIO, JOEL E. TRONO,
HUSSIN A. JAWAJI, JUL-ASNAM JAKARIA, LUZVIMINDA A. NOLASCO, VILMA G.
GASCO, MORITA S. MARMETO, PROCESA JUANICO, ANTONIO A. MONDRAGON, JR.,
JESSICA F. QUIACHON, PACITA G. MEDINA, ARNEL S. SANTOS, ANECITA T. TARAS,
TOMINDAO T. TARAS, NULCA C. SABDANI, AKMAD A. SABDANI, ROWENA J.
GARCIA, LINA P. CASAS, MARLYN G. FRANCISCO, MERCEDITA MAQUINANO,
NICOLAS T. RIO, TERESITA A. CASINAS, VIRGILIO F. IB-IB, PANTALEON S. ROJAS,
JR., EVELYN V. BEATINGO, MATILDE G. HUSSIN, ESPERANZA I. LLEDO, ADOLFINA
DELA MERCED, LAURA E. SANTOS, ROGACIANA MAQUILING, ALELIE D. SAMSON,
SHIRLEY L. ALVAREZ, MAGDALENA A. MARCOS, VIRGINIA S. ESPINOSA,
ANTONIO C. GUEVARA, AUGUSTA S. DE JESUS, SERVILLA A. BANCALE,
PROSERFINA GATINAO, RASMA A. FABRIGA, ROLANDO D. GATINAO, ANALISA G.
MEA, SARAH A. SALCEDO, ALICIA M. JAYAG, FERNANDO G. CABEROY, ROMEO R.
PONCE, EDNA S. PONCE, TEODORA T. LUY, WALDERICO F. ARIO, MELCHOR S.
BUCOY, EDITA H. CINCO, RUDY I. LIMBAROC, PETER MONTOJO, MARLYN S.
ATILANO, REGIDOR MEDALLO, EDWIN O. DEMASUAY, DENNIS M. SUICANO,
ROSALINA Q. ATILANO, ESTRELLA FELICIANO, IMELDA T. DAGALEA, MARILYN
RUFINO, JOSE AGUSTIN, EFREN RIVERA, CRISALDO VALERO, SAFIA HANDANG,
LUCENA R. MEDINA, DANNY BOY B. PANGASIAN, ABDURASA HASIL, ROEL ALTA,
JOBERT BELTRAN, EDNA FAUSTO, TAJMAHAR HADJULA, ELENA MAGHANOY,
ERIC B. QUITIOL, JESSE D. FLORES, GEMMA CANILLAS, ERNITO CANILLAS,
MARILOU JAVIER, MARGANI MADDIN, RICHARD SENA, FE D. CANOY, GEORGE
SALUD, EDGARDO BORGONIA, JR., ANTONIO ATILANO, JOSE CASTRO, and
LIBERATO BAGALANON,

Petitioners,

- versus -

MAR FISHING CO., INC., MIRAMAR FISHING CO., INC., ROBERT BUEHS AND
JEROME SPITZ.

Respondents.

G.R. No. 168208

Present:

CARPIO, J., Chairperson,

BRION,

PEREZ,

SERENO, and

REYES, JJ.

Promulgated:

June 13, 2012

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

DECISION

SERENO, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of
Court, seeking a review of the Court of Appeals (CA) 19 March 2004 and 12 May 2005
Resolutions in CA-G.R. SP NO. 82651. The appellate court had dismissed the Petition for
Review on the ground that it lacked a Verification and Certification against forum shopping.

The pertinent facts are as follows:

On 28 June 2001, respondent Mar Fishing Co., Inc. (Mar Fishing), engaged in the business of
fishing and canning of tuna, sold its principal assets to co-respondent Miramar Fishing Co., Inc.
(Miramar) through public bidding.[1] The proceeds of the sale were paid to the Trade and
Investment Corporation of the Philippines (TIDCORP) to cover Mar Fishings outstanding
obligation in the amount of ₱897,560,041.26.[2] In view of that transfer, Mar Fishing issued a
Memorandum dated 23 October 2001 informing all its workers that the company would cease to
operate by the end of the month.[3] On 29 October 2001 or merely two days prior to the months
end, it notified the Department of Labor and Employment (DOLE) of the closure of its business
operations.[4]

Thereafter, Mar Fishings labor union, Mar Fishing Workers Union NFL and Miramar entered
into a Memorandum of Agreement.[5] The Agreement provided that the acquiring company,
Miramar, shall absorb Mar Fishings regular rank and file employees whose performance was
satisfactory, without loss of seniority rights and privileges previously enjoyed.[6]

Unfortunately, petitioners, who worked as rank and file employees, were not hired or given
separation pay by Miramar.[7] Thus, petitioners filed Complaints for illegal dismissal with
money claims before the Arbitration Branch of the National Labor Relations Commission
(NLRC).

In its 30 July 2002 Decision, the Labor Arbiter (LA) found that Mar Fishing had necessarily
closed its operations, considering that Miramar had already bought the tuna canning plant.[8] By
reason of the closure, petitioners were legally dismissed for authorized cause.[9] In addition,
even if Mar Fishing reneged on notifying the DOLE within 30 days prior to its closure, that
failure did not make the dismissals void. Consequently, the LA ordered Mar Fishing to give
separation pay to its workers.[10]

The LA held thus:[11]

WHEREFORE, in view of the foregoing considerations, judgment is hereby rendered in these

cases:

1. Ordering Mar Fishing Company, Inc., through its president, treasurer, manager or other
proper officer or representative, to pay the complainants their respective separation pay, as
computed in page 12 to 33 hereof, all totaling SIX MILLION THREE HUNDRED THIRTY SIX
THOUSAND FIVE HUNDRED EIGHTY SEVEN & 77/100 PESOS (₱6,336,587.77);
2. Dismissing these case [sic] as against Miramar Fishing Company, Inc., as well as against
Robert Buehs and Jerome Spitz, for lack of cause of action;

3. Dismissing all other charges and claims of the complainants, for lack of merit.

SO ORDERED.

Aggrieved, petitioners pursued the action before the NLRC, which modified the LAs Decision.
Noting that Mar Fishing notified the DOLE only two days before the business closed, the labor
court considered petitioners dismissal as ineffectual.[12] Hence, it awarded, apart from
separation pay, full back wages to petitioners from the time they were terminated on 31 October
2001 until the date when the LA upheld the validity of their dismissal on 30 July 2002.[13]

Additionally, the NLRC pierced the veil of corporate fiction and ruled that Mar Fishing and
Miramar were one and the same entity, since their officers were the same.[14] Hence, both
companies were ordered to solidarily pay the monetary claims.[15]

On reconsideration, the NLRC modified its ruling by imposing liability only on Mar Fishing.
The labor court held that petitioners had no cause of action against Miramar, since labor
contracts cannot be enforced against the transferee of an enterprise in the absence of a stipulation
in the contract that the transferee assumes the obligation of the transferor.[16] Hence, the
dispositive portion reads:[17]

WHEREFORE, foregoing premises considered, the assailed resolution is MODIFIED in that

only Mar Fishing Company, Inc. through its responsible officers, is ordered to pay complainants
their separation pay, and full backwages from the date they were terminated from employment
until 30 July 2002, subject to computation during execution stage of proceedings at the
appropriate Regional Arbitration Branch.
SO ORDERED.

Despite the award of separation pay and back wages, petitioners filed a Rule 65 Petition before
the CA. This time, they argued that both Mar Fishing and Miramar should be made liable for
their separation pay, and that their back wages should be up to the time of their actual
reinstatement. However, finding that only 3 of the 228 petitioners[18] signed the Verification
and Certification against forum shopping, the CA instantly dismissed the action for certiorari
against the 225 other petitioners without ruling on the substantive aspects of the case.[19]

By means of a Manifestation with Omnibus Motion,[20] petitioners submitted a Verification and

Certification against forum shopping executed by 161 signatories. In the said pleading,
petitioners asked the CA to reconsider by invoking the rule that technical rules do not strictly
apply to labor cases.[21] Still, the CA denied petitioners contentions and held thus:[22]

Anent the liberality in application of the rules, as alleged by petitioners, the same deserves scant
consideration. x x x.

xxx. While litigation is not a game of technicalities, and that the rules of procedure should not be
enforced strictly at the cost of substantial justice, still it does not follow that the Rules of Court
may be ignored at will and at random to the prejudice of the orderly presentation, assessment and
just resolution of the issues. xxx.

Before this Court, 124 petitioners raise the issue of whether the CA gravely erred in dismissing
their Petition for Review on the ground that their pleading lacked a Verification and Certification
against forum shopping.[23]

The Rules of Court provide that a petition for certiorari must be verified and accompanied by a
sworn certification of non-forum shopping.[24] Failure to comply with these mandatory
requirements shall be sufficient ground for the dismissal of the petition.[25] Considering that
only 3 of the 228 named petitioners signed the requirement, the CA dismissed the case against
them, as they did not execute a Verification and Certification against forum shopping.
Petitioners invoke substantial compliance with procedural rules when their Manifestation already
contains a Verification and Certification against forum shopping executed by 161 signatories.
They heavily rely on Jaro v. Court of Appeals,[26] citing Piglas-Kamao v. National Labor
Relations Commission and Cusi-Hernandez v. Diaz, in which we discussed that the subsequent
submission of the missing documentary attachments with the Motion for Reconsideration
amounted to substantial compliance.

However, this very case does not involve a failure to attach the Annexes. Rather, the procedural
infirmity consists of omission the failure to sign a Verification and Certification against forum
shopping. Addressing this defect squarely, we have already resolved that because of
noncompliance with the requirements governing the certification of non-forum shopping, no
error could be validly attributed to the CA when it ordered the dismissal of the special civil
action for certiorari.[27] The lack of certification against forum shopping is not curable by mere
amendment of a complaint, but shall be a cause for the dismissal of the case without
prejudice.[28] Indeed, the general rule is that subsequent compliance with the requirements will
not excuse a party's failure to comply in the first instance.[29] Thus, on procedural aspects, the
appellate court correctly dismissed the case.

However, this Court has recognized that the merit of a case is a special circumstance or
compelling reason that justifies the relaxation of the rule requiring verification and certification
of non-forum shopping.[30] In order to fully resolve the issue, it is thus necessary to determine
whether technical rules were brushed aside at the expense of substantial justice.[31] This Court
will then delve into the issue on (1) the solidary liability of Mar Fishing and Miramar to pay
petitioners monetary claims and (2) the reckoning period for the award of back wages.

For a dismissal based on the closure of business to be valid, three (3) requirements must be
established. Firstly, the cessation of or withdrawal from business operations must be bona fide in
character. Secondly, there must be payment to the employees of termination pay amounting to at
least one-half (1/2) month pay for each year of service, or one (1) month pay, whichever is
higher. Thirdly, the company must serve a written notice on the employees and on the DOLE at
least one (1) month before the intended termination.[32]

In their Petition for Review on Certiorari, petitioners did not dispute the conclusion of the LA
and the NLRC that Mar Fishing had an authorized cause to dismiss its workers. Neither did
petitioners challenge the computation of their separation pay.
Rather, they questioned the holding that only Mar Fishing was liable for their monetary
claims.[33]

Basing their conclusion on the Memorandum of Agreement and Supplemental Agreement

between Miramar and Mar Fishings labor union, as well as the General Information Sheets and
Company Profiles of the two companies, petitioners assert that Miramar simply took over the
operations of Mar Fishing. In addition, they assert that these companies are one and the same
entity, given the commonality of their directors and the similarity of their business venture in
tuna canning plant operations.[34]

At the fore, the question of whether one corporation is merely an alter ego of another is purely
one of fact generally beyond the jurisdiction of this Court.[35] In any case, given only these bare
reiterations, this Court sustains the ruling of the LA as affirmed by the NLRC that Miramar and
Mar Fishing are separate and distinct entities, based on the marked differences in their stock
ownership.[36] Also, the fact that Mar Fishings officers remained as such in Miramar does not
by itself warrant a conclusion that the two companies are one and the same. As this Court held in
Sesbreo v. Court of Appeals, the mere showing that the corporations had a common director
sitting in all the boards without more does not authorize disregarding their separate juridical
personalities.[37]

Neither can the veil of corporate fiction between the two companies be pierced by the rest of
petitioners submissions, namely, the alleged take-over by Miramar of Mar Fishings operations
and the evident similarity of their businesses. At this point, it bears emphasizing that since
piercing the veil of corporate fiction is frowned upon, those who seek to pierce the veil must
clearly establish that the separate and distinct personalities of the corporations are set up to
justify a wrong, protect a fraud, or perpetrate a deception.[38] This, unfortunately, petitioners
have failed to do. In Indophil Textile Mill Workers Union vs. Calica, we ruled thus:[39]

In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that
the creation of the corporation is a devi[c]e to evade the application of the CBA between
petitioner Union and private respondent company. While we do not discount the possibility of
the similarities of the businesses of private respondent and Acrylic, neither are we inclined to
apply the doctrine invoked by petitioner in granting the relief sought. The fact that the businesses
of private respondent and Acrylic are related, that some of the employees of the private
respondent are the same persons manning and providing for auxiliary services to the units of
Acrylic, and that the physical plants, offices and facilities are situated in the same compound, it
is our considered opinion that these facts are not sufficient to justify the piercing of the corporate
veil of Acrylic. (Emphasis supplied.)

Having been found by the trial courts to be a separate entity, Mar Fishing and not Miramar is
required to compensate petitioners. Indeed, the back wages and retirement pay earned from the
former employer cannot be filed against the new owners or operators of an enterprise.[40]

Evidently, the assertions of petitioners fail on both procedural and substantive aspects.
Therefore, no special reasons exist to reverse the CAs dismissal of the case due to their failure to
abide by the mandatory procedure for filing a petition for review on certiorari. Given the
correctness of the appellate courts ruling and the lack of appropriate remedies, this Court will no
longer dwell on the exact computation of petitioners claims for back wages, which have been
sufficiently threshed out by the LA and the NLRC. Judicial review of labor cases does not go
beyond an evaluation of the sufficiency of the evidence upon which labor officials' findings
rest.[41]

While we sympathize with the situation of the workers in this case, we cannot disregard, absent
compelling reasons, the factual determinations and the legal doctrines that support the findings of
the courts a quo. Generally, the findings of fact and the conclusion of the labor courts are not
only accorded great weight and respect, but are even clothed with finality and deemed binding on
this Court, as long as they are supported by substantial evidence.[42]

On a final note, this Court reminds the parties seeking the ultimate relief of certiorari to observe
the rules, since nonobservance thereof cannot be brushed aside as a mere technicality.[43]
Procedural rules are not to be belittled or simply disregarded, for these prescribed procedures
ensure an orderly and speedy administration of justice.[44]IN VIEW THEREOF, the assailed 19
March 2004 and 12 May 2005 Resolutions of the Court of Appeals in CA-GR SP NO. 82651 are
AFFIRMED. Hence, the 04 July 2005 Petition for Review filed by petitioners is hereby DENIED
for lack of merit.
FIRST DIVISION

G.R. No. 182729 September 29, 2010

KUKAN INTERNATIONAL CORPORATION, Petitioner,

vs.

HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial Court of Manila,
Branch 21, and ROMEO M. MORALES, doing business under the name and style "RM Morales
Trophies and Plaques," Respondents.

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January 23,
2008 Decision1 and the April 16, 2008 Resolution2 rendered by the Court of Appeals (CA) in
CA-G.R. SP No. 100152.

The assailed CA decision affirmed the March 12, 20073 and June 7, 20074 Orders of the
Regional Trial Court (RTC) of Manila, Branch 21, in Civil Case No. 99-93173, entitled Romeo
M. Morales, doing business under the name and style RM Morales Trophies and Plaques v.
Kukan, Inc. In the said orders, the RTC disregarded the separate corporate identities of Kukan,
Inc. and Kukan International Corporation and declared them to be one and the same entity.
Accordingly, the RTC held Kukan International Corporation, albeit not impleaded in the
underlying complaint of Romeo M. Morales, liable for the judgment award decreed in a Decision
dated November 28, 20025 in favor of Morales and against Kukan, Inc.
The Facts

Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of
signages in a building being constructed in Makati City. Morales tendered the winning bid and
was awarded the PhP 5 million contract. Some of the items in the project award were later
excluded resulting in the corresponding reduction of the contract price to PhP 3,388,502. Despite
his compliance with his contractual undertakings, Morales was only paid the amount of PhP
1,976,371.07, leaving a balance of PhP 1,412,130.93, which Kukan, Inc. refused to pay despite
demands. Shortchanged, Morales filed a Complaint6 with the RTC against Kukan, Inc. for a sum
of money, the case docketed as Civil Case No. 99-93173 and eventually raffled to Branch 17 of
the court.

Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial ensued.
However, starting November 2000, Kukan, Inc. no longer appeared and participated in the
proceedings before the trial court, prompting the RTC to declare Kukan, Inc. in default and
paving the way for Morales to present his evidence ex parte.

On November 28, 2002, the RTC rendered a Decision finding for Morales and against Kukan,
Inc., disposing as follows:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by
preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering
Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum
from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable attorney’s

fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.

For lack of factual foundation, the counterclaim is DISMISSED.

IT IS SO ORDERED.7

After the above decision became final and executory, Morales moved for and secured a writ of
execution8 against Kukan, Inc. The sheriff then levied upon various personal properties found at
what was supposed to be Kukan, Inc.’s office at Unit 2205, 88 Corporate Center, Salcedo
Village, Makati City. Alleging that it owned the properties thus levied and that it was a different
corporation from Kukan, Inc., Kukan International Corporation (KIC) filed an Affidavit of
Third-Party Claim. Notably, KIC was incorporated in August 2000, or shortly after Kukan, Inc.
had stopped participating in Civil Case No. 99-93173.

In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30, 2003.
In it, Morales prayed, applying the principle of piercing the veil of corporate fiction, that an
order be issued for the satisfaction of the judgment debt of Kukan, Inc. with the properties under
the name or in the possession of KIC, it being alleged that both corporations are but one and the
same entity. KIC opposed Morales’ motion. By Order of May 29, 20039 as reiterated in a
subsequent order, the court denied the omnibus motion.

In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true
relationship between the two, Morales filed a Motion for Examination of Judgment Debtors
dated May 4, 2005. In this motion Morales sought that subponae be issued against the primary
stockholders of Kukan, Inc., among them Michael Chan, a.k.a. Chan Kai Kit. This too was
denied by the trial court in an Order dated May 24, 2005.10

Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who eventually
granted the motion. The case was re-raffled to Branch 21, presided by public respondent Judge
Amor Reyes.
Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate
Fiction to declare KIC as having no existence separate from Kukan, Inc. This time around, the
RTC, by Order dated March 12, 2007, granted the motion, the dispositive portion of which reads:

WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby
declares as follows:

1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the same
corporation;

2. the levy made on the properties of Kukan International Corp. is hereby valid;

3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay the amount
awarded to plaintiff pursuant to the decision of November [28], 2002 which has long been final
and executory.

SO ORDERED.

From the above order, KIC moved but was denied reconsideration in another Order dated June 7,
2007.

KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7,
2007 RTC Orders.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of which
states:
WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders
dated March 12, 2007 and June 7, 2007 of the court a quo are both AFFIRMED. No costs.

SO ORDERED.11

The CA later denied KIC’s motion for reconsideration in the assailed resolution.

Hence, the instant petition for review, with the following issues KIC raises for the Court’s
consideration:

1. There is no legal basis for the [CA] to resolve and declare that petitioner’s Constitutional
Right to Due Process was not violated by the public respondent in rendering the Orders dated
March 12, 2007 and June 7, 2007 and in declaring petitioner to be liable for the judgment
obligations of the corporation "Kukan, Inc." to private respondent – as petitioner is a stranger to
the case and was never made a party in the case before the trial court nor was it ever served a
summons and a copy of the complaint.

2. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12,
2007 and June 7, 2007 rendered by public respondent declaring the petitioner liable to the
judgment obligations of the corporation "Kukan, Inc." to private respondent are valid as said
orders of the public respondent modify and/or amend the trial court’s final and executory
decision rendered on November 28, 2002.

3. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12,
2007 and June 7, 2007 rendered by public respondent declaring the petitioner [KIC] and the
corporation "Kukan, Inc." as one and the same, and, therefore, the Veil of Corporate Fiction
between them be pierced – as the procedure undertaken by public respondent which the [CA]
upheld is not sanctioned by the Rules of Court and/or established jurisprudence enunciated by
this Honorable Supreme Court.12
In gist, the issues to be resolved boil down to the question of, first, whether the trial court can,
after the judgment against Kukan, Inc. has attained finality, execute it against the property of
KIC; second, whether the trial court acquired jurisdiction over KIC; and third, whether the trial
and appellate courts correctly applied, under the premises, the principle of piercing the veil of
corporate fiction.

The Ruling of the Court

The petition is meritorious.

First Issue: Against Whom Can a Final and

Executory Judgment Be Executed

The preliminary question that must be answered is whether or not the trial court can, after
adjudging Kukan, Inc. liable for a sum of money in a final and executory judgment, execute such
judgment debt against the property of KIC.

The poser must be answered in the negative.

In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control over the
execution of its judgment:

A case in which an execution has been issued is regarded as still pending so that all proceedings
on the execution are proceedings in the suit. There is no question that the court which rendered
the judgment has a general supervisory control over its process of execution, and this power
carries with it the right to determine every question of fact and law which may be involved in the
execution.
We reiterated the above holding in Javier v. Court of Appeals14 in this wise: "The said branch
has a general supervisory control over its processes in the execution of its judgment with a right
to determine every question of fact and law which may be involved in the execution."

The court’s supervisory control does not, however, extend as to authorize the alteration or
amendment of a final and executory decision, save for certain recognized exceptions, among
which is the correction of clerical errors. Else, the court violates the principle of finality of
judgment and its immutability, concepts which the Court, in Tan v. Timbal,15 defined:

As we held in Industrial Management International Development Corporation vs. NLRC:

It is an elementary principle of procedure that the resolution of the court in a given issue as
embodied in the dispositive part of a decision or order is the controlling factor as to settlement of
rights of the parties. Once a decision or order becomes final and executory, it is removed from
the power or jurisdiction of the court which rendered it to further alter or amend it. It thereby
becomes immutable and unalterable and any amendment or alteration which substantially affects
a final and executory judgment is null and void for lack of jurisdiction, including the entire
proceedings held for that purpose. An order of execution which varies the tenor of the judgment
or exceeds the terms thereof is a nullity. (Emphasis supplied.)

Republic v. Tango16 expounded on the same principle and its exceptions:

Deeply ingrained in our jurisprudence is the principle that a decision that has acquired finality
becomes immutable and unalterable. As such, it may no longer be modified in any respect even
if the modification is meant to correct erroneous conclusions of fact or law and whether it will be
made by the court that rendered it or by the highest court of the land. x x x

The doctrine of finality of judgment is grounded on the fundamental principle of public policy
and sound practice that, at the risk of occasional error, the judgment of courts and the award of
quasi-judicial agencies must become final on some definite date fixed by law. The only
exceptions to the general rule are the correction of clerical errors, the so-called nunc pro tunc
entries which cause no prejudice to any party, void judgments, and whenever circumstances
transpire after the finality of the decision which render its execution unjust and inequitable. None
of the exceptions obtains here to merit the review sought. (Emphasis added.)

So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment, order
the execution of its final decision in a manner as would amount to its prohibited alteration or
modification?

We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it
provides:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by
preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering
Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum
from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorney’s fees;
and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.

x x x x (Emphasis supplied.)
As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the
aforementioned awards to Morales. Thus, making KIC, thru the medium of a writ of execution,
answerable for the above judgment liability is a clear case of altering a decision, an instance of
granting relief not contemplated in the decision sought to be executed. And the change does not
fall under any of the recognized exceptions to the doctrine of finality and immutability of
judgment. It is a settled rule that a writ of execution must conform to the fallo of the judgment;
as an inevitable corollary, a writ beyond the terms of the judgment is a nullity.17

Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an
examination of the other issues raised by KIC would be proper.

Second Issue: Propriety of the RTC

Assuming Jurisdiction over KIC

The next issue turns on the validity of the execution the trial court authorized against KIC and its
property, given that it was neither made a party nor impleaded in Civil Case No. 99-93173, let
alone served with summons. In other words, did the trial court acquire jurisdiction over KIC?

In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself to
the jurisdiction of the trial court owing to its filing of four (4) pleadings adverted to earlier,
namely: (a) the Affidavit of Third-Party Claim;18 (b) the Comment and Opposition to Plaintiff’s
Omnibus Motion;19 (c) the Motion for Reconsideration of the RTC Order dated March 12,
2007;20 and (d) the Motion for Leave to Admit Reply.21 The CA, citing Section 20, Rule 14 of
the Rules of Court, stated that "the procedural rule on service of summons can be waived by
voluntary submission to the court’s jurisdiction through any form of appearance by the party or
its counsel."22

We cannot give imprimatur to the appellate court’s appreciation of the thrust of Sec. 20, Rule 14
of the Rules in concluding that the trial court acquired jurisdiction over KIC.

Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts acquire
jurisdiction over the parties in a civil case:
Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other hand,
jurisdiction over the defendants in a civil case is acquired either through the service of summons
upon them or through their voluntary appearance in court and their submission to its authority.
(Emphasis supplied.)

In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security
Corporation, stating: "[I]n civil cases, the trial court acquires jurisdiction over the person of the
defendant either by the service of summons or by the latter’s voluntary appearance and
submission to the authority of the former."

The court’s jurisdiction over a party-defendant resulting from his voluntary submission to its
authority is provided under Sec. 20, Rule 14 of the Rules, which states:

Section 20. Voluntary appearance. – The defendant’s voluntary appearance in the actions shall
be equivalent to service of summons. The inclusion in a motion to dismiss of other grounds aside
from lack of jurisdiction over the person of the defendant shall not be deemed a voluntary
appearance.

To be sure, the CA’s ruling that any form of appearance by the party or its counsel is deemed as
voluntary appearance finds support in the kindred Republic v. Ker & Co., Ltd.25 and De
Midgely v. Ferandos.26

Republic and De Midgely, however, have already been modified if not altogether superseded27
by La Naval Drug Corporation v. Court of Appeals,28 wherein the Court essentially ruled and
elucidated on the current view in our jurisdiction, to wit: "[A] special appearance before the
court––challenging its jurisdiction over the person through a motion to dismiss even if the
movant invokes other grounds––is not tantamount to estoppel or a waiver by the movant of his
objection to jurisdiction over his person; and such is not constitutive of a voluntary submission to
the jurisdiction of the court."29
In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even if it is
conceded that it raised affirmative defenses through its aforementioned pleadings, KIC never
abandoned its challenge, however implicit, to the RTC’s jurisdiction over its person. The
challenge was subsumed in KIC’s primary assertion that it was not the same entity as Kukan,
Inc. Pertinently, in its Comment and Opposition to Plaintiff’s Omnibus Motion dated May 20,
2003, KIC entered its "special but not voluntary appearance" alleging therein that it was a
different entity and has a separate legal personality from Kukan, Inc. And KIC would
consistently reiterate this assertion in all its pleadings, thus effectively resisting all along the
RTC’s jurisdiction of its person. It cannot be overemphasized that KIC could not file before the
RTC a motion to dismiss and its attachments in Civil Case No. 99-93173, precisely because KIC
was neither impleaded nor served with summons. Consequently, KIC could only assert and claim
through its affidavits, comments, and motions filed by special appearance before the RTC that it
is separate and distinct from Kukan, Inc.

Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its objection to
the court’s lack of jurisdiction over its person. It would defy logic to say that KIC unequivocally
submitted itself to the jurisdiction of the RTC when it strongly asserted that it and Kukan, Inc.
are different entities. In the scheme of things obtaining, KIC had no other option but to insist on
its separate identity and plead for relief consistent with that position.

Third Issue: Piercing the

Veil of Corporate Fiction

The third and main issue in this case is whether or not the trial and appellate courts correctly
applied the principle of piercing the veil of corporate entity––called also as disregarding the
fiction of a separate juridical personality of a corporation––to support a conclusion that Kukan,
Inc. and KIC are but one and the same corporation with respect to the contract award referred to
at the outset. This principle finds its context on the postulate that a corporation is an artificial
being invested with a personality separate and distinct from those of the stockholders and from
other corporations to which it may be connected or related.31

In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations

Commission,32 the Court revisited the subject principle of piercing the veil of corporate fiction
and wrote:
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation as
a mere collection of individuals or an aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation unifying the group. Another
formulation of this doctrine is that when two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to protect the rights of
third parties, disregard the legal fiction that two corporations are distinct entities and treat them
as identical or as one and the same.

Whether the separate personality of the corporation should be pierced hinges on obtaining facts
appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or
when necessary in the interest of justice. x x x (Emphasis supplied.)

The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:

While a corporation may exist for any lawful purpose, the law will regard it as an association of
persons or, in case of two corporations, merge them into one, when its corporate legal entity is
used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction.
The doctrine applies only when such 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.

To disregard the separate juridical personality of a corporation, the wrongdoing must be

established clearly and convincingly. It cannot be presumed.33 (Emphasis supplied.)

Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right to
due process when, in the execution of its November 28, 2002 Decision, the court authorized the
issuance of the writ against KIC for Kukan, Inc.’s judgment debt, albeit KIC has never been a
party to the underlying suit. As a counterpoint, Morales argues that KIC’s specific concern on
due process and on the validity of the writ to execute the RTC’s November 28, 2002 Decision
would be mooted if it were established that KIC and Kukan, Inc. are indeed one and the same
corporation.

Morales’ contention is untenable.

The principle of piercing the veil of corporate fiction, and the resulting treatment of two related
corporations as one and the same juridical person with respect to a given transaction, is basically
applied only to determine established liability;34 it is not available to confer on the court a
jurisdiction it has not acquired, in the first place, over a party not impleaded in a case. Elsewise
put, a corporation not impleaded in a suit cannot be subject to the court’s process of piercing the
veil of its corporate fiction. In that situation, the court has not acquired jurisdiction over the
corporation and, hence, any proceedings taken against that corporation and its property would
infringe on its right to due process. Aguedo Agbayani, a recognized authority on Commercial
Law, stated as much:

23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x
xx

This is so because the doctrine of piercing the veil of corporate fiction comes to play only during
the trial of the case after the court has already acquired jurisdiction over the corporation. Hence,
before this doctrine can be applied, based on the evidence presented, it is imperative that the
court must first have jurisdiction over the corporation.35 x x x (Emphasis supplied.)

The implication of the above comment is twofold: (1) the court must first acquire jurisdiction
over the corporation or corporations involved before its or their separate personalities are
disregarded; and (2) the doctrine of piercing the veil of corporate entity can only be raised during
a full-blown trial over a cause of action duly commenced involving parties duly brought under
the authority of the court by way of service of summons or what passes as such service.

The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the matter
of the time and manner of raising the principle in question, it is undisputed that no full-blown
trial involving KIC was had when the RTC disregarded the corporate veil of KIC. The reason for
this actuality is simple and undisputed: KIC was not impleaded in Civil Case No. 99-93173 and
that the RTC did not acquire jurisdiction over it. It was dragged to the case after it reacted to the
improper execution of its properties and veritably hauled to court, not thru the usual process of
service of summons, but by mere motion of a party with whom it has no privity of contract and
after the decision in the main case had already become final and executory. As to the propriety of
a plea for the application of the principle by mere motion, the following excerpts are instructive:

Generally, a motion is appropriate only in the absence of remedies by regular pleadings, and is
not available to settle important questions of law, or to dispose of the merits of the case. A
motion is usually a proceeding incidental to an action, but it may be a wholly distinct or
independent proceeding. A motion in this sense is not within this discussion even though the
relief demanded is denominated an "order."

A motion generally relates to procedure and is often resorted to in order to correct errors which
have crept in along the line of the principal action’s progress. Generally, where there is a
procedural defect in a proceeding and no method under statute or rule of court by which it may
be called to the attention of the court, a motion is an appropriate remedy. In many jurisdictions,
the motion has replaced the common-law pleas testing the sufficiency of the pleadings, and
various common-law writs, such as writ of error coram nobis and audita querela. In some cases,
a motion may be one of several remedies available. For example, in some jurisdictions, a motion
to vacate an order is a remedy alternative to an appeal therefrom.

Statutes governing motions are given a liberal construction.36 (Emphasis supplied.)

The bottom line issue of whether Morales can proceed against KIC for the judgment debt of
Kukan, Inc.––assuming hypothetically that he can, applying the piercing the corporate veil
principle––resolves itself into the question of whether a mere motion is the appropriate vehicle
for such purpose.

Verily, Morales espouses the application of the principle of piercing the corporate veil to hold
KIC liable on theory that Kukan, Inc. was out to defraud him through the use of the separate and
distinct personality of another corporation, KIC. In net effect, Morales’ adverted motion to pierce
the veil of corporate fiction dated January 3, 2007 stated a new cause of action, i.e., for the
liability of judgment debtor Kukan, Inc. to be borne by KIC on the alleged identity of the two
corporations. This new cause of action should be properly ventilated in another complaint and
subsequent trial where the doctrine of piercing the corporate veil can, if appropriate, be applied,
based on the evidence adduced. Establishing the claim of Morales and the corresponding liability
of KIC for Kukan Inc.’s indebtedness could hardly be the subject, under the premises, of a mere
motion interposed after the principal action against Kukan, Inc. alone had peremptorily been
terminated. After all, a complaint is one where the plaintiff alleges causes of action.

In any event, the principle of piercing the veil of corporate fiction finds no application to the
instant case.

As a general rule, courts should be wary of lifting the corporate veil between corporations,
however related. Philippine National Bank v. Andrada Electric Engineering Company37 explains
why:

A corporation is an artificial being created by operation of law. x x x It has a personality separate

and distinct from the persons composing it, as well as from any other legal entity to which it may
be related. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation. For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be
impaled only when it becomes a shield for fraud, illegality or inequity committed against third
persons.

Hence, any application of the doctrine of piercing the corporate veil should be done with caution.
A court should be mindful of the milieu where it is to be applied. It must be certain that the
corporate fiction was misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. Otherwise, an injustice that was never unintended may result
from an erroneous application.

This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the decedent, to escape liability arising from a debt, or to
perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives
or to cover up an otherwise blatant violation of the prohibition against forum-shopping. Only in
these and similar instances may the veil be pierced and disregarded. (Emphasis supplied.)

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and
convincing proof that the separate and distinct personality of the corporation was purposefully
employed to evade a legitimate and binding commitment and perpetuate a fraud or like
wrongdoings. To be sure, the Court has, on numerous occasions,38 applied the principle where a
corporation is dissolved and its assets are transferred to another to avoid a financial liability of
the first corporation with the result that the second corporation should be considered a
continuation and successor of the first entity.

In those instances when the Court pierced the veil of corporate fiction of two corporations, there
was a confluence of the following factors:

1. A first corporation is dissolved;

2. The assets of the first corporation is transferred to a second corporation to avoid a financial
liability of the first corporation; and

3. Both corporations are owned and controlled by the same persons such that the second
corporation should be considered as a continuation and successor of the first corporation.

In the instant case, however, the second and third factors are conspicuously absent. There is,
therefore, no compelling justification for disregarding the fiction of corporate entity separating
Kukan, Inc. from KIC. In applying the principle, both the RTC and the CA miserably failed to
identify the presence of the abovementioned factors. Consider:

The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on the
following premises and arguments:
While it is true that a corporation has a separate and distinct personality from its stockholder,
director and officers, the law expressly provides for an exception. When Michael Chan, the
Managing Director of defendant Kukan, Inc. (majority stockholder of the newly formed
corporation [KIC]) confirmed the award to plaintiff to supply and install interior signages in the
Enterprise Center he (Michael Chan, Managing Director of defendant Kukan, Inc.) knew that
there was no sufficient corporate funds to pay its obligation/account, thus implying bad faith on
his part and fraud in contracting the obligation. Michael Chan neither returned the interior
signages nor tendered payment to the plaintiff. This circumstance may warrant the piercing of
the veil of corporation fiction. Having been guilty of bad faith in the management of corporate
matters the corporate trustee, director or officer may be held personally liable. x x x

Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from
the circumstances of the case. x x x [A]nd the circumstances are: the signature of Michael Chan,
Managing Director of Kukan, Inc. appearing in the confirmation of the award sent to the
plaintiff; signature of Chan Kai Kit, a British National appearing in the Articles of Incorporation
and signature of Michael Chan also a British National appearing in the Articles of Incorporation
[of] Kukan International Corp. give the impression that they are one and the same person, that
Michael Chan and Chan Kai Kit are both majority stockholders of Kukan International Corp. and
Kukan, Inc. holding 40% of the stocks; that Kukan International Corp. is practically doing the
same kind of business as that of Kukan, Inc.39 (Emphasis supplied.)

As is apparent from its disquisition, the RTC brushed aside the separate corporate existence of
Kukan, Inc. and KIC on the main argument that Michael Chan owns 40% of the common shares
of both corporations, obviously oblivious that overlapping stock ownership is a common
business phenomenon. It must be remembered, however, that KIC’s properties were the ones
seized upon levy on execution and not that of Kukan, Inc. or of Michael Chan for that matter.
Mere ownership by a single stockholder or by another corporation of a substantial block of
shares of a corporation does not, standing alone, provide sufficient justification for disregarding
the separate corporate personality.40 For this ground to hold sway in this case, there must be
proof that Chan had control or complete dominion of Kukan and KIC’s finances, policies, and
business practices; he used such control to commit fraud; and the control was the proximate
cause of the financial loss complained of by Morales. The absence of any of the elements
prevents the piercing of the corporate veil.41 And indeed, the records do not show the presence
of these elements.

On the other hand, the CA held:

In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation x x x
worth more than three million pesos although it had only Php5,000.00 paid-up capital; [KIC] was
incorporated shortly before Kukan, Inc. suddenly ceased to appear and participate in the trial;
[KIC’s] purpose is related and somewhat akin to that of Kukan, Inc.; and in [KIC] Michael Chan,
a.k.a., Chan Kai Kit, holds forty percent of the outstanding stocks, while he formerly held the
same amount of stocks in Kukan Inc. These would lead to the inescapable conclusion that
Kukan, Inc. committed fraudulent representation by awarding to the private respondent the
contract with full knowledge that it was not in a position to comply with the obligation it had
assumed because of inadequate paid-up capital. It bears stressing that shareholders should in
good faith put at the risk of the business, unencumbered capital reasonably adequate for its
prospective liabilities. The capital should not be illusory or trifling compared with the business to
be done and the risk of loss.

Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan, a.k.a.
Chan Kai Kit has the largest block of shares in both business enterprises. The emergence of the
former was cleverly timed with the hasty withdrawal of the latter during the trial to avoid the
financial liability that was eventually suffered by the latter. The two companies have a related
business purpose. Considering these circumstances, the obvious conclusion is that the creation of
Kukan International Corporation served as a device to evade the obligation incurred by Kukan,
Inc. and yet profit from the goodwill attained by the name "Kukan" by continuing to engage in
the same line of business with the same list of clients.42 (Emphasis supplied.)

Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity of
the business activities in which both corporations are engaged as a jumping board to its
conclusion that the creation of KIC "served as a device to evade the obligation incurred by
Kukan, Inc." The appellate court, however, left a gaping hole by failing to demonstrate that
Kukan, Inc. and its stockholders defrauded Morales. In fine, there is no showing that the
incorporation, and the separate and distinct personality, of KIC was used to defeat Morales’ right
to recover from Kukan, Inc. Judging from the records, no serious attempt was made to levy on
the properties of Kukan, Inc. Morales could not, thus, validly argue that Kukan, Inc. tried to
avoid liability or had no property against which to proceed.

Morales further contends that Kukan, Inc.’s closure is evidenced by its failure to file its 2001
General Information Sheet (GIS) with the Securities and Exchange Commission. However, such
fact does not necessarily mean that Kukan, Inc. had altogether ceased operations, as Morales
would have this Court believe, for it is stated on the face of the GIS that it is only upon a failure
to file the corporate GIS for five (5) consecutive years that non-operation shall be presumed.

The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up
capital of PhP 5,000 is not an indication of the intent on the part of its management to defraud
creditors. Paid-up capital is merely seed money to start a corporation or a business entity. As in
this case, it merely represented the capitalization upon incorporation in 1997 of Kukan, Inc.
Paid-up capitalization of PhP 5,000 is not and should not be taken as a reflection of the firm’s
capacity to meet its recurrent and long-term obligations. It must be borne in mind that the equity
portion cannot be equated to the viability of a business concern, for the best test is the working
capital which consists of the liquid assets of a given business relating to the nature of the
business concern.lawphil

Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed as a
badge of fraud, for it is in compliance with Sec. 13 of the Corporation Code,43 which only
requires a minimum paid-up capital of PhP 5,000.1avvphi1

The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and
controlled as they are by the same stockholders, stands without factual basis. It is true that
Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock of both
corporations. But such circumstance, standing alone, is insufficient to establish identity. There
must be at least a substantial identity of stockholders for both corporations in order to consider
this factor to be constitutive of corporate identity.

It would not avail Morales any to rely44 on General Credit Corporation v. Alsons Development
and Investment Corporation.45 General Credit Corporation is factually not on all fours with the
instant case. There, the common stockholders of the corporations represented 90% of the
outstanding capital stock of the companies, unlike here where Michael Chan merely represents
40% of the outstanding capital stock of both KIC and Kukan, Inc., not even a majority of it. In
that case, moreover, evidence was adduced to support the finding that the funds of the second
corporation came from the first. Finally, there was proof in General Credit Corporation of
complete control, such that one corporation was a mere dummy or alter ego of the other, which is
absent in the instant case.
Evidently, the aforementioned case relied upon by Morales cannot justify the application of the
principle of piercing the veil of corporate fiction to the instant case. As shown by the records, the
name Michael Chan, the similarity of business activities engaged in, and incidentally the word
"Kukan" appearing in the corporate names provide the nexus between Kukan, Inc. and KIC. As
illustrated, these circumstances are insufficient to establish the identity of KIC as the alter ego or
successor of Kukan, Inc.

It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly, those
who seek to pierce the veil must clearly establish that the separate and distinct personalities of
the corporations are set up to justify a wrong, protect fraud, or perpetrate a deception. In the
concrete and on the assumption that the RTC has validly acquired jurisdiction over the party
concerned, Morales ought to have proved by convincing evidence that Kukan, Inc. was collapsed
and thereafter KIC purposely formed and operated to defraud him. Morales has not to us
discharged his burden.

WHEREFORE, the petition is hereby GRANTED. The CA’s January 23, 2008 Decision and
April 16, 2008 Resolution in CA-G.R. SP No. 100152 are hereby REVERSED and SET ASIDE.
The levy placed upon the personal properties of Kukan International Corporation is hereby
ordered lifted and the personal properties ordered returned to Kukan International Corporation.
The RTC of Manila, Branch 21 is hereby directed to execute the RTC Decision dated November
28, 2002 against Kukan, Inc. with reasonable dispatch.

No costs.

SO ORDERED.
Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 151413 February 13, 2008

CAGAYAN VALLEY DRUG CORPORATION, petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

VELASCO, JR., J.:

The Case

This petition for review under Rule 45 of the Rules of Court seeks the recall of the August 31,
2000 Resolution1 of the Court of Appeals (CA) in CA-G.R. SP No. 59778, which dismissed
petitioner Cagayan Valley Drug Corporation’s petition for review of the April 26, 2000
Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5581 on the ground of
defective verification and certification against forum shopping.

The Facts
Petitioner, a corporation duly organized and existing under Philippine laws, is a duly licensed
retailer of medicine and other pharmaceutical products. It operates two drugstores, one in
Tuguegarao, Cagayan, and the other in Roxas, Isabela, under the name and style of "Mercury
Drug."

Petitioner alleged that in 1995, it granted 20% sales discounts to qualified senior citizens on
purchases of medicine pursuant to Republic Act No. (RA) 74323 and its implementing rules and
regulations.

In compliance with Revenue Regulation No. (RR) 2-94, petitioner treated the 20% sales
discounts granted to qualified senior citizens in 1995 as deductions from the gross sales in order
to arrive at the net sales, instead of treating them as tax credit as provided by Section 4 of RA
7432.

On December 27, 1996, however, petitioner filed with the Bureau of Internal Revenue (BIR) a
claim for tax refund/tax credit of the full amount of the 20% sales discount it granted to senior
citizens for the year 1995, allegedly totaling to PhP 123,083 in accordance with Sec. 4 of RA
7432.

The BIR’s inaction on petitioner’s claim for refund/tax credit compelled petitioner to file on
March 18, 1998 a petition for review before the CTA docketed as C.T.A. Case No. 5581 in order
to forestall the two-year prescriptive period provided under Sec. 2304 of the 1977 Tax Code, as
amended. Thereafter, on March 31, 2000, petitioner amended its petition for review.

The Ruling of the Court of Tax Appeals

On April 26, 2000, the CTA rendered a Decision dismissing the petition for review for lack of
merit.5

The CTA sustained petitioner’s contention that pursuant to Sec. 4 of RA 7432, the 20% sales
discounts petitioner extended to qualified senior citizens in 1995 should be treated as tax credit
and not as deductions from the gross sales as erroneously interpreted in RR 2-94. The CTA
reiterated its consistent holdings that RR 2-94 is an invalid administrative interpretation of the
law it purports to implement as it contravenes and does not conform to the standards RA 7432
prescribes.

Notwithstanding petitioner’s entitlement to a tax credit from the 20% sales discounts it extended
to qualified senior citizens in 1995, the CTA nonetheless dismissed petitioner’s action for refund
or tax credit on account of petitioner’s net loss in 1995. First, the CTA rejected the refund as it is
clear that RA 7432 only grants the 20% sales discounts extended to qualified senior citizens as
tax credit and not as tax refund. Second, in rejecting the tax credit, the CTA reasoned that while
petitioner may be qualified for a tax credit, it cannot be so extended to petitioner on account of
its net loss in 1995.

The CTA ratiocinated that on matters of tax credit claim, the government applies the amount
determined to be reimbursable after proper verification against any sum that may be due and
collectible from the taxpayer. However, if no tax has been paid or if no amount is due and
collectible from the taxpayer, then a tax credit is unavailing. Moreover, it held that before
allowing recovery for claims for a refund or tax credit, it must first be established that there was
an actual collection and receipt by the government of the tax sought to be recovered. In the
instant case, the CTA found that petitioner did not pay any tax by virtue of its net loss position in
1995.

Petitioner’s Motion for Reconsideration was likewise denied through the appellate tax court’s
June 30, 2000 Resolution.6

The Ruling of the Court of Appeals

Aggrieved, petitioner elevated the matter before the CA, docketed as CA-G.R. SP No. 59778. On
August 31, 2000, the CA issued the assailed Resolution7 dismissing the petition on procedural
grounds. The CA held that the person who signed the verification and certification of absence of
forum shopping, a certain Jacinto J. Concepcion, President of petitioner, failed to adduce proof
that he was duly authorized by the board of directors to do so.
As far as the CA was concerned, the main issue was whether or not the verification and
certification of non-forum shopping signed by the President of petitioner is sufficient compliance
with Secs. 4 and 5, Rule 7 of the 1997 Rules of Civil Procedure.

The verification and certification in question reads:

I, JACINTO J. CONCEPCION, of legal age with office address at 2nd Floor, Mercury Drug
Corporation, No. 7 Mercury Ave, Bagumbayan, Quezon City, under oath, hereby state that:

1. I am the President of Cagayan Valley Drug Corporation, Petitioner in the above-entitled case
and am duly authorized to sign this Verification and Certification of Absence of Forum Shopping
by the Board of Director.

xxxx

The CA found no sufficient proof to show that Concepcion was duly authorized by the Board of
Directors of petitioner. The appellate court anchored its disposition on our ruling in Premium
Marble Resources, Inc. v. Court of Appeals (Premium), that "[i]n the absence of an authority
from the Board of Directors, no person, not even the officers of the corporation, can validly bind
the corporation."8

Hence, we have this petition.

The Issues

Petitioner raises two issues: first, whether petitioner’s president can sign the subject verification
and certification sans the approval of its Board of Directors. And second, whether the CTA
committed reversible error in denying and dismissing petitioner’s action for refund or tax credit
in C.T.A. Case No. 5581.
The Court’s Ruling

The petition is meritorious.

Premium not applicable

As regards the first issue, we find the CA to have erroneously relied on Premium. In said case,
the issue tackled was not on whether the president of Premium Marble Resources, Inc. was
authorized to sign the verification and certification against forum shopping, but rather on which
of the two sets of officers, both claiming to be the legal board of directors of Premium, have the
authority to file the suit for and in behalf of the company. The factual antecedents and issues in
Premium are not on all fours with the instant case and is, therefore, not applicable.

With respect to an individual litigant, there is no question that litigants must sign the sworn
verification and certification unless they execute a power of attorney authorizing another person
to sign it. With respect to a juridical person, Sec. 4, Rule 7 on verification and Sec. 5, Rule 7 on
certification against forum shopping are silent as to who the authorized signatory should be. Said
rules do not indicate if the submission of a board resolution authorizing the officer or
representative is necessary.

Corporate powers exercised through board of directors

It must be borne in mind that Sec. 23, in relation to Sec. 25 of the Corporation Code, clearly
enunciates that all corporate powers are exercised, all business conducted, and all properties
controlled by the board of directors. A corporation has a separate and distinct personality from its
directors and officers and can only exercise its corporate powers through the board of directors.
Thus, it is clear that an individual corporate officer cannot solely exercise any corporate power
pertaining to the corporation without authority from the board of directors. This has been our
constant holding in cases instituted by a corporation.
In a slew of cases, however, we have recognized the authority of some corporate officers to sign
the verification and certification against forum shopping. In Mactan-Cebu International Airport
Authority v. CA, we recognized the authority of a general manager or acting general manager to
sign the verification and certificate against forum shopping;9 in Pfizer v. Galan, we upheld the
validity of a verification signed by an "employment specialist" who had not even presented any
proof of her authority to represent the company;10 in Novelty Philippines, Inc., v. CA, we ruled
that a personnel officer who signed the petition but did not attach the authority from the company
is authorized to sign the verification and non-forum shopping certificate;11 and in Lepanto
Consolidated Mining Company v. WMC Resources International Pty. Ltd. (Lepanto), we ruled
that the Chairperson of the Board and President of the Company can sign the verification and
certificate against non-forum shopping even without the submission of the board’s
authorization.12

In sum, we have held that the following officials or employees of the company can sign the
verification and certification without need of a board resolution: (1) the Chairperson of the Board
of Directors, (2) the President of a corporation, (3) the General Manager or Acting General
Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case.

While the above cases do not provide a complete listing of authorized signatories to the
verification and certification required by the rules, the determination of the sufficiency of the
authority was done on a case to case basis. The rationale applied in the foregoing cases is to
justify the authority of corporate officers or representatives of the corporation to sign the
verification or certificate against forum shopping, being "in a position to verify the truthfulness
and correctness of the allegations in the petition."13

Authority from board of directors required

In Philippine Airlines v. Flight Attendants and Stewards Association of the Philippines, we ruled
that only individuals vested with authority by a valid board resolution may sign the certificate of
non-forum shopping on behalf of a corporation. The action can be dismissed if the certification
was submitted unaccompanied by proof of the signatory’s authority.14 We believe that
appending the board resolution to the complaint or petition is the better procedure to obviate any
question on the authority of the signatory to the verification and certification. The required
submission of the board resolution is grounded on the basic precept that corporate powers are
exercised by the board of directors,15 and not solely by an officer of the corporation. Hence, the
power to sue and be sued in any court or quasi-judicial tribunal is necessarily lodged with the
said board.

There is substantial compliance with Rule 7, Secs. 4 and 5

In the case at bar, we so hold that petitioner substantially complied with Secs. 4 and 5, Rule 7 of
the 1997 Revised Rules on Civil Procedure. First, the requisite board resolution has been
submitted albeit belatedly by petitioner. Second, we apply our ruling in Lepanto with the
rationale that the President of petitioner is in a position to verify the truthfulness and correctness
of the allegations in the petition. Third, the President of petitioner has signed the complaint
before the CTA at the inception of this judicial claim for refund or tax credit.

Consequently, the petition in CA-G.R. SP No. 59778 ought to be reinstated. However, in view of
the enactment of RA 9282 which made the decisions of the CTA appealable to this Court, we
will directly resolve the second issue which is a purely legal one.

Petitioner entitled to tax credit

The pith of the dispute between petitioner and respondent is whether petitioner is entitled to a tax
refund or tax credit of 20% sales discount granted to senior citizens under RA 7432 or whether
the discount should be treated as a deduction from gross income.

This issue is not new, as the Court has resolved several cases involving the very same issue. In
Commissioner of Internal Revenue v. Central Luzon Drug Corporation (Central Luzon),16 we
held that private drug companies are entitled to a tax credit for the 20% sales discounts they
granted to qualified senior citizens under RA 7432 and nullified Secs. 2.i and 4 of RR 2-94. In
Bicolandia Drug Corporation (formerly Elmas Drug Corporation) v. Commissioner of Internal
Revenue,17 we ruled that petitioner therein is entitled to a tax credit of the "cost" or the full 20%
sales discounts it granted pursuant to RA 7432. In the related case of Commissioner of Internal
Revenue v. Bicolandia Drug Corporation,18 we likewise ruled that respondent drug company
was entitled to a tax credit, and we struck down RR 2-94 to be null and void for failing to
conform with the law it sought to implement.
A perusal of the April 26, 2000 CTA Decision shows that the appellate tax court correctly ruled
that the 20% sales discounts petitioner granted to qualified senior citizens should be deducted
from petitioner’s income tax due and not from petitioner’s gross sales as erroneously provided in
RR 2-94. However, the CTA erred in denying the tax credit to petitioner on the ground that
petitioner had suffered net loss in 1995, and ruling that the tax credit is unavailing.

Net loss in a taxable year does not preclude grant of tax credit

It is true that petitioner did not pay any tax in 1995 since it suffered a net loss for that taxable
year. This fact, however, without more, does not preclude petitioner from availing of its statutory
right to a tax credit for the 20% sales discounts it granted to qualified senior citizens. The law
then applicable on this point is clear and without any qualification. Sec. 4 (a) of RA 7432
pertinently provides:

Sec. 4. Privileges for the Senior citizens.––The senior citizens shall be entitled to the following:

a) the grant of twenty percent (20%) discount from all establishments relative to utilization of
transportation services, hotels and similar lodging establishments, restaurants and recreation
centers and purchase of medicines anywhere in the country: Provided, That private
establishments may claim the cost as tax credit. (Emphasis ours.)

The fact that petitioner suffered a net loss in 1995 will not make the tax credit due to petitioner
unavailable. This is the core issue resolved in Central Luzon, where we ruled that the net loss for
a taxable year does not bar the grant of the tax credit to a taxpayer pursuant to RA 7432 and that
prior tax payments are not required for such grant. We explained:

Although this tax credit benefit is available, it need not be used by losing ventures, since there is
no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet
callow stroke of an administrative pen, simply because no reduction of taxes can instantly be
effected. By its nature, the tax credit may still be deducted from a future, not a present, tax
liability, without which it does not have any use. x x x
xxxx

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are
not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a
prior tax payment is needed. The Tax Code is in fact replete with provisions granting or allowing
tax credits, even though no taxes have been previously paid.19

It is thus clear that petitioner is entitled to a tax credit for the full 20% sales discounts it extended
to qualified senior citizens for taxable year 1995. Considering that the CTA has not disallowed
the PhP 123,083 sales discounts petitioner claimed before the BIR and CTA, we are constrained
to grant them as tax credit in favor of petitioner.

Consequently, petitioner’s appeal before the CA in CA-G.R. SP No. 59778 must be granted, and,
necessarily, the April 26, 2000 CTA Decision in C.T.A. Case No. 5581 reversed and set aside.

WHEREFORE, the petition is GRANTED. The August 31, 2000 CA Resolution in CA-G.R. SP
No. 59778 is ANNULLED AND SET ASIDE. The April 26, 2000 CTA Decision in C.T.A. Case
No. 5581 dismissing petitioner’s claim for tax credit is accordingly REVERSED AND SET
ASIDE. The Commissioner of Internal Revenue is ORDERED to issue a Tax Credit Certificate
in the name of petitioner in the amount of PhP 123,083. No costs.

SO ORDERED.
FIRST DIVISION

[G.R. No. 108734. May 29, 1996]

CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR RELATIONS

COMMISSION, (First Division); and Norberto Marabe, Rodolfo Raquel, Cristobal Riego,
Manuel Gillego, Palcronio Giducos, Pedro Aboigar, Norberto Comendador, Rogello Salut,
Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Aifredo Albera, Paquito Salut, Domingo
Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares,
Ferdinand Torres, Felipe Basilan, and Ruben Robalos, respondents.

DECISION

HERMOSISIMA, JR., J.:

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is
just but the alter ego of a person or of another corporation. Where badges of fraud exist; where
public convenience is defeated; where a wrong is sought to be justified thereby, the corporate
fiction or the notion of legal entity should come to naught. The law in these instances will regard
the corporation as a mere association of persons and, in case of two corporations, merge them
into one.

Thus, where a sister corporation is used as a shield to evade a corporations subsidiary liability for
damages, the corporation may not be heard to say that it has a personality separate and distinct
from the other corporation. The piercing of the corporate veil comes into play.

This special civil action ostensibly raises the question of whether the National Labor Relations
Commission committed grave abuse of discretion when it issued a break-open order to the sheriff
to be enforced against personal property found in the premises of petitioners sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan
Road, Valenzuela, Metro Manila, is engaged in the construction business. Private respondents
were employed by said company as laborers, carpenters and riggers.

On November, 1981, private respondents were served individual written notices of termination
of employment by petitioner, effective on November 30, 1981. It was stated in the individual
notices that their contracts of employment had expired and the project in which they were hired
had been completed.

Public respondent found it to be, the fact, however, that at the time of the termination of private
respondents employment, the project in which they were hired had not yet been finished and
completed. Petitioner had to engage the services of sub-contractors whose workers performed the
functions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and
non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against
petitioner.

On December 19, 1984, the Labor Arbiter rendered judgment1 ordering petitioner to reinstate
private respondents and to pay them back wages equivalent to one year or three hundred working
days.

On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the
motion for reconsideration filed by petitioner on the ground that the said decision had already
become final and executory.2

On October 16, 1986, the NLRC Research and Information Department made the finding that
private respondents backwages amounted to P199,800.00.3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute
the Decision, dated December 19, 1984. The writ was partially satisfied through garnishment of
sums from petitioners debtor, the Metropolitan Waterworks and Sewerage Authority, in the
amount of P81,385.34. Said amount was turned over to the cashier of the NLRC.

On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the
sheriff to collect from herein petitioner the sum of P117,414.76, representing the balance of the
judgment award, and to reinstate private respondents to their former positions.

On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of
execution on petitioner through the security guard on duty but the service was refused on the
ground that petitioner no longer occupied the premises.

On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second
alias writ of execution.

The said writ had not been enforced by the special sheriff because, as stated in his progress
report, dated November 2, 1989:

1. All the employees inside petitioners premises at 355 Maysan Road, Valenzuela, Metro Manila,
claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by
respondent;

2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the properties he had
levied upon.4

The said special sheriff recommended that a break-open order be issued to enable him to enter
petitioners premises so that he could proceed with the public auction sale of the aforesaid
personal properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor
Arbiter alleging that the properties sought to be levied upon by the sheriff were owned by Hydro
(Phils.), Inc. (HPPI) of which he is the Vice-President.

On November 23, 1989, private respondents filed a Motion for Issuance of a Break-Open Order,
alleging that HPPI and petitioner corporation were owned by the same incorporator!
stockholders. They also alleged that petitioner temporarily suspended its business operations in
order to evade its legal obligations to them and that private respondents were willing to post an
indemnity bond to answer for any damages which petitioner and HPPI may suffer because of the
issuance of the break-open order.

In support of their claim against HPPI, private respondents presented duly certified copies of the
General Informations Sheet, dated May 15, 1987, submitted by petitioner to the Securities and
Exchange Commission (SEC) and the General Information Sheet, dated May 15, 1987,
submitted by HPPI to the Securities and Exchange Commission.

The General Information Sheet submitted by the petitioner1 revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

HPPI P6,999,500.00

Antonio W. Lim 2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member

Elisa C. Lim Member

Teodulo R. Dino Member

Virgilio O. Casino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa 0. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road

Valenzuela, Metro Manila.5

On the other hand, the General Information Sheet of HPPI revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W. Lim P400,000.00

Elisa C. Lim 57,700.00

AWL Trading 455,000.00

Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Elisa C. Lim Member

Dennis S. Cuyegkeng Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.6

On February 1, 1990, HPPI filed an Opposition to private respondents motion for issuance of a
break-open order, contending that HPPI is a corporation which is separate and distinct from
petitioner. HPPI also alleged that the two corporations are engaged in two different kinds of
businesses, i.e., HPPI is a manufacturing firm while petitioner was then engaged in construction.

On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents motion
for break-open order.

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the
order of the Labor Arbiter, issued a break-open order and directed private respondents to file a
bond. Thereafter, it directed the sheriff to proceed with the auction sale of the properties already
levied upon. It dismissed the third-party claim for lack of merit.

Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution,
dated December 3, 1992.

Hence, the resort to the present petition.

Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the
execution of its decision despite a third-party claim on the levied property. Petitioner further
contends, that the doctrine of piercing the corporate veil should not have been applied, in this
case, in the absence of any showing that it created HPPI in order to evade its liability to private
respondents. It also contends that HPPI is engaged in the manufacture and sale of steel, concrete
and iron pipes, a business which is distinct and separate from petitioners construction business.
Hence, it is of no consequence that petitioner and HPPI shared the same premises, the same
President and the same set of officers and subscribers.7

We find petitioners contention to be unmeritorious.

It is a fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporations to which it may be connected.8 But,
this separate and distinct personality of a corporation is merely a fiction created by law for
convenience and to promote justice.9 So, when the notion of separate juridical personality is
used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a
device to defeat the labor laws,10 this separate personality of the corporation may be disregarded
or the veil of corporate fiction pierced.11 This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation.12

The conditions under which the juridical entity may be disregarded vary according to the
peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid down,
but certainly, there are some probative factors of identity that will justify the application of the
doctrine of piercing the corporate veil, to wit:

1. Stock ownership by one or common ownership of both corporations.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

4. Methods of conducting the business.13

The SEC en banc explained the instrumentality rule which the courts have applied in
disregarding the separate juridical personality of corporations as follows:

Where one corporation is so organized and controlled and its affairs are conducted so that it is, in
fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the
instrumentality may be disregarded. The control necessary to invoke the rule is not majority or
even complete stock control but such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but
a conduit for its principal. It must be kept in mind that the control must be shown to have been
exercised at the time the acts complained of took place. Moreover, the control and breach of duty
must proximately cause the injury or unjust loss for which the complaint is made.

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is
as follows:

1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of plaintiffs legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.

The absence of any one of these elements prevents piercing the corporate veil. in applying the
instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendants relationship to that operation. 14

Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper
corporation, a sham or a subterfuge is purely one of fact.15

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations
on April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission
on May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro
Manila. On the other hand, HPPI, the third-party claimant, submitted on the same day, a similar
information sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro
Manila.
Furthermore, the NLRC stated that:

Both information sheets were filed by the same Virgilio O. Casino as the corporate secretary of
both corporations. It would also not be amiss to note that both corporations had the same
president, the same board of directors, the same corporate officers, and substantially the same
subscribers.

From the foregoing, it appears that, among other things, the respondent (herein petitioner) and
the third-party claimant shared the same address and/or premises. Under this circumstances, (sic)
it cannot be said that the property levied upon by the sheriff were not of respondents.16

Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of backwages and to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to petitioner corporation.

The facts in this case are analogous to Claparols v. Court of Industrial Relations17 where we had
the occasion to rule:

Respondent courts findings that indeed the Claparols Steel and Nail Plant, which ceased
operation of June 30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the
next day, July 1, 1957, up to December 7, 1962, when the latter finally ceased to operate, were
not disputed by petitioner. it is very clear that the latter corporation was a continuation and
successor of the first entity x x x. Both predecessors and successor were owned and controlled by
petitioner Eduardo Claparols and there was no break in the succession and continuity of the same
business. This avoiding-the-liability scheme is very patent, considering that 90% of the
subscribed shares of stock of the Claparols Steel Corporation (the second corporation) was
owned by respondent x x x Claparols himself, and all the assets of the dissolved Claparols Steel
and Nail Plant were turned over to the emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a corporate fiction
whose veil in the present case could, and should, be pierced as it was deliberately and
maliciously designed to evade its financial obligation to its employees.

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject
of the execution, private respondents had no other recourse but to apply for a break-open order
after the third-party claim of HPPI was dismissed for lack of merit by the NLRC. This is in
consonance with Section 3, Rule VII of the NLRC Manual of Execution of Judgment which
provides that:

Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his
representative entry to the place where the property subject of execution is located or kept, the
judgment creditor may apply to the Commission or Labor Arbiter concerned for a break-open
order.

Furthermore, our perusal of the records shows that the twin requirements of due notice and
hearing were complied with. Petitioner and the third-party claimant were given the opportunity
to submit evidence in support of their claim.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open
order issued by the Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial
agencies supported by substantial evidence are binding on this Court and are entitled to great
respect, in the absence of showing of grave abuse of a discretion.18

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated
April 23, 1992 and December 3, 1992, are AFFIRMED.

SO ORDERED.
Republic of the Philippines

SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 115849 January 24, 1996

FIRST PHILIPPINE INTERNATIONAL BANK (Formerly Producers Bank of the Philippines)

and MERCURIO RIVERA, petitioners,

vs.

COURT OF APPEALS, CARLOS EJERCITO, in substitution of DEMETRIO DEMETRIA, and

JOSE JANOLO, respondents.

DECISION

PANGANIBAN, J.:

In the absence of a formal deed of sale, may commitments given by bank officers in an exchange
of letters and/or in a meeting with the buyers constitute a perfected and enforceable contract of
sale over 101 hectares of land in Sta. Rosa, Laguna? Does the doctrine of "apparent authority"
apply in this case? If so, may the Central Bank-appointed conservator of Producers Bank (now
First Philippine International Bank) repudiate such "apparent authority" after said contract has
been deemed perfected? During the pendency of a suit for specific performance, does the filing
of a "derivative suit" by the majority shareholders and directors of the distressed bank to prevent
the enforcement or implementation of the sale violate the ban against forum-shopping?

Simply stated, these are the major questions brought before this Court in the instant Petition for
review on certiorari under Rule 45 of the Rules of Court, to set aside the Decision promulgated
January 14, 1994 of the respondent Court of Appeals1 in CA-G.R CV No. 35756 and the
Resolution promulgated June 14, 1994 denying the motion for reconsideration. The dispositive
portion of the said Decision reads:

WHEREFORE, the decision of the lower court is MODIFIED by the elimination of the damages
awarded under paragraphs 3, 4 and 6 of its dispositive portion and the reduction of the award in
paragraph 5 thereof to P75,000.00, to be assessed against defendant bank. In all other aspects,
said decision is hereby AFFIRMED.

All references to the original plaintiffs in the decision and its dispositive portion are deemed,
herein and hereafter, to legally refer to the plaintiff-appellee Carlos C. Ejercito.

Costs against appellant bank.

The dispositive portion of the trial court's2 decision dated July 10, 1991, on the other hand, is as
follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and
against the defendants as follows:

1. Declaring the existence of a perfected contract to buy and sell over the six (6) parcels of
land situated at Don Jose, Sta. Rosa, Laguna with an area of 101 hectares, more or less, covered
by and embraced in Transfer Certificates of Title Nos. T-106932 to T-106937, inclusive, of the
Land Records of Laguna, between the plaintiffs as buyers and the defendant Producers Bank for
an agreed price of Five and One Half Million (P5,500,000.00) Pesos;

2. Ordering defendant Producers Bank of the Philippines, upon finality of this decision and
receipt from the plaintiffs the amount of P5.5 Million, to execute in favor of said plaintiffs a deed
of absolute sale over the aforementioned six (6) parcels of land, and to immediately deliver to the
plaintiffs the owner's copies of T.C.T. Nos. T-106932 to T- 106937, inclusive, for purposes of
registration of the same deed and transfer of the six (6) titles in the names of the plaintiffs;
3. Ordering the defendants, jointly and severally, to pay plaintiffs Jose A. Janolo and
Demetrio Demetria the sums of P200,000.00 each in moral damages;

4. Ordering the defendants, jointly and severally, to pay plaintiffs the sum of P100,000.00
as exemplary damages ;

5. Ordering the defendants, jointly and severally, to pay the plaintiffs the amount of
P400,000.00 for and by way of attorney's fees;

6. Ordering the defendants to pay the plaintiffs, jointly and severally, actual and moderate
damages in the amount of P20,000.00;

With costs against the defendants.

After the parties filed their comment, reply, rejoinder, sur-rejoinder and reply to sur-rejoinder,
the petition was given due course in a Resolution dated January 18, 1995. Thence, the parties
filed their respective memoranda and reply memoranda. The First Division transferred this case
to the Third Division per resolution dated October 23, 1995. After carefully deliberating on the
aforesaid submissions, the Court assigned the case to the undersigned ponente for the writing of
this Decision.

The Parties

Petitioner First Philippine International Bank (formerly Producers Bank of the Philippines;
petitioner Bank, for brevity) is a banking institution organized and existing under the laws of the
Republic of the Philippines. Petitioner Mercurio Rivera (petitioner Rivera, for brevity) is of legal
age and was, at all times material to this case, Head-Manager of the Property Management
Department of the petitioner Bank.
Respondent Carlos Ejercito (respondent Ejercito, for brevity) is of legal age and is the assignee
of original plaintiffs-appellees Demetrio Demetria and Jose Janolo.

Respondent Court of Appeals is the court which issued the Decision and Resolution sought to be
set aside through this petition.

The Facts

The facts of this case are summarized in the respondent Court's Decision3 as follows:

(1) In the course of its banking operations, the defendant Producer Bank of the Philippines
acquired six parcels of land with a total area of 101 hectares located at Don Jose, Sta. Rose,
Laguna, and covered by Transfer Certificates of Title Nos. T-106932 to T-106937. The property
used to be owned by BYME Investment and Development Corporation which had them
mortgaged with the bank as collateral for a loan. The original plaintiffs, Demetrio Demetria and
Jose O. Janolo, wanted to purchase the property and thus initiated negotiations for that purpose.

(2) In the early part of August 1987 said plaintiffs, upon the suggestion of BYME
investment's legal counsel, Jose Fajardo, met with defendant Mercurio Rivera, Manager of the
Property Management Department of the defendant bank. The meeting was held pursuant to
plaintiffs' plan to buy the property (TSN of Jan. 16, 1990, pp. 7-10). After the meeting, plaintiff
Janolo, following the advice of defendant Rivera, made a formal purchase offer to the bank
through a letter dated August 30, 1987 (Exh. "B"), as follows:

August 30, 1987

The Producers Bank of the Philippines

Makati, Metro Manila

Attn. Mr. Mercurio Q. Rivera

Manager, Property Management Dept.

Gentleman:

I have the honor to submit my formal offer to purchase your properties covered by titles listed
hereunder located at Sta. Rosa, Laguna, with a total area of 101 hectares, more or less.

TCT NO.

AREA

T-106932

113,580 sq. m.

T-106933

70,899 sq. m.

T-106934

52,246 sq. m.

T-106935
96,768 sq. m.

T-106936

187,114 sq. m.

T-106937

481,481 sq. m.

My offer is for PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00)

PESOS, in cash.

Kindly contact me at Telephone Number 921-1344.

(3) On September 1, 1987, defendant Rivera made on behalf of the bank a formal reply by letter
which is hereunder quoted (Exh. "C"):

September 1, 1987

JP M-P GUTIERREZ ENTERPRISES

142 Charisma St., Doña Andres II

Rosario, Pasig, Metro Manila

Attention: JOSE O. JANOLO

Dear Sir:

Thank you for your letter-offer to buy our six (6) parcels of acquired lots at Sta. Rosa, Laguna
(formerly owned by Byme Industrial Corp.). Please be informed however that the bank's counter-
offer is at P5.5 million for more than 101 hectares on lot basis.

We shall be very glad to hear your position on the on the matter.

Best regards.

(4) On September 17, 1987, plaintiff Janolo, responding to Rivera's aforequoted reply, wrote
(Exh. "D"):

September 17, 1987

Producers Bank

Paseo de Roxas

Makati, Metro Manila

Attention: Mr. Mercurio Rivera

Gentlemen:

In reply to your letter regarding my proposal to purchase your 101-hectare lot located at Sta.
Rosa, Laguna, I would like to amend my previous offer and I now propose to buy the said lot at
P4.250 million in CASH..
Hoping that this proposal meets your satisfaction.

(5) There was no reply to Janolo's foregoing letter of September 17, 1987. What took place
was a meeting on September 28, 1987 between the plaintiffs and Luis Co, the Senior Vice-
President of defendant bank. Rivera as well as Fajardo, the BYME lawyer, attended the meeting.
Two days later, or on September 30, 1987, plaintiff Janolo sent to the bank, through Rivera, the
following letter (Exh. "E"):

The Producers Bank of the Philippines

Paseo de Roxas, Makati

Metro Manila

Attention: Mr. Mercurio Rivera

Re: 101 Hectares of Land

in Sta. Rosa, Laguna

Gentlemen:

Pursuant to our discussion last 28 September 1987, we are pleased to inform you that we are
accepting your offer for us to purchase the property at Sta. Rosa, Laguna, formerly owned by
Byme Investment, for a total price of PESOS: FIVE MILLION FIVE HUNDRED THOUSAND
(P5,500,000.00).

Thank you.

(6) On October 12, 1987, the conservator of the bank (which has been placed under
conservatorship by the Central Bank since 1984) was replaced by an Acting Conservator in the
person of defendant Leonida T. Encarnacion. On November 4, 1987, defendant Rivera wrote
plaintiff Demetria the following letter (Exh. "F"):

Attention: Atty. Demetrio Demetria

Dear Sir:

Your proposal to buy the properties the bank foreclosed from Byme investment Corp. located at
Sta. Rosa, Laguna is under study yet as of this time by the newly created committee for
submission to the newly designated Acting Conservator of the bank.

For your information.

(7) What thereafter transpired was a series of demands by the plaintiffs for compliance by the
bank with what plaintiff considered as a perfected contract of sale, which demands were in one
form or another refused by the bank. As detailed by the trial court in its decision, on November
17, 1987, plaintiffs through a letter to defendant Rivera (Exhibit "G") tendered payment of the
amount of P5.5 million "pursuant to (our) perfected sale agreement." Defendants refused to
receive both the payment and the letter. Instead, the parcels of land involved in the transaction
were advertised by the bank for sale to any interested buyer (Exh, "H" and "H-1"). Plaintiffs
demanded the execution by the bank of the documents on what was considered as a "perfected
agreement." Thus:

Mr. Mercurio Rivera

Manager, Producers Bank

Paseo de Roxas, Makati

Metro Manila

Dear Mr. Rivera:

This is in connection with the offer of our client, Mr. Jose O. Janolo, to purchase your 101-
hectare lot located in Sta. Rosa, Laguna, and which are covered by TCT No. T-106932 to
106937.

From the documents at hand, it appears that your counter-offer dated September 1, 1987 of this
same lot in the amount of P5.5 million was accepted by our client thru a letter dated September
30, 1987 and was received by you on October 5, 1987.

In view of the above circumstances, we believe that an agreement has been perfected. We were
also informed that despite repeated follow-up to consummate the purchase, you now refuse to
honor your commitment. Instead, you have advertised for sale the same lot to others.

In behalf of our client, therefore, we are making this formal demand upon you to consummate
and execute the necessary actions/documentation within three (3) days from your receipt hereof.
We are ready to remit the agreed amount of P5.5 million at your advice. Otherwise, we shall be
constrained to file the necessary court action to protect the interest of our client.

We trust that you will be guided accordingly.

(8) Defendant bank, through defendant Rivera, acknowledged receipt of the foregoing letter
and stated, in its communication of December 2, 1987 (Exh. "I"), that said letter has been
"referred . . . to the office of our Conservator for proper disposition" However, no response came
from the Acting Conservator. On December 14, 1987, the plaintiffs made a second tender of
payment (Exh. "L" and "L-1"), this time through the Acting Conservator, defendant Encarnacion.
Plaintiffs' letter reads:

PRODUCERS BANK OF

THE PHILIPPINES

Paseo de Roxas,
Makati, Metro Manila

Attn.: Atty. NIDA ENCARNACION

Central Bank Conservator

We are sending you herewith, in - behalf of our client, Mr. JOSE O. JANOLO, MBTC Check
No. 258387 in the amount of P5.5 million as our agreed purchase price of the 101-hectare lot
covered by TCT Nos. 106932, 106933, 106934, 106935, 106936 and 106937 and registered
under Producers Bank.

This is in connection with the perfected agreement consequent from your offer of P5.5 Million as
the purchase price of the said lots. Please inform us of the date of documentation of the sale
immediately.

Kindly acknowledge receipt of our payment.

(9) The foregoing letter drew no response for more than four months. Then, on May 3, 1988,
plaintiff, through counsel, made a final demand for compliance by the bank with its obligations
under the considered perfected contract of sale (Exhibit "N"). As recounted by the trial court
(Original Record, p. 656), in a reply letter dated May 12, 1988 (Annex "4" of defendant's answer
to amended complaint), the defendants through Acting Conservator Encarnacion repudiated the
authority of defendant Rivera and claimed that his dealings with the plaintiffs, particularly his
counter-offer of P5.5 Million are unauthorized or illegal. On that basis, the defendants justified
the refusal of the tenders of payment and the non-compliance with the obligations under what the
plaintiffs considered to be a perfected contract of sale.

(10) On May 16, 1988, plaintiffs filed a suit for specific performance with damages against
the bank, its Manager Rivers and Acting Conservator Encarnacion. The basis of the suit was that
the transaction had with the bank resulted in a perfected contract of sale, The defendants took the
position that there was no such perfected sale because the defendant Rivera is not authorized to
sell the property, and that there was no meeting of the minds as to the price.
On March 14, 1991, Henry L. Co (the brother of Luis Co), through counsel Sycip Salazar
Hernandez and Gatmaitan, filed a motion to intervene in the trial court, alleging that as owner of
80% of the Bank's outstanding shares of stock, he had a substantial interest in resisting the
complaint. On July 8, 1991, the trial court issued an order denying the motion to intervene on the
ground that it was filed after trial had already been concluded. It also denied a motion for
reconsideration filed thereafter. From the trial court's decision, the Bank, petitioner Rivera and
conservator Encarnacion appealed to the Court of Appeals which subsequently affirmed with
modification the said judgment. Henry Co did not appeal the denial of his motion for
intervention.

In the course of the proceedings in the respondent Court, Carlos Ejercito was substituted in place
of Demetria and Janolo, in view of the assignment of the latters' rights in the matter in litigation
to said private respondent.

On July 11, 1992, during the pendency of the proceedings in the Court of Appeals, Henry Co and
several other stockholders of the Bank, through counsel Angara Abello Concepcion Regala and
Cruz, filed an action (hereafter, the "Second Case") — purportedly a "derivative suit" — with the
Regional Trial Court of Makati, Branch 134, docketed as Civil Case No. 92-1606, against
Encarnacion, Demetria and Janolo "to declare any perfected sale of the property as
unenforceable and to stop Ejercito from enforcing or implementing the sale"4 In his answer,
Janolo argued that the Second Case was barred by litis pendentia by virtue of the case then
pending in the Court of Appeals. During the pre-trial conference in the Second Case, plaintiffs
filed a Motion for Leave of Court to Dismiss the Case Without Prejudice. "Private respondent
opposed this motion on the ground, among others, that plaintiff's act of forum shopping justifies
the dismissal of both cases, with prejudice."5 Private respondent, in his memorandum, averred
that this motion is still pending in the Makati RTC.

In their Petition6 and Memorandum7 , petitioners summarized their position as follows:

I.

The Court of Appeals erred in declaring that a contract of sale was perfected between Ejercito (in
substitution of Demetria and Janolo) and the bank.
II.

The Court of Appeals erred in declaring the existence of an enforceable contract of sale between
the parties.

III.

The Court of Appeals erred in declaring that the conservator does not have the power to overrule
or revoke acts of previous management.

IV.

The findings and conclusions of the Court of Appeals do not conform to the evidence on record.

On the other hand, petitioners prayed for dismissal of the instant suit on the ground8 that:

I.

Petitioners have engaged in forum shopping.

II.

The factual findings and conclusions of the Court of Appeals are supported by the evidence on
record and may no longer be questioned in this case.

III.
The Court of Appeals correctly held that there was a perfected contract between Demetria and
Janolo (substituted by; respondent Ejercito) and the bank.

IV.

The Court of Appeals has correctly held that the conservator, apart from being estopped from
repudiating the agency and the contract, has no authority to revoke the contract of sale.

The Issues

From the foregoing positions of the parties, the issues in this case may be summed up as follows:

1) Was there forum-shopping on the part of petitioner Bank?

2) Was there a perfected contract of sale between the parties?

3) Assuming there was, was the said contract enforceable under the statute of frauds?

4) Did the bank conservator have the unilateral power to repudiate the authority of the bank
officers and/or to revoke the said contract?

5) Did the respondent Court commit any reversible error in its findings of facts?

The First Issue: Was There Forum-Shopping?

In order to prevent the vexations of multiple petitions and actions, the Supreme Court
promulgated Revised Circular No. 28-91 requiring that a party "must certify under oath . . . [that]
(a) he has not (t)heretofore commenced any other action or proceeding involving the same issues
in the Supreme Court, the Court of Appeals, or any other tribunal or agency; (b) to the best of his
knowledge, no such action or proceeding is pending" in said courts or agencies. A violation of
the said circular entails sanctions that include the summary dismissal of the multiple petitions or
complaints. To be sure, petitioners have included a VERIFICATION/CERTIFICATION in their
Petition stating "for the record(,) the pendency of Civil Case No. 92-1606 before the Regional
Trial Court of Makati, Branch 134, involving a derivative suit filed by stockholders of petitioner
Bank against the conservator and other defendants but which is the subject of a pending Motion
to Dismiss Without Prejudice.9

Private respondent Ejercito vigorously argues that in spite of this verification, petitioners are
guilty of actual forum shopping because the instant petition pending before this Court involves
"identical parties or interests represented, rights asserted and reliefs sought (as that) currently
pending before the Regional Trial Court, Makati Branch 134 in the Second Case. In fact, the
issues in the two cases are so interwined that a judgement or resolution in either case will
constitute res judicata in the other." 10

On the other hand, petitioners explain 11 that there is no forum-shopping because:

1) In the earlier or "First Case" from which this proceeding arose, the Bank was impleaded
as a defendant, whereas in the "Second Case" (assuming the Bank is the real party in interest in a
derivative suit), it was plaintiff;

2) "The derivative suit is not properly a suit for and in behalf of the corporation under the
circumstances";

3) Although the CERTIFICATION/VERIFICATION (supra) signed by the Bank president

and attached to the Petition identifies the action as a "derivative suit," it "does not mean that it is
one" and "(t)hat is a legal question for the courts to decide";
4) Petitioners did not hide the Second Case at they mentioned it in the said
VERIFICATION/CERTIFICATION.

We rule for private respondent.

To begin with, forum-shopping originated as a concept in private international law.12 , where

non-resident litigants are given the option to choose the forum or place wherein to bring their suit
for various reasons or excuses, including to secure procedural advantages, to annoy and harass
the defendant, to avoid overcrowded dockets, or to select a more friendly venue. To combat these
less than honorable excuses, the principle of forum non conveniens was developed whereby a
court, in conflicts of law cases, may refuse impositions on its jurisdiction where it is not the most
"convenient" or available forum and the parties are not precluded from seeking remedies
elsewhere.

In this light, Black's Law Dictionary 13 says that forum shopping "occurs when a party attempts
to have his action tried in a particular court or jurisdiction where he feels he will receive the most
favorable judgment or verdict." Hence, according to Words and Phrases14 , "a litigant is open to
the charge of "forum shopping" whenever he chooses a forum with slight connection to factual
circumstances surrounding his suit, and litigants should be encouraged to attempt to settle their
differences without imposing undue expenses and vexatious situations on the courts".

In the Philippines, forum shopping has acquired a connotation encompassing not only a choice of
venues, as it was originally understood in conflicts of laws, but also to a choice of remedies. As
to the first (choice of venues), the Rules of Court, for example, allow a plaintiff to commence
personal actions "where the defendant or any of the defendants resides or may be found, or
where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff" (Rule 4, Sec, 2
[b]). As to remedies, aggrieved parties, for example, are given a choice of pursuing civil
liabilities independently of the criminal, arising from the same set of facts. A passenger of a
public utility vehicle involved in a vehicular accident may sue on culpa contractual, culpa
aquiliana or culpa criminal — each remedy being available independently of the others —
although he cannot recover more than once.

In either of these situations (choice of venue or choice of remedy), the litigant actually shops for
a forum of his action, This was the original concept of the term forum shopping.
Eventually, however, instead of actually making a choice of the forum of their actions, litigants,
through the encouragement of their lawyers, file their actions in all available courts, or invoke all
relevant remedies simultaneously. This practice had not only resulted to (sic) conflicting
adjudications among different courts and consequent confusion enimical (sic) to an orderly
administration of justice. It had created extreme inconvenience to some of the parties to the
action.

Thus, "forum shopping" had acquired a different concept — which is unethical professional legal
practice. And this necessitated or had given rise to the formulation of rules and canons
discouraging or altogether prohibiting the practice. 15

What therefore originally started both in conflicts of laws and in our domestic law as a legitimate
device for solving problems has been abused and mis-used to assure scheming litigants of
dubious reliefs.

To avoid or minimize this unethical practice of subverting justice, the Supreme Court, as already
mentioned, promulgated Circular 28-91. And even before that, the Court had prescribed it in the
Interim Rules and Guidelines issued on January 11, 1983 and had struck down in several cases
16 the inveterate use of this insidious malpractice. Forum shopping as "the filing of repetitious
suits in different courts" has been condemned by Justice Andres R. Narvasa (now Chief Justice)
in Minister of Natural Resources, et al., vs. Heirs of Orval Hughes, et al., "as a reprehensible
manipulation of court processes and proceedings . . ." 17 when does forum shopping take place?

There is forum-shopping whenever, as a result of an adverse opinion in one forum, a party seeks
a favorable opinion (other than by appeal or certiorari) in another. The principle applies not only
with respect to suits filed in the courts but also in connection with litigations commenced in the
courts while an administrative proceeding is pending, as in this case, in order to defeat
administrative processes and in anticipation of an unfavorable administrative ruling and a
favorable court ruling. This is specially so, as in this case, where the court in which the second
suit was brought, has no jurisdiction.18

The test for determining whether a party violated the rule against forum shopping has been laid
dawn in the 1986 case of Buan vs. Lopez 19 , also by Chief Justice Narvasa, and that is, forum
shopping exists where the elements of litis pendentia are present or where a final judgment in
one case will amount to res judicata in the other, as follows:

There thus exists between the action before this Court and RTC Case No. 86-36563 identity of
parties, or at least such parties as represent the same interests in both actions, as well as identity
of rights asserted and relief prayed for, the relief being founded on the same facts, and the
identity on the two preceding particulars is such that any judgment rendered in the other action,
will, regardless of which party is successful, amount to res adjudicata in the action under
consideration: all the requisites, in fine, of auter action pendant.

xxx xxx xxx

As already observed, there is between the action at bar and RTC Case No. 86-36563, an identity
as regards parties, or interests represented, rights asserted and relief sought, as well as basis
thereof, to a degree sufficient to give rise to the ground for dismissal known as auter action
pendant or lis pendens. That same identity puts into operation the sanction of twin dismissals just
mentioned. The application of this sanction will prevent any further delay in the settlement of the
controversy which might ensue from attempts to seek reconsideration of or to appeal from the
Order of the Regional Trial Court in Civil Case No. 86-36563 promulgated on July 15, 1986,
which dismissed the petition upon grounds which appear persuasive.

Consequently, where a litigant (or one representing the same interest or person) sues the same
party against whom another action or actions for the alleged violation of the same right and the
enforcement of the same relief is/are still pending, the defense of litis pendencia in one case is
bar to the others; and, a final judgment in one would constitute res judicata and thus would cause
the dismissal of the rest. In either case, forum shopping could be cited by the other party as a
ground to ask for summary dismissal of the two 20 (or more) complaints or petitions, and for
imposition of the other sanctions, which are direct contempt of court, criminal prosecution, and
disciplinary action against the erring lawyer.

Applying the foregoing principles in the case before us and comparing it with the Second Case, it
is obvious that there exist identity of parties or interests represented, identity of rights or causes
and identity of reliefs sought.
Very simply stated, the original complaint in the court a quo which gave rise to the instant
petition was filed by the buyer (herein private respondent and his predecessors-in-interest)
against the seller (herein petitioners) to enforce the alleged perfected sale of real estate. On the
other hand, the complaint 21 in the Second Case seeks to declare such purported sale involving
the same real property "as unenforceable as against the Bank", which is the petitioner herein. In
other words, in the Second Case, the majority stockholders, in representation of the Bank, are
seeking to accomplish what the Bank itself failed to do in the original case in the trial court. In
brief, the objective or the relief being sought, though worded differently, is the same, namely, to
enable the petitioner Bank to escape from the obligation to sell the property to respondent. In
Danville Maritime, Inc. vs. Commission on Audit. 22 , this Court ruled that the filing by a party
of two apparently different actions, but with the same objective, constituted forum shopping:

In the attempt to make the two actions appear to be different, petitioner impleaded different
respondents therein — PNOC in the case before the lower court and the COA in the case before
this Court and sought what seems to be different reliefs. Petitioner asks this Court to set aside the
questioned letter-directive of the COA dated October 10, 1988 and to direct said body to approve
the Memorandum of Agreement entered into by and between the PNOC and petitioner, while in
the complaint before the lower court petitioner seeks to enjoin the PNOC from conducting a
rebidding and from selling to other parties the vessel "T/T Andres Bonifacio", and for an
extension of time for it to comply with the paragraph 1 of the memorandum of agreement and
damages. One can see that although the relief prayed for in the two (2) actions are ostensibly
different, the ultimate objective in both actions is the same, that is, approval of the sale of vessel
in favor of petitioner and to overturn the letter-directive of the COA of October 10, 1988
disapproving the sale. (emphasis supplied).

In an earlier case 23 but with the same logic and vigor, we held:

In other words, the filing by the petitioners of the instant special civil action for certiorari and
prohibition in this Court despite the pendency of their action in the Makati Regional Trial Court,
is a species of forum-shopping. Both actions unquestionably involve the same transactions, the
same essential facts and circumstances. The petitioners' claim of absence of identity simply
because the PCGG had not been impleaded in the RTC suit, and the suit did not involve certain
acts which transpired after its commencement, is specious. In the RTC action, as in the action
before this Court, the validity of the contract to purchase and sell of September 1, 1986, i.e.,
whether or not it had been efficaciously rescinded, and the propriety of implementing the same
(by paying the pledgee banks the amount of their loans, obtaining the release of the pledged
shares, etc.) were the basic issues. So, too, the relief was the same: the prevention of such
implementation and/or the restoration of the status quo ante. When the acts sought to be
restrained took place anyway despite the issuance by the Trial Court of a temporary restraining
order, the RTC suit did not become functus oficio. It remained an effective vehicle for obtention
of relief; and petitioners' remedy in the premises was plain and patent: the filing of an amended
and supplemental pleading in the RTC suit, so as to include the PCGG as defendant and seek
nullification of the acts sought to be enjoined but nonetheless done. The remedy was certainly
not the institution of another action in another forum based on essentially the same facts, The
adoption of this latter recourse renders the petitioners amenable to disciplinary action and both
their actions, in this Court as well as in the Court a quo, dismissible.

In the instant case before us, there is also identity of parties, or at least, of interests represented.
Although the plaintiffs in the Second Case (Henry L. Co. et al.) are not name parties in the First
Case, they represent the same interest and entity, namely, petitioner Bank, because:

Firstly, they are not suing in their personal capacities, for they have no direct personal interest in
the matter in controversy. They are not principally or even subsidiarily liable; much less are they
direct parties in the assailed contract of sale; and

Secondly, the allegations of the complaint in the Second Case show that the stockholders are
bringing a "derivative suit". In the caption itself, petitioners claim to have brought suit "for and
in behalf of the Producers Bank of the Philippines" 24 . Indeed, this is the very essence of a
derivative suit:

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation

wherein he holdsstock in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In
such actions, the suing stockholder is regarded as a nominal party, with the corporation as the
real party in interest. (Gamboa v. Victoriano, 90 SCRA 40, 47 [1979]; emphasis supplied).

In the face of the damaging admissions taken from the complaint in the Second Case, petitioners,
quite strangely, sought to deny that the Second Case was a derivative suit, reasoning that it was
brought, not by the minority shareholders, but by Henry Co et al., who not only own, hold or
control over 80% of the outstanding capital stock, but also constitute the majority in the Board of
Directors of petitioner Bank. That being so, then they really represent the Bank. So, whether they
sued "derivatively" or directly, there is undeniably an identity of interests/entity represented.

Petitioner also tried to seek refuge in the corporate fiction that the personality Of the Bank is
separate and distinct from its shareholders. But the rulings of this Court are consistent: "When
the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of
a monopoly or generally the perpetration of knavery or crime, 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." 25

In addition to the many cases 26 where the corporate fiction has been disregarded, we now add
the instant case, and declare herewith that the corporate veil cannot be used to shield an
otherwise blatant violation of the prohibition against forum-shopping. Shareholders, whether
suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to
trifle with court processes, particularly where, as in this case, the corporation itself has not been
remiss in vigorously prosecuting or defending corporate causes and in using and applying
remedies available to it. To rule otherwise would be to encourage corporate litigants to use their
shareholders as fronts to circumvent the stringent rules against forum shopping.

Finally, petitioner Bank argued that there cannot be any forum shopping, even assuming
arguendo that there is identity of parties, causes of action and reliefs sought, "because it (the
Bank) was the defendant in the (first) case while it was the plaintiff in the other (Second
Case)",citing as authority Victronics Computers, Inc., vs. Regional Trial Court, Branch 63,
Makati, etc. et al., 27 where Court held:

The rule has not been extended to a defendant who, for reasons known only to him, commences
a new action against the plaintiff — instead of filing a responsive pleading in the other case —
setting forth therein, as causes of action, specific denials, special and affirmative defenses or
even counterclaims, Thus, Velhagen's and King's motion to dismiss Civil Case No. 91-2069 by
no means negates the charge of forum-shopping as such did not exist in the first place. (emphasis
supplied)
Petitioner pointed out that since it was merely the defendant in the original case, it could not
have chosen the forum in said case.

Respondent, on the other hand, replied that there is a difference in factual setting between
Victronics and the present suit. In the former, as underscored in the above-quoted Court ruling,
the defendants did not file any responsive pleading in the first case. In other words, they did not
make any denial or raise any defense or counter-claim therein In the case before us however,
petitioners filed a responsive pleading to the complaint — as a result of which, the issues were
joined.

Indeed, by praying for affirmative reliefs and interposing counter–claims in their responsive
pleadings, the petitioners became plaintiffs themselves in the original case, giving unto
themselves the very remedies they repeated in the Second Case.

Ultimately, what is truly important to consider in determining whether forum-shopping exists or

not is the vexation caused the courts and parties-litigant by a party who asks different courts
and/or administrative agencies to rule on the same or related causes and/or to grant the same or
substantially the same reliefs, in the process creating the possibility of conflicting decisions
being rendered by the different fora upon the same issue. In this case, this is exactly the problem:
a decision recognizing the perfection and directing the enforcement of the contract of sale will
directly conflict with a possible decision in the Second Case barring the parties front enforcing or
implementing the said sale. Indeed, a final decision in one would constitute res judicata in the
other 28 .

The foregoing conclusion finding the existence of forum-shopping notwithstanding, the only
sanction possible now is the dismissal of both cases with prejudice, as the other sanctions cannot
be imposed because petitioners' present counsel entered their appearance only during the
proceedings in this Court, and the Petition's VERIFICATION/CERTIFICATION contained
sufficient allegations as to the pendency of the Second Case to show good faith in observing
Circular 28-91. The Lawyers who filed the Second Case are not before us; thus the rudiments of
due process prevent us from motu propio imposing disciplinary measures against them in this
Decision. However, petitioners themselves (and particularly Henry Co, et al.) as litigants are
admonished to strictly follow the rules against forum-shopping and not to trifle with court
proceedings and processes They are warned that a repetition of the same will be dealt with more
severely.
Having said that, let it be emphasized that this petition should be dismissed not merely because
of forum-shopping but also because of the substantive issues raised, as will be discussed shortly.

The Second Issue: Was The Contract Perfected?

The respondent Court correctly treated the question of whether or not there was, on the basis of
the facts established, a perfected contract of sale as the ultimate issue. Holding that a valid
contract has been established, respondent Court stated:

There is no dispute that the object of the transaction is that property owned by the defendant
bank as acquired assets consisting of six (6) parcels of land specifically identified under Transfer
Certificates of Title Nos. T-106932 to T-106937. It is likewise beyond cavil that the bank
intended to sell the property. As testified to by the Bank's Deputy Conservator, Jose Entereso,
the bank was looking for buyers of the property. It is definite that the plaintiffs wanted to
purchase the property and it was precisely for this purpose that they met with defendant Rivera,
Manager of the Property Management Department of the defendant bank, in early August 1987.
The procedure in the sale of acquired assets as well as the nature and scope of the authority of
Rivera on the matter is clearly delineated in the testimony of Rivera himself, which testimony
was relied upon by both the bank and by Rivera in their appeal briefs. Thus (TSN of July 30,
1990. pp. 19-20):

A: The procedure runs this way: Acquired assets was turned over to me and then I published
it in the form of an inter-office memorandum distributed to all branches that these are acquired
assets for sale. I was instructed to advertise acquired assets for sale so on that basis, I have to
entertain offer; to accept offer, formal offer and upon having been offered, I present it to the
Committee. I provide the Committee with necessary information about the property such as
original loan of the borrower, bid price during the foreclosure, total claim of the bank, the
appraised value at the time the property is being offered for sale and then the information which
are relative to the evaluation of the bank to buy which the Committee considers and it is the
Committee that evaluate as against the exposure of the bank and it is also the Committee that
submit to the Conservator for final approval and once approved, we have to execute the deed of
sale and it is the Conservator that sign the deed of sale, sir.
The plaintiffs, therefore, at that meeting of August 1987 regarding their purpose of buying the
property, dealt with and talked to the right person. Necessarily, the agenda was the price of the
property, and plaintiffs were dealing with the bank official authorized to entertain offers, to
accept offers and to present the offer to the Committee before which the said official is
authorized to discuss information relative to price determination. Necessarily, too, it being
inherent in his authority, Rivera is the officer from whom official information regarding the
price, as determined by the Committee and approved by the Conservator, can be had. And Rivera
confirmed his authority when he talked with the plaintiff in August 1987. The testimony of
plaintiff Demetria is clear on this point (TSN of May 31,1990, pp. 27-28):

Q: When you went to the Producers Bank and talked with Mr. Mercurio Rivera, did you ask
him point-blank his authority to sell any property?

A: No, sir. Not point blank although it came from him, (W)hen I asked him how long it
would take because he was saying that the matter of pricing will be passed upon by the
committee. And when I asked him how long it will take for the committee to decide and he said
the committee meets every week. If I am not mistaken Wednesday and in about two week's (sic)
time, in effect what he was saying he was not the one who was to decide. But he would refer it to
the committee and he would relay the decision of the committee to me.

Q — Please answer the question.

A — He did not say that he had the authority (.) But he said he would refer the matter to the
committee and he would relay the decision to me and he did just like that.

"Parenthetically, the Committee referred to was the Past Due Committee of which Luis Co was
the Head, with Jose Entereso as one of the members.

What transpired after the meeting of early August 1987 are consistent with the authority and the
duties of Rivera and the bank's internal procedure in the matter of the sale of bank's assets. As
advised by Rivera, the plaintiffs made a formal offer by a letter dated August 20, 1987 stating
that they would buy at the price of P3.5 Million in cash. The letter was for the attention of
Mercurio Rivera who was tasked to convey and accept such offers. Considering an aspect of the
official duty of Rivera as some sort of intermediary between the plaintiffs-buyers with their
proposed buying price on one hand, and the bank Committee, the Conservator and ultimately the
bank itself with the set price on the other, and considering further the discussion of price at the
meeting of August resulting in a formal offer of P3.5 Million in cash, there can be no other
logical conclusion than that when, on September 1, 1987, Rivera informed plaintiffs by letter that
"the bank's counter-offer is at P5.5 Million for more than 101 hectares on lot basis," such
counter-offer price had been determined by the Past Due Committee and approved by the
Conservator after Rivera had duly presented plaintiffs' offer for discussion by the Committee of
such matters as original loan of borrower, bid price during foreclosure, total claim of the bank,
and market value. Tersely put, under the established facts, the price of P5.5 Million was, as
clearly worded in Rivera's letter (Exh. "E"), the official and definitive price at which the bank
was selling the property.

There were averments by defendants below, as well as before this Court, that the P5.5 Million
price was not discussed by the Committee and that price. As correctly characterized by the trial
court, this is not credible. The testimonies of Luis Co and Jose Entereso on this point are at best
equivocal and considering the gratuitous and self-serving character of these declarations, the
bank's submission on this point does not inspire belief. Both Co ad Entereso, as members of the
Past Due Committee of the bank, claim that the offer of the plaintiff was never discussed by the
Committee. In the same vein, both Co and Entereso openly admit that they seldom attend the
meetings of the Committee. It is important to note that negotiations on the price had started in
early August and the plaintiffs had already offered an amount as purchase price, having been
made to understand by Rivera, the official in charge of the negotiation, that the price will be
submitted for approval by the bank and that the bank's decision will be relayed to plaintiffs.
From the facts, the official bank price. At any rate, the bank placed its official, Rivera, in a
position of authority to accept offers to buy and negotiate the sale by having the offer officially
acted upon by the bank. The bank cannot turn around and later say, as it now does, that what
Rivera states as the bank's action on the matter is not in fact so. It is a familiar doctrine, the
doctrine of ostensible authority, that if a corporation knowingly permits one of its officers, or any
other agent, to do acts within the scope of an apparent authority, and thus holds him out to the
public as possessing power to do those acts, the corporation will, as against any one who has in
good faith dealt with the corporation through such agent, he estopped from denying his authority
(Francisco v. GSIS, 7 SCRA 577, 583-584; PNB v. Court of Appeals, 94 SCRA 357, 369-370;
Prudential Bank v. Court of Appeals, G.R. No. 103957, June 14, 1993). 29

Article 1318 of the Civil Code enumerates the requisites of a valid and perfected contract as
follows: "(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."
There is no dispute on requisite no. 2. The object of the questioned contract consists of the six (6)
parcels of land in Sta. Rosa, Laguna with an aggregate area of about 101 hectares, more or less,
and covered by Transfer Certificates of Title Nos. T-106932 to T-106937. There is, however, a
dispute on the first and third requisites.

Petitioners allege that "there is no counter-offer made by the Bank, and any supposed counter-
offer which Rivera (or Co) may have made is unauthorized. Since there was no counter-offer by
the Bank, there was nothing for Ejercito (in substitution of Demetria and Janolo) to accept." 30
They disputed the factual basis of the respondent Court's findings that there was an offer made
by Janolo for P3.5 million, to which the Bank counter-offered P5.5 million. We have perused the
evidence but cannot find fault with the said Court's findings of fact. Verily, in a petition under
Rule 45 such as this, errors of fact — if there be any - are, as a rule, not reviewable. The mere
fact that respondent Court (and the trial court as well) chose to believe the evidence presented by
respondent more than that presented by petitioners is not by itself a reversible error. In fact, such
findings merit serious consideration by this Court, particularly where, as in this case, said courts
carefully and meticulously discussed their findings. This is basic.

Be that as it may, and in addition to the foregoing disquisitions by the Court of Appeals, let us
review the question of Rivera's authority to act and petitioner's allegations that the P5.5 million
counter-offer was extinguished by the P4.25 million revised offer of Janolo. Here, there are
questions of law which could be drawn from the factual findings of the respondent Court. They
also delve into the contractual elements of consent and cause.

The authority of a corporate officer in dealing with third persons may be actual or apparent. The
doctrine of "apparent authority", with special reference to banks, was laid out in Prudential Bank
vs. Court of Appeals31 , where it was held that:

Conformably, we have declared in countless decisions that the principal is liable for obligations
contracted by the agent. The agent's apparent representation yields to the principal's true
representation and the contract is considered as entered into between the principal and the third
person (citing National Food Authority vs. Intermediate Appellate Court, 184 SCRA 166).
A bank is liable for wrongful acts of its officers done in the interests of the bank or in the course
of dealings of the officers in their representative capacity but not for acts outside the scape of
their authority (9 C.J.S., p. 417). A bank holding out its officers and agents as worthy of
confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in
the apparent scope of their employment; nor will it be permitted to shirk its responsibility for
such frauds even though no benefit may accrue to the bank therefrom (10 Am Jur 2d, p. 114).
Accordingly, a banking corporation is liable to innocent third persons where the representation is
made in the course of its business by an agent acting within the general scope of his authority
even though, in the particular case, the agent is secretly abusing his authority and attempting to
perpetrate a fraud upon his principal or some other person, for his own ultimate benefit
(McIntosh v. Dakota Trust Co., 52 ND 752, 204 NW 818, 40 ALR 1021).

Application of these principles is especially necessary because banks have a fiduciary

relationship with the public and their stability depends on the confidence of the people in their
honesty and efficiency. Such faith will be eroded where banks do not exercise strict care in the
selection and supervision of its employees, resulting in prejudice to their depositors.

From the evidence found by respondent Court, it is obvious that petitioner Rivera has apparent or
implied authority to act for the Bank in the matter of selling its acquired assets. This evidence
includes the following:

(a) The petition itself in par. II-i (p. 3) states that Rivera was "at all times material to this
case, Manager of the Property Management Department of the Bank". By his own admission,
Rivera was already the person in charge of the Bank's acquired assets (TSN, August 6, 1990, pp.
8-9);

(b) As observed by respondent Court, the land was definitely being sold by the Bank. And
during the initial meeting between the buyers and Rivera, the latter suggested that the buyers'
offer should be no less than P3.3 million (TSN, April 26, 1990, pp. 16-17);

(c) Rivera received the buyers' letter dated August 30, 1987 offering P3.5 million (TSN, 30
July 1990, p.11);
(d) Rivera signed the letter dated September 1, 1987 offering to sell the property for P5.5
million (TSN, July 30, p. 11);

(e) Rivera received the letter dated September 17, 1987 containing the buyers' proposal to
buy the property for P4.25 million (TSN, July 30, 1990, p. 12);

(f) Rivera, in a telephone conversation, confirmed that the P5.5 million was the final price of
the Bank (TSN, January 16, 1990, p. 18);

(g) Rivera arranged the meeting between the buyers and Luis Co on September 28, 1994,
during which the Bank's offer of P5.5 million was confirmed by Rivera (TSN, April 26, 1990,
pp. 34-35). At said meeting, Co, a major shareholder and officer of the Bank, confirmed Rivera's
statement as to the finality of the Bank's counter-offer of P5.5 million (TSN, January 16, 1990, p.
21; TSN, April 26, 1990, p. 35);

(h) In its newspaper advertisements and announcements, the Bank referred to Rivera as the
officer acting for the Bank in relation to parties interested in buying assets owned/acquired by
the Bank. In fact, Rivera was the officer mentioned in the Bank's advertisements offering for sale
the property in question (cf. Exhs. "S" and "S-1").

In the very recent case of Limketkai Sons Milling, Inc. vs. Court of Appeals, et. al.32 , the Court,
through Justice Jose A. R. Melo, affirmed the doctrine of apparent authority as it held that the
apparent authority of the officer of the Bank of P.I. in charge of acquired assets is borne out by
similar circumstances surrounding his dealings with buyers.

To be sure, petitioners attempted to repudiate Rivera's apparent authority through documents and
testimony which seek to establish Rivera's actual authority. These pieces of evidence, however,
are inherently weak as they consist of Rivera's self-serving testimony and various inter-office
memoranda that purport to show his limited actual authority, of which private respondent cannot
be charged with knowledge. In any event, since the issue is apparent authority, the existence of
which is borne out by the respondent Court's findings, the evidence of actual authority is
immaterial insofar as the liability of a corporation is concerned 33 .
Petitioners also argued that since Demetria and Janolo were experienced lawyers and their "law
firm" had once acted for the Bank in three criminal cases, they should be charged with actual
knowledge of Rivera's limited authority. But the Court of Appeals in its Decision (p. 12) had
already made a factual finding that the buyers had no notice of Rivera's actual authority prior to
the sale. In fact, the Bank has not shown that they acted as its counsel in respect to any acquired
assets; on the other hand, respondent has proven that Demetria and Janolo merely associated
with a loose aggrupation of lawyers (not a professional partnership), one of whose members
(Atty. Susana Parker) acted in said criminal cases.

Petitioners also alleged that Demetria's and Janolo's P4.25 million counter-offer in the letter
dated September 17, 1987 extinguished the Bank's offer of P5.5 million 34 .They disputed the
respondent Court's finding that "there was a meeting of minds when on 30 September 1987
Demetria and Janolo through Annex "L" (letter dated September 30, 1987) "accepted" Rivera's
counter offer of P5.5 million under Annex "J" (letter dated September 17, 1987)", citing the late
Justice Paras35 , Art. 1319 of the Civil Code 36 and related Supreme Court rulings starting with
Beaumont vs. Prieto 37 .

However, the above-cited authorities and precedents cannot apply in the instant case because, as
found by the respondent Court which reviewed the testimonies on this point, what was
"accepted" by Janolo in his letter dated September 30, 1987 was the Bank's offer of P5.5 million
as confirmed and reiterated to Demetria and Atty. Jose Fajardo by Rivera and Co during their
meeting on September 28, 1987. Note that the said letter of September 30, 1987 begins
with"(p)ursuant to our discussion last 28 September 1987 . . .

Petitioners insist that the respondent Court should have believed the testimonies of Rivera and
Co that the September 28, 1987 meeting "was meant to have the offerors improve on their
position of P5.5. million."38 However, both the trial court and the Court of Appeals found
petitioners' testimonial evidence "not credible", and we find no basis for changing this finding of
fact.

Indeed, we see no reason to disturb the lower courts' (both the RTC and the CA) common
finding that private respondents' evidence is more in keeping with truth and logic — that during
the meeting on September 28, 1987, Luis Co and Rivera "confirmed that the P5.5 million price
has been passed upon by the Committee and could no longer be lowered (TSN of April 27, 1990,
pp. 34-35)"39 . Hence, assuming arguendo that the counter-offer of P4.25 million extinguished
the offer of P5.5 million, Luis Co's reiteration of the said P5.5 million price during the
September 28, 1987 meeting revived the said offer. And by virtue of the September 30, 1987
letter accepting this revived offer, there was a meeting of the minds, as the acceptance in said
letter was absolute and unqualified.

We note that the Bank's repudiation, through Conservator Encarnacion, of Rivera's authority and
action, particularly the latter's counter-offer of P5.5 million, as being "unauthorized and illegal"
came only on May 12, 1988 or more than seven (7) months after Janolo' acceptance. Such delay,
and the absence of any circumstance which might have justifiably prevented the Bank from
acting earlier, clearly characterizes the repudiation as nothing more than a last-minute attempt on
the Bank's part to get out of a binding contractual obligation.

Taken together, the factual findings of the respondent Court point to an implied admission on the
part of the petitioners that the written offer made on September 1, 1987 was carried through
during the meeting of September 28, 1987. This is the conclusion consistent with human
experience, truth and good faith.

It also bears noting that this issue of extinguishment of the Bank's offer of P5.5 million was
raised for the first time on appeal and should thus be disregarded.

This Court in several decisions has repeatedly adhered to the principle that points of law,
theories, issues of fact and arguments not adequately 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 (Santos vs. IAC, No. 74243, November 14, 1986, 145 SCRA 592).40

. . . It is settled jurisprudence that an issue which was neither averred in the complaint nor raised
during the trial in the court below cannot be raised for the first time on appeal as it would be
offensive to the basic rules of fair play, justice and due process (Dihiansan vs. CA, 153 SCRA
713 [1987]; Anchuelo vs. IAC, 147 SCRA 434 [1987]; Dulos Realty & Development Corp. vs.
CA, 157 SCRA 425 [1988]; Ramos vs. IAC, 175 SCRA 70 [1989]; Gevero vs. IAC, G.R. 77029,
August 30, 1990).41
Since the issue was not raised in the pleadings as an affirmative defense, private respondent was
not given an opportunity in the trial court to controvert the same through opposing evidence.
Indeed, this is a matter of due process. But we passed upon the issue anyway, if only to avoid
deciding the case on purely procedural grounds, and we repeat that, on the basis of the evidence
already in the record and as appreciated by the lower courts, the inevitable conclusion is simply
that there was a perfected contract of sale.

The Third Issue: Is the Contract Enforceable?

The petition alleged42 :

Even assuming that Luis Co or Rivera did relay a verbal offer to sell at P5.5 million during the
meeting of 28 September 1987, and it was this verbal offer that Demetria and Janolo accepted
with their letter of 30 September 1987, the contract produced thereby would be unenforceable by
action — there being no note, memorandum or writing subscribed by the Bank to evidence such
contract. (Please see article 1403[2], Civil Code.)

Upon the other hand, the respondent Court in its Decision (p, 14) stated:

. . . Of course, the bank's letter of September 1, 1987 on the official price and the plaintiffs'
acceptance of the price on September 30, 1987, are not, in themselves, formal contracts of sale.
They are however clear embodiments of the fact that a contract of sale was perfected between the
parties, such contract being binding in whatever form it may have been entered into (case
citations omitted). Stated simply, the banks' letter of September 1, 1987, taken together with
plaintiffs' letter dated September 30, 1987, constitute in law a sufficient memorandum of a
perfected contract of sale.

The respondent Court could have added that the written communications commenced not only
from September 1, 1987 but from Janolo's August 20, 1987 letter. We agree that, taken together,
these letters constitute sufficient memoranda — since they include the names of the parties, the
terms and conditions of the contract, the price and a description of the property as the object of
the contract.
But let it be assumed arguendo that the counter-offer during the meeting on September 28, 1987
did constitute a "new" offer which was accepted by Janolo on September 30, 1987. Still, the
statute of frauds will not apply by reason of the failure of petitioners to object to oral testimony
proving petitioner Bank's counter-offer of P5.5 million. Hence, petitioners — by such utter
failure to object — are deemed to have waived any defects of the contract under the statute of
frauds, pursuant to Article 1405 of the Civil Code:

Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are
ratified by the failure to object to the presentation of oral evidence to prove the same, or by the
acceptance of benefits under them.

As private respondent pointed out in his Memorandum, oral testimony on the reaffirmation of the
counter-offer of P5.5 million is a plenty — and the silence of petitioners all throughout the
presentation makes the evidence binding on them thus;

A Yes, sir, I think it was September 28, 1987 and I was again present because Atty.
Demetria told me to accompany him we were able to meet Luis Co at the Bank.

xxx xxx xxx

Q Now, what transpired during this meeting with Luis Co of the Producers Bank?

A Atty. Demetria asked Mr. Luis Co whether the price could be reduced, sir.

Q What price?

A The 5.5 million pesos and Mr. Luis Co said that the amount cited by Mr. Mercurio Rivera
is the final price and that is the price they intends (sic) to have, sir.
Q What do you mean?.

A That is the amount they want, sir.

Q What is the reaction of the plaintiff Demetria to Luis Co's statement (sic) that the
defendant Rivera's counter-offer of 5.5 million was the defendant's bank (sic) final offer?

A He said in a day or two, he will make final acceptance, sir.

Q What is the response of Mr. Luis Co?.

A He said he will wait for the position of Atty. Demetria, sir.

[Direct testimony of Atty. Jose Fajardo, TSN, January 16, 1990, at pp. 18-21.]

Q What transpired during that meeting between you and Mr. Luis Co of the defendant
Bank?

A We went straight to the point because he being a busy person, I told him if the amount of
P5.5 million could still be reduced and he said that was already passed upon by the committee.
What the bank expects which was contrary to what Mr. Rivera stated. And he told me that is the
final offer of the bank P5.5 million and we should indicate our position as soon as possible.

Q What was your response to the answer of Mr. Luis Co?

A I said that we are going to give him our answer in a few days and he said that was it.
Atty. Fajardo and I and Mr. Mercurio [Rivera] was with us at the time at his office.

Q For the record, your Honor please, will you tell this Court who was with Mr. Co in his
Office in Producers Bank Building during this meeting?

A Mr. Co himself, Mr. Rivera, Atty. Fajardo and I.

Q By Mr. Co you are referring to?

A Mr. Luis Co.

Q After this meeting with Mr. Luis Co, did you and your partner accede on (sic) the counter
offer by the bank?

A Yes, sir, we did.? Two days thereafter we sent our acceptance to the bank which offer we
accepted, the offer of the bank which is P5.5 million.

[Direct testimony of Atty. Demetria, TSN, 26 April 1990, at pp. 34-36.]

Q According to Atty. Demetrio Demetria, the amount of P5.5 million was reached by the
Committee and it is not within his power to reduce this amount. What can you say to that
statement that the amount of P5.5 million was reached by the Committee?

A It was not discussed by the Committee but it was discussed initially by Luis Co and the
group of Atty. Demetrio Demetria and Atty. Pajardo (sic) in that September 28, 1987 meeting,
sir.
[Direct testimony of Mercurio Rivera, TSN, 30 July 1990, pp. 14-15.]

The Fourth Issue: May the Conservator Revoke

the Perfected and Enforceable Contract.

It is not disputed that the petitioner Bank was under a conservator placed by the Central Bank of
the Philippines during the time that the negotiation and perfection of the contract of sale took
place. Petitioners energetically contended that the conservator has the power to revoke or
overrule actions of the management or the board of directors of a bank, under Section 28-A of
Republic Act No. 265 (otherwise known as the Central Bank Act) as follows:

Whenever, on the basis of a report submitted by the appropriate supervising or examining

department, the Monetary Board finds that a bank or a non-bank financial intermediary
performing quasi-banking functions is in a state of continuing inability or unwillingness to
maintain a state of liquidity deemed adequate to protect the interest of depositors and creditors,
the Monetary Board may appoint a conservator to take charge of the assets, liabilities, and the
management of that institution, collect all monies and debts due said institution and exercise all
powers necessary to preserve the assets of the institution, reorganize the management thereof,
and restore its viability. He shall have the power to overrule or revoke the actions of the previous
management and board of directors of the bank or non-bank financial intermediary performing
quasi-banking functions, any provision of law to the contrary notwithstanding, and such other
powers as the Monetary Board shall deem necessary.

In the first place, this issue of the Conservator's alleged authority to revoke or repudiate the
perfected contract of sale was raised for the first time in this Petition — as this was not litigated
in the trial court or Court of Appeals. As already stated earlier, issues not raised and/or ventilated
in the trial court, let alone in the Court of Appeals, "cannot be raised for the first time on appeal
as it would be offensive to the basic rules of fair play, justice and due process."43

In the second place, there is absolutely no evidence that the Conservator, at the time the contract
was perfected, actually repudiated or overruled said contract of sale. The Bank's acting
conservator at the time, Rodolfo Romey, never objected to the sale of the property to Demetria
and Janolo. What petitioners are really referring to is the letter of Conservator Encarnacion, who
took over from Romey after the sale was perfected on September 30, 1987 (Annex V, petition)
which unilaterally repudiated — not the contract — but the authority of Rivera to make a binding
offer — and which unarguably came months after the perfection of the contract. Said letter dated
May 12, 1988 is reproduced hereunder:

May 12, 1988

Atty. Noe C. Zarate

Zarate Carandang Perlas & Ass.

Suite 323 Rufino Building

Ayala Avenue, Makati, Metro-Manila

Dear Atty. Zarate:

This pertains to your letter dated May 5, 1988 on behalf of Attys. Janolo and Demetria regarding
the six (6) parcels of land located at Sta. Rosa, Laguna.

We deny that Producers Bank has ever made a legal counter-offer to any of your clients nor
perfected a "contract to sell and buy" with any of them for the following reasons.

In the "Inter-Office Memorandum" dated April 25, 1986 addressed to and approved by former
Acting Conservator Mr. Andres I. Rustia, Producers Bank Senior Manager Perfecto M. Pascua
detailed the functions of Property Management Department (PMD) staff and officers (Annex A.),
you will immediately read that Manager Mr. Mercurio Rivera or any of his subordinates has no
authority, power or right to make any alleged counter-offer. In short, your lawyer-clients did not
deal with the authorized officers of the bank.

Moreover, under Sec. 23 and 36 of the Corporation Code of the Philippines (Bates Pambansa
Blg. 68.) and Sec. 28-A of the Central Bank Act (Rep. Act No. 265, as amended), only the Board
of Directors/Conservator may authorize the sale of any property of the corportion/bank..
Our records do not show that Mr. Rivera was authorized by the old board or by any of the bank
conservators (starting January, 1984) to sell the aforesaid property to any of your clients.
Apparently, what took place were just preliminary discussions/consultations between him and
your clients, which everyone knows cannot bind the Bank's Board or Conservator.

We are, therefore, constrained to refuse any tender of payment by your clients, as the same is
patently violative of corporate and banking laws. We believe that this is more than sufficient
legal justification for refusing said alleged tender.

Rest assured that we have nothing personal against your clients. All our acts are official, legal
and in accordance with law. We also have no personal interest in any of the properties of the
Bank.

Please be advised accordingly.

Very truly yours,

(Sgd.) Leonida T. Encarnacion

LEONIDA T. EDCARNACION

Acting Conservator

In the third place, while admittedly, the Central Bank law gives vast and far-reaching powers to
the conservator of a bank, it must be pointed out that such powers must be related to the
"(preservation of) the assets of the bank, (the reorganization of) the management thereof and (the
restoration of) its viability." Such powers, enormous and extensive as they are, cannot extend to
the post-facto repudiation of perfected transactions, otherwise they would infringe against the
non-impairment clause of the Constitution 44 . If the legislature itself cannot revoke an existing
valid contract, how can it delegate such non-existent powers to the conservator under Section 28-
A of said law?
Obviously, therefore, Section 28-A merely gives the conservator power to revoke contracts that
are, under existing law, deemed to be defective — i.e., void, voidable, unenforceable or
rescissible. Hence, the conservator merely takes the place of a bank's board of directors. What
the said board cannot do — such as repudiating a contract validly entered into under the doctrine
of implied authority — the conservator cannot do either. Ineluctably, his power is not unilateral
and he cannot simply repudiate valid obligations of the Bank. His authority would be only to
bring court actions to assail such contracts — as he has already done so in the instant case. A
contrary understanding of the law would simply not be permitted by the Constitution. Neither by
common sense. To rule otherwise would be to enable a failing bank to become solvent, at the
expense of third parties, by simply getting the conservator to unilaterally revoke all previous
dealings which had one way or another or come to be considered unfavorable to the Bank,
yielding nothing to perfected contractual rights nor vested interests of the third parties who had
dealt with the Bank.

The Fifth Issue: Were There Reversible Errors of Facts?

Basic is the doctrine that in petitions for review under Rule 45 of the Rules of Court, findings of
fact by the Court of Appeals are not reviewable by the Supreme Court. In Andres vs.
Manufacturers Hanover & Trust Corporation, 45 , we held:

. . . The rule regarding questions of fact being raised with this Court in a petition for certiorari
under Rule 45 of the Revised Rules of Court has been stated in Remalante vs. Tibe, G.R. No.
59514, February 25, 1988, 158 SCRA 138, thus:

The rule in this jurisdiction is that only questions of law may be raised in a petition for certiorari
under Rule 45 of the Revised Rules of Court. "The jurisdiction of the Supreme Court in cases
brought to it from the Court of Appeals is limited to reviewing and revising the errors of law
imputed to it, its findings of the fact being conclusive " [Chan vs. Court of Appeals, G.R. No. L-
27488, June 30, 1970, 33 SCRA 737, reiterating a long line of decisions]. This Court has
emphatically declared that "it is not the function of the Supreme Court to analyze or weigh such
evidence all over again, its jurisdiction being limited to reviewing errors of law that might have
been committed by the lower court" (Tiongco v. De la Merced, G. R. No. L-24426, July 25,
1974, 58 SCRA 89; Corona vs. Court of Appeals, G.R. No. L-62482, April 28, 1983, 121 SCRA
865; Baniqued vs. Court of Appeals, G. R. No. L-47531, February 20, 1984, 127 SCRA 596).
"Barring, therefore, a showing that the findings complained of are totally devoid of support in the
record, or that they are so glaringly erroneous as to constitute serious abuse of discretion, such
findings must stand, for this Court is not expected or required to examine or contrast the oral and
documentary evidence submitted by the parties" [Santa Ana, Jr. vs. Hernandez, G. R. No. L-
16394, December 17, 1966, 18 SCRA 973] [at pp. 144-145.]

Likewise, in Bernardo vs. Court of Appeals 46 , we held:

The resolution of this petition invites us to closely scrutinize the facts of the case, relating to the
sufficiency of evidence and the credibility of witnesses presented. This Court so held that it is
not the function of the Supreme Court to analyze or weigh such evidence all over again. The
Supreme Court's jurisdiction is limited to reviewing errors of law that may have been committed
by the lower court. The Supreme Court is not a trier of facts. . . .

As held in the recent case of Chua Tiong Tay vs. Court of Appeals and Goldrock Construction
and Development Corp. 47 :

The Court has consistently held that the factual findings of the trial court, as well as the Court of
Appeals, are final and conclusive and may not be reviewed on appeal. Among the exceptional
circumstances where a reassessment of facts found by the lower courts is allowed are when the
conclusion is a finding grounded entirely on speculation, surmises or conjectures; when the
inference made is manifestly absurd, mistaken or impossible; when there is grave abuse of
discretion in the appreciation of facts; when the judgment is premised on a misapprehension of
facts; when the findings went beyond the issues of the case and the same are contrary to the
admissions of both appellant and appellee. After a careful study of the case at bench, we find
none of the above grounds present to justify the re-evaluation of the findings of fact made by the
courts below.

In the same vein, the ruling of this Court in the recent case of South Sea Surety and Insurance
Company Inc. vs. Hon. Court of Appeals, et al. 48 is equally applicable to the present case:

We see no valid reason to discard the factual conclusions of the appellate court, . . . (I)t is not the
function of this Court to assess and evaluate all over again the evidence, testimonial and
documentary, adduced by the parties, particularly where, such as here, the findings of both the
trial court and the appellate court on the matter coincide. (emphasis supplied)

Petitioners, however, assailed the respondent Court's Decision as "fraught with findings and
conclusions which were not only contrary to the evidence on record but have no bases at all,"
specifically the findings that (1) the "Bank's counter-offer price of P5.5 million had been
determined by the past due committee and approved by conservator Romey, after Rivera
presented the same for discussion" and (2) "the meeting with Co was not to scale down the price
and start negotiations anew, but a meeting on the already determined price of P5.5 million"
Hence, citing Philippine National Bank vs. Court of Appeals 49 , petitioners are asking us to
review and reverse such factual findings.

The first point was clearly passed upon by the Court of Appeals 50 , thus:

There can be no other logical conclusion than that when, on September 1, 1987, Rivera informed
plaintiffs by letter that "the bank's counter-offer is at P5.5 Million for more than 101 hectares on
lot basis, "such counter-offer price had been determined by the Past Due Committee and
approved by the Conservator after Rivera had duly presented plaintiffs' offer for discussion by
the Committee . . . Tersely put, under the established fact, the price of P5.5 Million was, as
clearly worded in Rivera's letter (Exh. "E"), the official and definitive price at which the bank
was selling the property. (p. 11, CA Decision)

xxx xxx xxx

. . . The argument deserves scant consideration. As pointed out by plaintiff, during the meeting of
September 28, 1987 between the plaintiffs, Rivera and Luis Co, the senior vice-president of the
bank, where the topic was the possible lowering of the price, the bank official refused it and
confirmed that the P5.5 Million price had been passed upon by the Committee and could no
longer be lowered (TSN of April 27, 1990, pp. 34-35) (p. 15, CA Decision).

The respondent Court did not believe the evidence of the petitioners on this point, characterizing
it as "not credible" and "at best equivocal and considering the gratuitous and self-serving
character of these declarations, the bank's submissions on this point do not inspire belief."
To become credible and unequivocal, petitioners should have presented then Conservator
Rodolfo Romey to testify on their behalf, as he would have been in the best position to establish
their thesis. Under the rules on evidence 51 , such suppression gives rise to the presumption that
his testimony would have been adverse, if produced.

The second point was squarely raised in the Court of Appeals, but petitioners' evidence was
deemed insufficient by both the trial court and the respondent Court, and instead, it was
respondent's submissions that were believed and became bases of the conclusions arrived at.

In fine, it is quite evident that the legal conclusions arrived at from the findings of fact by the
lower courts are valid and correct. But the petitioners are now asking this Court to disturb these
findings to fit the conclusion they are espousing, This we cannot do.

To be sure, there are settled exceptions where the Supreme Court may disregard findings of fact
by the Court of Appeals 52 . We have studied both the records and the CA Decision and we find
no such exceptions in this case. On the contrary, the findings of the said Court are supported by a
preponderance of competent and credible evidence. The inferences and conclusions are
seasonably based on evidence duly identified in the Decision. Indeed, the appellate court
patiently traversed and dissected the issues presented before it, lending credibility and
dependability to its findings. The best that can be said in favor of petitioners on this point is that
the factual findings of respondent Court did not correspond to petitioners' claims, but were closer
to the evidence as presented in the trial court by private respondent. But this alone is no reason to
reverse or ignore such factual findings, particularly where, as in this case, the trial court and the
appellate court were in common agreement thereon. Indeed, conclusions of fact of a trial judge
— as affirmed by the Court of Appeals — are conclusive upon this Court, absent any serious
abuse or evident lack of basis or capriciousness of any kind, because the trial court is in a better
position to observe the demeanor of the witnesses and their courtroom manner as well as to
examine the real evidence presented.

Epilogue.

In summary, there are two procedural issues involved forum-shopping and the raising of issues
for the first time on appeal [viz., the extinguishment of the Bank's offer of P5.5 million and the
conservator's powers to repudiate contracts entered into by the Bank's officers] — which per se
could justify the dismissal of the present case. We did not limit ourselves thereto, but delved as
well into the substantive issues — the perfection of the contract of sale and its enforceability,
which required the determination of questions of fact. While the Supreme Court is not a trier of
facts and as a rule we are not required to look into the factual bases of respondent Court's
decisions and resolutions, we did so just the same, if only to find out whether there is reason to
disturb any of its factual findings, for we are only too aware of the depth, magnitude and vigor
by which the parties through their respective eloquent counsel, argued their positions before this
Court.We are not unmindful of the tenacious plea that the petitioner Bank is operating
abnormally under a government-appointed conservator and "there is need to rehabilitate the
Bank in order to get it back on its feet . . . as many people depend on (it) for investments,
deposits and well as employment. As of June 1987, the Bank's overdraft with the Central Bank
had already reached P1.023 billion . . . and there were (other) offers to buy the subject properties
for a substantial amount of money." 53While we do not deny our sympathy for this distressed
bank, at the same time, the Court cannot emotionally close its eyes to overriding considerations
of substantive and procedural law, like respect for perfected contracts, non-impairment of
obligations and sanctions against forum-shopping, which must be upheld under the rule of law
and blind justice.This Court cannot just gloss over private respondent's submission that, while
the subject properties may currently command a much higher price, it is equally true that at the
time of the transaction in 1987, the price agreed upon of P5.5 million was reasonable,
considering that the Bank acquired these properties at a foreclosure sale for no more than P3.5
million 54 . That the Bank procrastinated and refused to honor its commitment to sell cannot
now be used by it to promote its own advantage, to enable it to escape its binding obligation and
to reap the benefits of the increase in land values. To rule in favor of the Bank simply because
the property in question has algebraically accelerated in price during the long period of litigation
is to reward lawlessness and delays in the fulfillment of binding contracts. Certainly, the Court
cannot stamp its imprimatur on such outrageous proposition.

WHEREFORE, finding no reversible error in the questioned Decision and Resolution, the Court
hereby DENIES the petition. The assailed Decision is AFFIRMED. Moreover, petitioner Bank is
REPRIMANDED for engaging in forum-shopping and WARNED that a repetition of the same
or similar acts will be dealt with more severely. Costs against petitioners.

SO ORDERED.

Narvasa, C.J., Davide Jr., Melo and Francisco, JJ., concur.

Republic of the Philippines

Supreme Court

Manila

SECOND DIVISION

TIMOTEO H. SARONA,

Petitioner,

- versus -

NATIONAL LABOR RELATIONS

COMMISSION, ROYALE SECURITY

AGENCY (FORMERLY SCEPTRE

SECURITY AGENCY) and

CESAR S. TAN,

Respondents.

G.R. No. 185280

Present:

CARPIO, J.,

Chairperson,

PEREZ,

SERENO,

REYES, and
BERNABE, JJ.

Promulgated:

January 18, 2012

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

DECISION

REYES, J.:

This is a petition for review under Rule 45 of the Rules of Court from the May 29, 2008
Decision1 of the Twentieth Division of the Court of Appeals (CA) in CA-G.R. SP No. 02127
entitled “Timoteo H. Sarona v. National Labor Relations Commission, Royale Security Agency
(formerly Sceptre Security Agency) and Cesar S. Tan” (Assailed Decision), which affirmed the
National Labor Relations Commission’s (NLRC) November 30, 2005 Decision and January 31,
2006 Resolution, finding the petitioner illegally dismissed but limiting the amount of his
backwages to three (3) monthly salaries. The CA likewise affirmed the NLRC’s finding that the
petitioner’s separation pay should be computed only on the basis of his length of service with
respondent Royale Security Agency (Royale). The CA held that absent any showing that Royale
is a mere alter ego of Sceptre Security Agency (Sceptre), Royale cannot be compelled to
recognize the petitioner’s tenure with Sceptre. The dispositive portion of the CA’s Assailed
Decision states:

WHEREFORE, in view of the foregoing, the instant petition is PARTLY GRANTED, though
piercing of the corporate veil is hereby denied for lack of merit. Accordingly, the assailed
Decision and Resolution of the NLRC respectively dated November 30, 2005 and January 31,
2006 are hereby AFFIRMED as to the monetary awards.

SO ORDERED. 2

Factual Antecedents

On June 20, 2003, the petitioner, who was hired by Sceptre as a security guard sometime in April
1976, was asked by Karen Therese Tan (Karen), Sceptre’s Operation Manager, to submit a
resignation letter as the same was supposedly required for applying for a position at Royale. The
petitioner was also asked to fill up Royale’s employment application form, which was handed to
him by Royale’s General Manager, respondent Cesar Antonio Tan II (Cesar).3

After several weeks of being in floating status, Royale’s Security Officer, Martin Gono (Martin),
assigned the petitioner at Highlight Metal Craft, Inc. (Highlight Metal) from July 29, 2003 to
August 8, 2003. Thereafter, the petitioner was transferred and assigned to Wide Wide World
Express, Inc. (WWWE, Inc.). During his assignment at Highlight Metal, the petitioner used the
patches and agency cloths of Sceptre and it was only

when he was posted at WWWE, Inc. that he started using those of Royale.4

On September 17, 2003, the petitioner was informed that his assignment at WWWE, Inc. had
been withdrawn because Royale had allegedly been replaced by another security agency. The
petitioner, however, shortly discovered thereafter that Royale was never replaced as WWWE,
Inc.’s security agency. When he placed a call at WWWE, Inc., he learned that his fellow security
guard was not relieved from his post.5

On September 21, 2003, the petitioner was once again assigned at Highlight Metal, albeit for a
short period from September 22, 2003 to September 30, 2003. Subsequently, when the petitioner
reported at Royale’s office on October 1, 2003, Martin informed him that he would no longer be
given any assignment per the instructions of Aida Sabalones-Tan (Aida), general manager of
Sceptre. This prompted him to file a complaint for illegal dismissal on October 4, 2003.6

In his May 11, 2005 Decision, Labor Arbiter Jose Gutierrez (LA Gutierrez) ruled in the
petitioner’s favor and found him illegally dismissed. For being unsubstantiated, LA Gutierrez
denied credence to the respondents’ claim that the termination of the petitioner’s employment
relationship with Royale was on his accord following his alleged employment in another
company. That the petitioner was no longer interested in being an employee of Royale cannot be
presumed from his request for a certificate of employment, a claim which, to begin with, he
vehemently denies. Allegation of the petitioner’s abandonment is negated by his filing of a
complaint for illegal dismissal three (3) days after he was informed that he would no longer be
given any assignments. LA Gutierrez ruled:

In short, respondent wanted to impress before us that complainant abandoned his employment.
We are not however, convinced.
There is abandonment when there is a clear proof showing that one has no more interest to return
to work. In this instant case, the record has no proof to such effect. In a long line of decisions, the
Supreme Court ruled:

“Abandonment of position is a matter of intention expressed in clearly certain and unequivocal

acts, however, an interim employment does not mean abandonment.” (Jardine Davis, Inc. vs.
NLRC, 225 SCRA 757).

“In abandonment, there must be a concurrence of the intention to abandon and some overt acts
from which an employee may be declared as having no more interest to work.” (C. Alcontin &
Sons, Inc. vs. NLRC, 229 SCRA 109).

“It is clear, deliberate and unjustified refusal to severe employment and not mere absence that is
required to constitute abandonment.” x x x” (De Ysasi III vs. NLRC, 231 SCRA 173).

Aside from lack of proof showing that complainant has abandoned his employment, the record
would show that immediate action was taken in order to protest his dismissal from employment.
He filed a complaint [for] illegal dismissal on October 4, 2004 or three (3) days after he was
dismissed. This act, as declared by the Supreme Court is inconsistent with abandonment, as held
in the case of Pampanga Sugar Development Co., Inc. vs. NLRC, 272 SCRA 737 where the
Supreme Court ruled:
“The immediate filing of a complaint for [i]llegal [d]ismissal by an employee is inconsistent with
abandonment.”7

The respondents were ordered to pay the petitioner backwages, which LA Gutierrez computed
from the day he was dismissed, or on October 1, 2003, up to the promulgation of his Decision on
May 11, 2005. In lieu of reinstatement, the respondents were ordered to pay the petitioner
separation pay equivalent to his one (1) month salary in consideration of his tenure with Royale,
which lasted for only one (1) month and three (3) days. In this

regard, LA Gutierrez refused to pierce Royale’s corporate veil for purposes of factoring the
petitioner’s length of service with Sceptre in the computation of his separation pay. LA Gutierrez
ruled that Royale’s corporate personality, which is separate and distinct from that of Sceptre, a
sole proprietorship owned by the late Roso Sabalones (Roso) and later, Aida, cannot be pierced
absent clear and convincing evidence that Sceptre and Royale share the same stockholders and
incorporators and that Sceptre has complete control and dominion over the finances and business
affairs of Royale. Specifically:

To support its prayer of piercing the veil of corporate entity of respondent Royale, complainant
avers that respondent Royal (sic) was using the very same office of SCEPTRE in C. Padilla St.,
Cebu City. In addition, all officers and staff of SCEPTRE are now the same officers and staff of
ROYALE, that all [the] properties of SCEPTRE are now being owned by ROYALE and that
ROYALE is now occupying the property of SCEPTRE. We are not however, persuaded.

It should be pointed out at this juncture that SCEPTRE, is a single proprietorship. Being so, it
has no distinct and separate personality. It is owned by the late Roso T. Sabalones. After the
death of the owner, the property is supposed to be divided by the heirs and any claim against the
sole proprietorship is a claim against Roso T. Sabalones. After his death, the claims should be
instituted against the estate of Roso T. Sabalones. In short, the estate of the late Roso T.
Sabalones should have been impleaded as respondent of this case.
Complainant wanted to impress upon us that Sceptre was organized into another entity now
called Royale Security Agency. There is however, no proof to this assertion. Likewise, there is
no proof that Roso T. Sabalones, organized his single proprietorship business into a corporation,
Royale Security Agency. On the contrary, the name of Roso T. Sabalones does not appear in the
Articles of Incorporation. The names therein as incorporators are:

Bruno M. Kuizon – [P]150,000.00

Wilfredo K. Tan – 100,000.00

Karen Therese S. Tan – 100,000.00

Cesar Antonio S. Tan – 100,000.00

Gabeth Maria K. Tan – 50,000.00

Complainant claims that two (2) of the incorporators are the granddaughters of Roso T.
Sabalones. This fact even give (sic) us further reason to conclude that respondent Royal (sic)
Security Agency is not an alter ego or conduit of SCEPTRE. It is obvious that respondent Royal
(sic) Security Agency is not owned by the owner of “SCEPTRE”.

It may be true that the place where respondent Royale hold (sic) office is the same office
formerly used by “SCEPTRE.” Likewise, it may be true that the same officers and staff now
employed by respondent Royale Security Agency were the same officers and staff employed by
“SCEPTRE.” We find, however, that these facts are not sufficient to justify to require respondent
Royale to answer for the liability of Sceptre, which was owned solely by the late Roso T.
Sabalones. As we have stated above, the remedy is to address the claim on the estate of Roso T.
Sabalones.8

The respondents appealed LA Gutierrez’s May 11, 2005 Decision to the NLRC, claiming that the
finding of illegal dismissal was attended with grave abuse of discretion. This appeal was,
however, dismissed by the NLRC in its November 30, 2005 Decision,9 the dispositive portion of
which states:

WHEREFORE, premises considered, the Decision of the Labor Arbiter declaring the illegal
dismissal of complainant is hereby AFFIRMED.

However[,] We modify the monetary award by limiting the grant of backwages to only three (3)
months in view of complainant’s very limited service which lasted only for one month and three
days.

1. Backwages - [P]15,600.00

2. Separation Pay - 5,200.00

3. 13th Month Pay - 583.34

[P]21,383.34 Attorney’s Fees- 2,138.33

Total [P]23,521.67

The appeal of respondent Royal (sic) Security Agency is hereby DISMISSED for lack of merit.

SO ORDERED.10

The NLRC partially affirmed LA Gutierrez’s May 11, 2005 Decision. It concurred with the
latter’s finding that the petitioner was illegally dismissed and the manner by which his separation
pay was computed, but modified the monetary award in the petitioner’s favor by reducing the
amount of his backwages from P95,600.00 to P15,600.00. The NLRC determined the petitioner’s
backwages as limited to three (3) months of his last monthly salary, considering that his
employment with Royale was only for a period for one (1) month and three (3) days, thus:11

On the other hand, while complainant is entitled to backwages, We are aware that his stint with
respondent Royal (sic) lasted only for one (1) month and three (3) days such that it is Our
considered view that his backwages should be limited to only three (3) months.

Backwages:

[P]5,200.00 x 3 months = [P]15,600.0012

The petitioner, on the other hand, did not appeal LA Gutierrez’s May 11, 2005 Decision but
opted to raise the validity of LA Gutierrez’s adverse findings with respect to piercing Royale’s
corporate personality and computation of his separation pay in his Reply to the respondents’
Memorandum of Appeal. As the filing of an appeal is the prescribed remedy and no aspect of the
decision can be overturned by a mere reply, the NLRC dismissed the petitioner’s efforts to
reverse LA Gutierrez’s disposition of these issues. Effectively, the petitioner had already waived
his right to question LA Gutierrez’s Decision when he failed to file an appeal within the
reglementary period. The NLRC held:

On the other hand, in complainant’s Reply to Respondent’s Appeal Memorandum he prayed that
the doctrine of piercing the veil of corporate fiction of respondent be applied so that his services
with Sceptre since 1976 [will not] be deleted. If complainant assails this particular finding in the
Labor Arbiter’s Decision, complainant should have filed an appeal and not seek a relief by
merely filing a Reply to Respondent’s Appeal Memorandum.13

Consequently, the petitioner elevated the NLRC’s November 30, 2005 Decision to the CA by
way of a Petition for Certiorari under Rule 65 of the Rules of Court. On the other hand, the
respondents filed no appeal from the NLRC’s finding that the petitioner was illegally dismissed.

The CA, in consideration of substantial justice and the jurisprudential dictum that an appealed
case is thrown open for the appellate court’s review, disagreed with the NLRC and proceeded to
review the evidence on record to determine if Royale is Sceptre’s alter ego that would warrant
the piercing of its corporate veil.14 According to the CA, errors not assigned on appeal may be
reviewed as technicalities should not serve as bar to the full adjudication of cases. Thus:
In Cuyco v. Cuyco, which We find application in the instant case, the Supreme Court held:

“In their Reply, petitioners alleged that their petition only raised the sole issue of interest on the
interest due, thus, by not filing their own petition for review, respondents waived their privilege
to bring matters for the Court’s review that [does] not deal with the sole issue raised.

Procedurally, the appellate court in deciding the case shall consider only the assigned errors,
however, it is equally settled that the Court is clothed with ample authority to review matters not
assigned as errors in an appeal, if it finds that their consideration is necessary to arrive at a just
disposition of the case.”

Therefore, for full adjudication of the case, We have to primarily resolve the issue of whether the
doctrine of piercing the corporate veil be justly applied in order to determine petitioner’s length
of service with private respondents.15 (citations omitted)

Nonetheless, the CA ruled against the petitioner and found the evidence he submitted to support
his allegation that Royale and Sceptre are one and the same juridical entity to be wanting. The
CA refused to pierce Royale’s corporate mask as one of the “probative factors that would justify
the application of the doctrine of piercing the corporate veil is stock ownership by one or
common ownership of both corporations” and the petitioner failed to present clear and
convincing proof that Royale and Sceptre are commonly owned or controlled. The relevant
portions of the CA’s Decision state:
In the instant case, We find no evidence to show that Royale Security Agency, Inc. (hereinafter
“Royale”), a corporation duly registered with the Securities and Exchange Commission (SEC)
and Sceptre Security Agency (hereinafter “Sceptre”), a single proprietorship, are one and the
same entity.

Petitioner, who has been with Sceptre since 1976 and, as ruled by both the Labor Arbiter and the
NLRC, was illegally dismissed by Royale on October 1, 2003, alleged that in order to
circumvent labor laws, especially to avoid payment of money claims and the consideration on
the length of service of its employees, Royale was established as an alter ego or business conduit
of Sceptre. To prove his claim, petitioner declared that Royale is conducting business in the same
office of Sceptre, the latter being owned by the late retired Gen. Roso Sabalones, and was
managed by the latter’s daughter, Dr. Aida Sabalones-Tan; that two of Royale’s incorporators
are grandchildren [of] the late Gen. Roso Sabalones; that all the properties of Sceptre are now
owned by Royale, and that the officers and staff of both business establishments are the same;
that the heirs of Gen. Sabalones should have applied for dissolution of Sceptre before the SEC
before forming a new corporation.

On the other hand, private respondents declared that Royale was incorporated only on March 10,
2003 as evidenced by the Certificate of Incorporation issued by the SEC on the same date; that
Royale’s incorporators are Bruino M. Kuizon, Wilfredo Gracia K. Tan, Karen Therese S. Tan,
Cesar Antonio S. Tan II and [Gabeth] Maria K. Tan.

Settled is the tenet that allegations in the complaint must be duly proven by competent evidence
and the burden of proof is on the party making the allegation. Further, Section 1 of Rule 131 of
the Revised Rules of Court provides:

“SECTION 1. Burden of proof. – Burden of proof is the duty of a party to present evidence on
the facts in issue necessary to establish his claim or defense by the amount of evidence required
by law.”
We believe that petitioner did not discharge the required burden of proof to establish his
allegations. As We see it, petitioner’s claim that Royale is an alter ego or business conduit of
Sceptre is without basis because aside from the fact that there is no common ownership of both
Royale and Sceptre, no evidence on record would prove that Sceptre, much less the late retired
Gen. Roso Sabalones or his heirs, has control or complete domination of Royale’s finances and
business transactions. Absence of this first element, coupled by petitioner’s failure to present
clear and convincing evidence to substantiate his allegations, would prevent piercing of the
corporate veil. Allegations must be proven by sufficient evidence. Simply stated, he who alleges
a fact has the burden of proving it; mere allegation is not evidence.16 (citations omitted)

By way of this Petition, the petitioner would like this Court to revisit the computation of his
backwages, claiming that the same should be computed from the time he was illegally dismissed
until the finality of this decision.17 The petitioner would likewise have this Court review and
examine anew the factual allegations and the supporting evidence to determine if the CA erred in
its refusal to pierce Royale’s corporate mask and rule that it is but a mere continuation or
successor of Sceptre. According to the petitioner, the erroneous computation of his separation
pay was due to the CA’s failure, as well as the NLRC and LA Gutierrez, to consider evidence
conclusively demonstrating that Royale and Sceptre are one and the same juridical entity. The
petitioner claims that since Royale is no more than Sceptre’s alter ego, it should recognize and
credit his length of service with Sceptre.18

The petitioner claimed that Royale and Sceptre are not separate legal persons for purposes of
computing the amount of his separation pay and other benefits under the Labor Code. The
piercing of Royale’s corporate personality is justified by several indicators that Royale was
incorporated for the sole purpose of defeating his right to security of tenure and circumvent
payment of his benefits to which he is entitled under the law: (i) Royale was holding office in the
same property used by Sceptre as its principal place of business;19 (ii) Sceptre and Royal have
the same officers and employees;20 (iii) on October 14, 1994, Roso, the sole proprietor of
Sceptre, sold to Aida, and her husband, Wilfredo Gracia K. Tan (Wilfredo),21 the property used
by Sceptre as its principal place of business;22 (iv) Wilfredo is one of the incorporators of
Royale;23 (v) on May 3, 1999, Roso ceded the license to operate Sceptre issued by the
Philippine National Police to Aida;24 (vi) on July 28, 1999, the business name “Sceptre Security
& Detective Agency” was registered with the Department of Trade and Industry (DTI) under the
name of Aida;25 (vii) Aida exercised control over the affairs of Sceptre and Royale, as she was,
in fact, the one who dismissed the petitioner from employment;26 (viii) Karen, the daughter of
Aida, was Sceptre’s Operation Manager and is one of the incorporators of Royale;27 and (ix)
Cesar Tan II, the son of Aida was one of Sceptre’s officers and is one of the incorporators of
Royale.28

In their Comment, the respondents claim that the petitioner is barred from questioning the
manner by which his backwages and separation pay were computed. Earlier, the petitioner
moved for the execution of the NLRC’s November 30, 2005 Decision29 and the respondents
paid him the full amount of the monetary award thereunder shortly after the writ of execution
was issued.30 The respondents likewise maintain that Royale’s separate and distinct corporate
personality should be respected considering that the evidence presented by the petitioner fell
short of establishing that Royale is a mere alter ego of Sceptre.

The petitioner does not deny that he has received the full amount of backwages and separation
pay as provided under the NLRC’s November 30, 2005 Decision.31 However, he claims that this
does not preclude this Court from modifying a decision that is tainted with grave abuse of
discretion or issued without jurisdiction.32

ISSUES

Considering the conflicting submissions of the parties, a judicious determination of their

respective rights and obligations requires this Court to resolve the following substantive issues:
a. Whether Royale’s corporate fiction should be pierced for the purpose of compelling it to
recognize the petitioner’s length of service with Sceptre and for holding it liable for the benefits
that have accrued to him arising from his employment with Sceptre; and

b. Whether the petitioner’s backwages should be limited to his salary for three (3) months.

OUR RULING

Because his receipt of the proceeds of the award under the NLRC’s November 30, 2005 Decision
is qualified and without prejudice to the CA’s resolution of his petition for certiorari, the
petitioner is not barred from exercising his right to elevate the decision of the CA to this Court.

Before this Court proceeds to decide this Petition on its merits, it is imperative to resolve the
respondents’ contention that the full satisfaction of the award under the NLRC’s November 30,
2005 Decision bars the petitioner from questioning the validity thereof. The respondents submit
that they had paid the petitioner the amount of P21,521.67 as directed by the NLRC and this
constitutes a waiver of his right to file an appeal to this Court.

The respondents fail to convince.

The petitioner’s receipt of the monetary award adjudicated by the NLRC is not absolute,
unconditional and unqualified. The petitioner’s May 3, 2007 Motion for Release contains a
reservation, stating in his prayer that: “it is respectfully prayed that the respondents and/or Great
Domestic Insurance Co. be ordered to RELEASE/GIVE the amount of P23,521.67 in favor of
the complainant TIMOTEO H. SARONA without prejudice to the outcome of the petition with
the CA.”33

In Leonis Navigation Co., Inc., et al. v. Villamater, et al.,34 this Court ruled that the prevailing
party’s receipt of the full amount of the judgment award pursuant to a writ of execution issued by
the labor arbiter does not

close or terminate the case if such receipt is qualified as without prejudice to the outcome of the
petition for certiorari pending with the CA.

Simply put, the execution of the final and executory decision or resolution of the NLRC shall
proceed despite the pendency of a petition for certiorari, unless it is restrained by the proper
court. In the present case, petitioners already paid Villamater’s widow, Sonia, the amount of
P3,649,800.00, representing the total and permanent disability award plus attorney’s fees,
pursuant to the Writ of Execution issued by the Labor Arbiter. Thereafter, an Order was issued
declaring the case as "closed and terminated". However, although there was no motion for
reconsideration of this last Order, Sonia was, nonetheless, estopped from claiming that the
controversy had already reached its end with the issuance of the Order closing and terminating
the case. This is because the Acknowledgment Receipt she signed when she received petitioners’
payment was without prejudice to the final outcome of the petition for certiorari pending before
the CA.35

The finality of the NLRC’s decision does not preclude the filing of a petition for certiorari under
Rule 65 of the Rules of Court. That the NLRC issues an entry of judgment after the lapse of ten
(10) days from the parties’ receipt of its decision36 will only give rise to the prevailing party’s
right to move for the execution thereof but will not prevent the CA from taking cognizance of a
petition for certiorari on jurisdictional and due process considerations.37 In turn, the decision
rendered by the CA on a petition for certiorari may be appealed to this Court by way of a petition
for review on certiorari under Rule 45 of the Rules of Court. Under Section 5, Article VIII of the
Constitution, this Court has the power to “review, revise, reverse, modify, or affirm on appeal or
certiorari as the law or the Rules of Court may provide, final judgments and orders of lower
courts in x x x all cases in which only an error or question of law is involved.” Consistent with
this constitutional mandate, Rule 45 of the Rules of Court provides the remedy of an appeal by
certiorari from decisions, final orders or resolutions of the CA in any case, i.e., regardless of the
nature of the action or proceedings

involved, which would be but a continuation of the appellate process over the original case.38
Since an appeal to this Court is not an original and independent action but a continuation of the
proceedings before the CA, the filing of a petition for review under Rule 45 cannot be barred by
the finality of the NLRC’s decision in the same way that a petition for certiorari under Rule 65
with the CA cannot.

Furthermore, if the NLRC’s decision or resolution was reversed and set aside for being issued
with grave abuse of discretion by way of a petition for certiorari to the CA or to this Court by
way of an appeal from the decision of the CA, it is considered void ab initio and, thus, had never
become final and executory.39

A Rule 45 Petition should be confined to questions of law. Nevertheless, this Court has the
power to resolve a question of fact, such as whether a corporation is a mere alter ego of another
entity or whether the corporate fiction was invoked for fraudulent or malevolent ends, if the
findings in assailed decision is not supported by the evidence on record or based on a
misapprehension of facts.

The question of whether one corporation is merely an alter ego of another is purely one of fact.
So is the question of whether a corporation is a paper company, a sham or subterfuge or whether
the petitioner adduced the requisite quantum of evidence warranting the piercing of the veil of
the respondent’s corporate personality.40
As a general rule, this Court is not a trier of facts and a petition for review on certiorari under
Rule 45 of the Rules of Court must exclusively raise questions of law. Moreover, if factual
findings of the NLRC and the LA have been affirmed by the CA, this Court accords them the
respect and finality they deserve. It is well-settled and oft-repeated that findings of fact of
administrative agencies and quasi-judicial bodies, which have acquired expertise because their
jurisdiction is confined to specific matters, are generally accorded not only respect, but finality
when affirmed by the CA. 41

Nevertheless, this Court will not hesitate to deviate from what are clearly procedural guidelines
and disturb and strike down the findings of the CA and those of the labor tribunals if there is a
showing that they are unsupported by the evidence on record or there was a patent
misappreciation of facts. Indeed, that the impugned decision of the CA is consistent with the
findings of the labor tribunals does not per se conclusively demonstrate the correctness thereof.
By way of exception to the general rule, this Court will scrutinize the facts if only to rectify the
prejudice and injustice resulting from an incorrect assessment of the evidence presented.

A resolution of an issue that has supposedly become final and executory as the petitioner only
raised it in his reply to the respondents’ appeal may be revisited by the appellate court if such is
necessary for a just disposition of the case.

As above-stated, the NLRC refused to disturb LA Gutierrez’s denial of the petitioner’s plea to
pierce Royale’s corporate veil as the petitioner did not appeal any portion of LA Gutierrez’s May
11, 2005 Decision.
In this respect, the NLRC cannot be accused of grave abuse of discretion. Under Section 4(c),
Rule VI of the NLRC Rules,42 the NLRC shall limit itself to reviewing and deciding only the
issues that were elevated on appeal. The NLRC, while not totally bound by technical rules of
procedure, is not licensed to disregard and violate the implementing rules it implemented. 43

Nonetheless, technicalities should not be allowed to stand in the way of equitably and completely
resolving the rights and obligations of the parties. Technical rules are not binding in labor cases
and are not to be applied strictly if the result would be detrimental to the working man.44 This
Court may choose not to encumber itself with technicalities and limitations consequent to
procedural rules if such will only serve as a hindrance to its duty to decide cases judiciously and
in a manner that would put an end with finality to all existing conflicts between the parties.

Royale is a continuation or successor of Sceptre.

A corporation is an artificial being created by operation of law. It possesses the right of

succession and such powers, attributes, and properties expressly authorized by law or incident to
its existence. It has a personality separate and distinct from the persons composing it, as well as
from any other legal entity to which it may be related. This is basic.45

Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation. For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be
impaled only when it becomes a shield for fraud, illegality or inequity committed against third
persons.46
Hence, any application of the doctrine of piercing the corporate veil should be done with caution.
A court should be mindful of the milieu where it is to be applied. It must be certain that the
corporate fiction was misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. Otherwise, an injustice that was never unintended may result
from an erroneous application.47

Whether the separate personality of the corporation should be pierced hinges on obtaining facts
appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or
when necessary in the interest of justice. After all, the concept of corporate entity was not meant
to promote unfair objectives.48

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat
of public convenience as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect
fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the

corporation is so organized and controlled and its affairs are so conducted as

to make it merely an instrumentality, agency, conduit or adjunct of another corporation.49

In this regard, this Court finds cogent reason to reverse the CA’s findings. Evidence abound
showing that Royale is a mere continuation or successor of Sceptre and fraudulent objectives are
behind Royale’s incorporation and the petitioner’s subsequent employment therein. These are
plainly suggested by events that the respondents do not dispute and which the CA, the NLRC
and LA Gutierrez accept as fully substantiated but misappreciated as insufficient to warrant the
use of the equitable weapon of piercing.
As correctly pointed out by the petitioner, it was Aida who exercised control and supervision
over the affairs of both Sceptre and Royale. Contrary to the submissions of the respondents that
Roso had been the only one in sole control of Sceptre’s finances and business affairs, Aida took
over as early as 1999 when Roso assigned his license to operate Sceptre on May 3, 1999.50 As
further proof of Aida’s acquisition of the rights as Sceptre’s sole proprietor, she caused the
registration of the business name “Sceptre Security & Detective Agency” under her name with
the DTI a few months after Roso abdicated his rights to Sceptre in her favor.51 As far as Royale
is concerned, the respondents do not deny that she has a hand in its management and operation
and possesses control and supervision of its employees, including the petitioner. As the petitioner
correctly pointed out, that Aida was the one who decided to stop giving any assignments to the
petitioner and summarily dismiss him is an eloquent testament of the power she wields insofar as
Royale’s affairs are concerned. The presence of actual common control coupled with the misuse
of the corporate form to perpetrate oppressive or manipulative conduct or evade performance of
legal obligations is patent; Royale cannot hide behind its corporate fiction.

Aida’s control over Sceptre and Royale does not, by itself, call for a disregard of the corporate
fiction. There must be a showing that a fraudulent intent or illegal purpose is behind the exercise
of such control to warrant the piercing of the corporate veil.52 However, the manner by which
the petitioner was made to resign from Sceptre and how he became an employee of Royale
suggest the perverted use of the legal fiction of the separate corporate personality. It is
undisputed that the petitioner tendered his resignation and that he applied at Royale at the
instance of Karen and Cesar and on the impression they created that these were necessary for his
continued employment. They orchestrated the petitioner’s resignation from Sceptre and
subsequent employment at Royale, taking advantage of their ascendancy over the petitioner and
the latter’s lack of knowledge of his rights and the consequences of his actions. Furthermore, that
the petitioner was made to resign from Sceptre and apply with Royale only to be
unceremoniously terminated shortly thereafter leads to the ineluctable conclusion that there was
intent to violate the petitioner’s rights as an employee, particularly his right to security of tenure.
The respondents’ scheme reeks of bad faith and fraud and compassionate justice dictates that
Royale and Sceptre be merged as a single entity, compelling Royale to credit and recognize the
petitioner’s length of service with Sceptre. The respondents cannot use the legal fiction of a
separate corporate personality for ends subversive of the policy and purpose behind its
creation53 or which could not have been intended by law to which it owed its being.54
For the piercing doctrine to apply, it is of no consequence if Sceptre is a sole proprietorship. As
ruled in Prince Transport, Inc., et al. v. Garcia, et al.,55 it is the act of hiding behind the separate
and distinct personalities of juridical entities to perpetuate fraud, commit illegal acts, evade one’s
obligations that the equitable piercing doctrine was formulated to address and prevent:

A settled formulation of the doctrine of piercing the corporate veil is that when two business
enterprises are owned, conducted and controlled by the same parties, both law and equity will,
when necessary to protect the rights of third parties, disregard the legal fiction that these two
entities are distinct and treat them as identical or as one and the same. In the present case, it may
be true that Lubas is a single proprietorship and not a corporation. However, petitioners’ attempt
to isolate themselves from and hide behind the supposed separate and distinct personality of
Lubas so as to evade their liabilities is precisely what the classical doctrine of piercing the veil of
corporate entity seeks to prevent and remedy.56

Also, Sceptre and Royale have the same principal place of business. As early as October 14,
1994, Aida and Wilfredo became the owners of the property used by Sceptre as its principal
place of business by virtue of a Deed of Absolute Sale they executed with Roso.57 Royale,
shortly after its incorporation, started to hold office in the same property. These, the respondents
failed to dispute.

The respondents do not likewise deny that Royale and Sceptre share the same officers and
employees. Karen assumed the dual role of Sceptre’s Operation Manager and incorporator of
Royale. With respect to the petitioner, even if he has already resigned from Sceptre and has been
employed by Royale, he was still using the patches and agency cloths of Sceptre during his
assignment at Highlight Metal.
Royale also claimed a right to the cash bond which the petitioner posted when he was still with
Sceptre. If Sceptre and Royale are indeed separate entities, Sceptre should have released the
petitioner’s cash bond when he resigned and Royale would have required the petitioner to post a
new cash bond in its favor.

Taking the foregoing in conjunction with Aida’s control over Sceptre’s and Royale’s business
affairs, it is patent that Royale was a mere subterfuge for Aida. Since a sole proprietorship does
not have a separate and distinct personality from that of the owner of the enterprise, the latter is
personally liable. This is what she sought to avoid but cannot prosper.

Effectively, the petitioner cannot be deemed to have changed employers as Royale and Sceptre
are one and the same. His separation pay should, thus, be computed from the date he was hired
by Sceptre in April 1976 until the finality of this decision. Based on this Court’s ruling in
Masagana Concrete Products, et al. v. NLRC, et al.,58 the intervening period between the day an
employee was illegally dismissed and the day the decision finding him illegally dismissed
becomes final and executory shall be considered in the computation of his separation pay as a
period of “imputed” or “putative” service:

Separation pay, equivalent to one month's salary for every year of service, is awarded as an
alternative to reinstatement when the latter is no longer an option. Separation pay is computed
from the commencement of employment up to the time of termination, including the imputed
service for which the employee is entitled to backwages, with the salary rate prevailing at the end
of the period of putative service being the basis for computation.59

It is well-settled, even axiomatic, that if reinstatement is not possible, the period covered in the
computation of backwages is from the time the employee was unlawfully terminated until the
finality of the decision finding illegal dismissal.
With respect to the petitioner’s backwages, this Court cannot subscribe to the view that it should
be limited to an amount equivalent to three (3) months of his salary. Backwages is a remedy
affording the employee a way to recover what he has lost by reason of the unlawful dismissal.60
In awarding backwages, the primordial consideration is the income that should have accrued to
the employee from the time that he was dismissed up to his reinstatement61 and the length of
service prior to his dismissal is definitely inconsequential.

As early as 1996, this Court, in Bustamante, et al. v. NLRC, et al.,62 clarified in no uncertain
terms that if reinstatement is no longer possible, backwages should be computed from the time
the employee was terminated until the finality of the decision, finding the dismissal unlawful.

Therefore, in accordance with R.A. No. 6715, petitioners are entitled on their full backwages,
inclusive of allowances and other benefits or their monetary equivalent, from the time their
actual compensation was withheld on them up to the time of their actual reinstatement.

As to reinstatement of petitioners, this Court has already ruled that reinstatement is no longer
feasible, because the company would be adjustly prejudiced by the continued employment of
petitioners who at present are overage, a separation pay equal to one-month salary granted to
them in the Labor Arbiter's decision was in order and, therefore, affirmed on the Court's decision
of 15 March 1996. Furthermore, since reinstatement on this case is no longer feasible, the
amount of backwages shall be computed from the time of their illegal termination on 25 June
1990 up to the time of finality of this decision.63 (emphasis supplied)
A further clarification was made in Javellana, Jr. v. Belen:64

Article 279 of the Labor Code, as amended by Section 34 of Republic Act 6715 instructs:

Art. 279. Security of Tenure. - In cases of regular employment, the employer shall not terminate
the services of an employee except for a just cause or when authorized by this Title. An
employee who is unjustly dismissed from work shall be entitled to reinstatement without loss of
seniority rights and other privileges and to his full backwages, inclusive of allowances, and to his
other benefits or their monetary equivalent computed from the time his compensation was
withheld from him up to the time of his actual reinstatement.

Clearly, the law intends the award of backwages and similar benefits to accumulate past the date
of the Labor Arbiter's decision until the dismissed employee is actually reinstated. But if, as in
this case, reinstatement is no longer possible, this Court has consistently ruled that backwages
shall be computed from the time of illegal dismissal until the date the decision becomes final.65
(citation omitted)

In case separation pay is awarded and reinstatement is no longer feasible, backwages shall be
computed from the time of illegal dismissal up to the finality of the decision should separation
pay not be paid in the meantime. It is the employee’s actual receipt of the full amount of his
separation pay that will effectively terminate the employment of an illegally dismissed
employee.66 Otherwise, the employer-employee relationship subsists and the illegally dismissed
employee is entitled to backwages, taking into account the increases and other benefits, including
the 13th month pay, that were received by his co-employees who are not dismissed.67 It is the
obligation of the employer to pay an illegally dismissed employee or worker the whole amount
of the salaries or wages, plus all other benefits and
bonuses and general increases, to which he would have been normally entitled had he not been
dismissed and had not stopped working.68

In fine, this Court holds Royale liable to pay the petitioner backwages to be computed from his
dismissal on October 1, 2003 until the finality of this decision. Nonetheless, the amount received
by the petitioner from the respondents in satisfaction of the November 30, 2005 Decision shall be
deducted accordingly.

Finally, moral damages and exemplary damages at P25,000.00 each as indemnity for the
petitioner’s dismissal, which was tainted by bad faith and fraud, are in order. Moral damages
may be recovered where the dismissal of the employee was tainted by bad faith or fraud, or
where it constituted an act oppressive to labor, and done in a manner contrary to morals, good
customs or public policy while exemplary damages are recoverable only if the dismissal was
done in a wanton, oppressive, or malevolent manner.69

WHEREFORE, premises considered, the Petition is hereby GRANTED. We REVERSE and

SET ASIDE the CA’s May 29, 2008 Decision in C.A.-G.R. SP No. 02127 and order the
respondents to pay the petitioner the following minus the amount of (P23,521.67) paid to the
petitioner in satisfaction of the NLRC’s November 30, 2005 Decision in NLRC Case No. V-
000355-05:

a) full backwages and other benefits computed from October 1, 2003 (the date Royale
illegally dismissed the petitioner) until the finality of this decision;

b) separation pay computed from April 1976 until the finality of this decision at the rate of
one month pay per year of service;
c) ten percent (10%) attorney’s fees based on the total amount of the awards under (a) and
(b) above;

d) moral damages of Twenty-Five Thousand Pesos (P25,000.00); and

exemplary damages of Twenty-Five Thousand Pesos (P25,000.00).

This case is REMANDED to the labor arbiter for computation of the separation pay, backwages,
and other monetary awards due the petitioner.

SO ORDERED.
FIRST DIVISION

CHILD LEARNING CENTER, INC. G.R. No. 150920

and SPOUSES EDGARDO L. LIMON

and SYLVIA S. LIMON, Present:

Petitioners,

DAVIDE, JR., C.J. (Chairman),

- versus - QUISUMBING,

YNARES-SANTIAGO,

CARPIO, and

AZCUNA, JJ.

TIMOTHY TAGARIO, assisted by

his parents BASILIO TAGORIO and Promulgated:

HERMINIA TAGORIO,

Respondents. November 25, 2005

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

DECISION

AZCUNA, J.:

This petition started with a tort case filed with the Regional Trial Court of Makati by Timothy
Tagorio and his parents, Basilio R. Tagorio and Herminia Tagorio, docketed as Civil Case No.
91-1389. The complaint[1] alleged that during the school year 1990-1991, Timothy was a Grade
IV student at Marymount School, an academic institution operated and maintained by Child
Learning Center, Inc. (CLC). In the afternoon of March 5, 1991, between 1 and 2 p.m., Timothy
entered the boys comfort room at the third floor of the Marymount building to answer the call of
nature. He, however, found himself locked inside and unable to get out. Timothy started to panic
and so he banged and kicked the door and yelled several times for help. When no help arrived he
decided to open the window to call for help. In the process of opening the window, Timothy
went right through and fell down three stories. Timothy was hospitalized and given medical
treatment for serious multiple physical injuries.
An action under Article 2176 of the Civil Code was filed by respondents against the CLC, the
members of its Board of Directors, namely Spouses Edgardo and Sylvia Limon, Alfonso Cruz,
Carmelo Narciso and Luningning Salvador, and the Administrative Officer of Marymount
School, Ricardo Pilao. In its defense,[2] CLC maintained that there was nothing defective about
the locking mechanism of the door and that the fall of Timothy was not due to its fault or
negligence. CLC further maintained that it had exercised the due care and diligence of a good
father of a family to ensure the safety, well-being and convenience of its students.

After trial, the court a quo found in favor of respondents and ordered petitioners CLC and
Spouses Limon to pay respondents, jointly and severally, P200,253.12 as actual and
compensatory damages, P200,000 as moral damages, P50,000 as exemplary damages, P100,000
as attorneys fees and the costs of the suit. The trial court disregarded the corporate fiction of
CLC and held the Spouses Limon personally liable because they were the ones who actually
managed the affairs of the CLC.

Petitioners CLC and the Spouses Limon appealed the decision to the Court of Appeals.

On September 28, 2001, the Court of Appeals[3] affirmed the decision in toto. Petitioners
elevated the case to this Court under Rule 45 of the Rules of Court, after their motion for
reconsideration was denied by Resolution of November 23, 2001.[4]
Petitioners question several factual findings of the trial court, which were affirmed by the Court
of Appeals, namely:[5]

1. That respondent was allegedly trapped inside the boys comfort room located at the
third floor of the school building on March 5, 1991;

2. That respondent allegedly banged and kicked the door of said comfort room several
times to attract attention and that he allegedly yelled thereat for help which never came;

3. That respondent was allegedly forced to open the window of said comfort room to
seek help;

4. That the lock set installed at the boys comfort room located in the third floor of the
school building on March 5, 1991 was allegedly defective and that the same lock set was
involved in previous incidents of alleged malfunctioning;

5. That petitioner Child Learning Center, Inc. allegedly failed to install iron grills in
the window of the boys comfort room at the third floor of the school building;
6. That petitioner Child Learning Center, Inc. allegedly failed to exercise the due care
of a good father of a family in the selection and supervision of its employees;

7. That the proximate cause of respondents accident was allegedly not due to his own
contributory negligence;

8. That there was an alleged basis to apply the legal principle of piercing the veil of
corporate entity in resolving the issue of alleged liability of petitioners Edgardo L. Limon and
Sylvia S. Limon;

9. That there was alleged basis for petitioners to pay respondent actual, moral and
exemplary damages, plus attorneys fees;

10. That there was an alleged basis in not awarding petitioners prayer for moral and
exemplary damages, including attorneys fees.
Generally, factual findings of the trial court, affirmed by the Court of Appeals, are final and
conclusive and may not be reviewed on appeal. The established exceptions are: (1) when the
inference made is manifestly mistaken, absurd or impossible; (2) when there is grave abuse of
discretion; (3) when the findings are grounded entirely on speculations, surmises or conjectures;
(4) when the judgment of the Court of Appeals is based on misapprehension of facts; (5) when
the findings of fact are conflicting; (6) when the Court of Appeals, in making its findings, went
beyond the issues of the case and the same is contrary to the admissions of both appellant and
appellee; (7) when the findings of fact are conclusions without citation of specific evidence on
which they are based; (8) when the Court of Appeals manifestly overlooked certain relevant facts
not disputed by the parties and which, if properly considered, would justify a different
conclusion; and (9) when the findings of fact of the Court of Appeals are premised on the
absence of evidence and are contradicted by the evidence on record.[6]

On the basis of the records of this case, this Court finds no justification to reverse the factual
findings and consider this case as an exception to the general rule.

In every tort case filed under Article 2176 of the Civil Code, plaintiff has to prove by a
preponderance of evidence: (1) the damages suffered by the plaintiff; (2) the fault or negligence
of the defendant or some other person for whose act he must respond; and (3) the connection of
cause and effect between the fault or negligence and the damages incurred.[7]

Fault, in general, signifies a voluntary act or omission which causes damage to the right of
another giving rise to an obligation on the part of the actor to repair such damage. Negligence is
the failure to observe for the protection of the interest of another person that degree of care,
precaution and vigilance which the circumstances justly demand. Fault requires the execution of
a positive act which causes damage to another while negligence consists of the omission to do
acts which result in damage to another.[8]

In this tort case, respondents contend that CLC failed to provide precautionary measures to avoid
harm and injury to its students in two instances: (1) failure to fix a defective door knob despite
having been notified of the problem; and (2) failure to install safety grills on the window where
Timothy fell from.

The trial court found that the lock was defective on March 5, 1991:[9]

The door knob was defective. After the incident of March 5, 1991, said door knob was taken off
the door of the toilet where Timothy was in. The architect who testified during the trial declared
that although there were standard specifications for door knobs for comfort room[s], and he
designed them according to that requirement, he did not investigate whether the door knob
specified in his plans during the construction [was] actually put in place. This is so because he
did not verify whether the door knob he specified w[as] actually put in place at the particular
comfort room where Timothy was barred from getting outside. (TSN, pp. 19-20, December 8,
1994).

The Court of Appeals held that there was no reason to disturb the factual assessment:[10]
After having perused the records, We fail to see any indication of whim or arbitrariness on the
part of the trial magistrate in his assessment of the facts of the case. That said, We deem it not to
be within Our business to recast the factual conclusions reached by the court below.

Petitioners would make much of the point that no direct evidence was presented to prove that the
door knob was indeed defective on the date in question.

The fact, however, that Timothy fell out through the window shows that the door could not be
opened from the inside. That sufficiently points to the fact that something was wrong with the
door, if not the door knob, under the principle of res ipsa loquitor. The doctrine of res ipsa
loquitor applies where (1) the accident was of such character as to warrant an inference that it
would not have happened except for the defendants negligence; (2) the accident must have been
caused by an agency or instrumentality within the exclusive management or control of the person
charged with the negligence complained of; and (3) the accident must not have been due to any
voluntary action or contribution on the part of the person injured.[11] Petitioners are clearly
answerable for failure to see to it that the doors of their school toilets are at all times in working
condition. The fact that a student had to go through the window, instead of the door, shows that
something was wrong with the door.

As to the absence of grills on the window, petitioners contend that there was no such requirement
under the Building Code. Nevertheless, the fact is that such window, as petitioners themselves
point out, was approximately 1.5 meters from the floor, so that it was within reach of a student
who finds the regular exit, the door, not functioning. Petitioners, with the due diligence of a good
father of the family, should have anticipated that a student, locked in the toilet by a non-working
door, would attempt to use the window to call for help or even to get out. Considering all the
circumstances, therefore, there is sufficient basis to sustain a finding of liability on petitioners
part.

Petitioners argument that CLC exercised the due diligence of a good father of a family in the
selection and supervision of its employees is not decisive. Due diligence in the selection and
supervision of employees is applicable where the employer is being held responsible for the acts
or omissions of others under Article 2180 of the Civil Code.[12] In this case, CLCs liability is
under Article 2176 of the Civil Code, premised on the fact of its own negligence in not ensuring
that all its doors are properly maintained.

Our pronouncement that Timothy climbed out of the window because he could not get out using
the door, negates petitioners other contention that the proximate cause of the accident was
Timothys own negligence. The injuries he sustained from the fall were the product of a natural
and continuous sequence, unbroken by any intervening cause, that originated from CLCs own
negligence.

We, however, agree with petitioners that there was no basis to pierce CLCs separate corporate
personality. To disregard the corporate existence, the plaintiff must prove: (1) Control by the
individual owners, not mere majority or complete stock ownership, resulting in complete
domination not only of finances but of policy and business practice in respect to a transaction 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 a dishonest and unjust act in
contravention of the plaintiffs legal right; and (3) the control and breach of duty must
proximately cause the injury or unjust loss complained of. The absence of these elements
prevents piercing the corporate veil.[13] The evidence on record fails to show that these elements
are present, especially given the fact that plaintiffs complaint had pleaded that CLC is a
corporation duly organized and existing under the laws of the Philippines.

On 9th and 10th points raised concerning the award of damages, the resolution would rest on
factual determinations by the trial court, affirmed by the Court of Appeals, and no legal issue
warrants our intervention.

WHEREFORE, the petition is partly granted and the Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 50961 dated September 28, 2001 and November 23, 2001,
respectively, are MODIFIED in that petitioners Spouses Edgardo and Sylvia Limon are absolved
from personal liability. The Decision and Resolution are AFFIRMED in all other respects. No
pronouncement as to costs.

SO ORDERED.
SECOND DIVISION

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

Petitioner,

Present:

PUNO, J., Chairman,

AUSTRIA-MARTINEZ,

versus CALLEJO, SR.,

TINGA, and

CHICO-NAZARIO, JJ.

JRB REALTY, INC.,

Respondent. Promulgated:

July 15, 2005

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

DECISION

CALLEJO, SR., J.:

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

The facts are as follows:

In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named Blanco Center, on
its parcel of land located at 119 Alfaro St., Salcedo Village, Makati City. An air conditioning
system was needed for the Blanco Law Firm housed at the second floor of the building. On
March 13, 1980, the respondents Executive Vice-President, Jose R. Blanco, accepted the contract
quotation of Mr. A.G. Morrison, President of Aircon and Refrigeration Industries, Inc. (Aircon),
for two (2) sets of Fedders Adaptomatic 30,000 kcal (Code: 10-TR) air conditioning equipment
with a net total selling price of P99,586.00.[2] Thereafter, two (2) brand new packaged air
conditioners of 10 tons capacity each to deliver 30,000 kcal or 120,000 BTUH[3] were installed
by Aircon. When the units with rotary compressors were installed, they could not deliver the
desired cooling temperature. Despite several adjustments and corrective measures, the
respondent conceded that Fedders Air Conditioning USAs technology for rotary compressors for
big capacity conditioners like those installed at the Blanco Center had not yet been perfected.
The parties thereby agreed to replace the units with reciprocating/semi-hermetic compressors
instead. In a Letter dated March 26, 1981,[4] Aircon stated that it would be replacing the units
currently installed with new ones using rotary compressors, at the earliest possible time.
Regrettably, however, it could not specify a date when delivery could be effected.

TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of the
units, inclusive of parts and services. In October 1987, the respondent learned, through
newspaper ads,[5] that Maxim Industrial and Merchandising Corporation (Maxim, for short) was
the new and exclusive licensee of Fedders Air Conditioning USA in the Philippines for the
manufacture, distribution, sale, installation and maintenance of Fedders air conditioners. The
respondent requested that Maxim honor the obligation of Aircon, but the latter refused.
Considering that the ten-year period of prescription was fast approaching, to expire on March 13,
1990, the respondent then instituted, on January 29, 1990, an action for specific performance
with damages against Aircon & Refrigeration Industries, Inc., Fedders Air Conditioning USA,
Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine Davies, Inc.[6] The
latter was impleaded as defendant, considering that Aircon was a subsidiary of the petitioner.
The respondent prayed that judgment be rendered, as follows:

1. Ordering the defendants to jointly and severally at their account and expense deliver, install
and place in operation two

brand new units of each 10-tons capacity Fedders unitary packaged air conditioners with Fedders
USAs technology perfected rotary compressors to always deliver 30,000 kcal or 120,000 BTUH
to the second floor of the Blanco Center building at 119 Alfaro St., Salcedo Village, Makati,
Metro Manila;

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

3. Ordering defendants to jointly and severally pay plaintiffs P150,000.00 attorneys fees and
other costs of litigation, as well as exemplary damages in an amount not less than or equal to
Prayer 2 above; and
4. Granting plaintiff such other and further relief as shall be just and equitable in the premises.[7]

Of the four defendants, only the petitioner filed its Answer. The court did not acquire jurisdiction
over Aircon because the latter ceased operations, as its corporate life ended on December 31,
1986.[8] Upon motion, defendants Fedders Air Conditioning USA and Maxim were declared in
default.[9]

On May 17, 1996, the RTC rendered its Decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered ordering defendants Jardine Davies, Inc., Fedders
Air Conditioning USA, Inc. and Maxim Industrial and Merchandising Corporation, jointly and
severally:

1. To deliver, install and place into operation the two (2) brand new units of Fedders
unitary packaged airconditioning units each of 10 tons capacity with rotary compressors to
deliver 30,000 kcal or 120,000 BTUH to the second floor of the Blanco Center building, or to
pay plaintiff the current price for two such units;
2. To reimburse plaintiff the amount of P556,551.55 as and for the unsaved electricity
bills from October 21, 1981 up to April 30, 1995; and another amount of P185,951.67 as and for
repair costs;

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

4. Cost of suit.[10]

The petitioner filed its notice of appeal with the CA, alleging that the trial court erred in holding
it liable because it was not a party to the contract between JRB Realty, Inc. and Aircon, and that
it had a personality separate and distinct from that of Aircon.

On March 23, 2000, the CA affirmed the trial courts ruling in toto; hence, this petition.

The petitioner raises the following assignment of errors:

I.

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

II.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE

ALTER EGO, THE COURT OF APPEALS ERRED IN NOT DECLARING AIRCONS
OBLIGATION TO DELIVER THE TWO (2) AIRCONDITIONING UNITS TO JRB AS
HAVING BEEN SUBSTANTIALLY COMPLIED WITH IN GOOD FAITH.

III.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE

ALTER EGO, THE COURT OF APPEALS ERRED IN NOT DECLARING JRBS CAUSES
OF ACTION AS HAVING BEEN BARRED BY LACHES.

IV.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE
ALTER EGO, THE COURT OF APPEALS ERRED IN FINDING JRB ENTITLED TO
RECOVER ALLEGED UNSAVED ELECTRICITY EXPENSES.

V.

THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY

ATTORNEYS FEES.

VI.

THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO JARDINE FOR
DAMAGES.[11]

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

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

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

Defendant Jardines witness, Atty. Fe delos Santos-Quiaoit admitted that defendant Aircon,
renamed Aircon & Refrigeration Industries, Inc. is one of the subsidiaries of Jardine Davies
(TSN, September 22, 1995, p. 12). She also testified that Jardine nominated, elected, and
appointed the controlling majority of the Board of Directors and the highest officers of Aircon
(Ibid, pp. 10,13-14).
The foregoing circumstances provide justifiable basis for this Court to disregard the fiction of
corporate entity and treat defendant Aircon as part of the instrumentality of co-defendant
Jardine.[12]

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

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

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

(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to Atty. J.R. Blanco
(Exh. J);
(d) News items of Bulletin Today dated August 30, 1982 (Exh. L);

(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979 listing Aircon as one of its
subsidiaries (Exh. P);

(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh. S);

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

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

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

being invested by law with a personality separate and distinct from its stockholders and from
other corporations to which it may be connected. While a corporation is allowed to exist solely
for a lawful purpose, the law will regard it as an association of persons or in case of two
corporations, merge them into one, when this corporate legal entity is used as a cloak for fraud or
illegality.[14] This is the doctrine of piercing the veil of corporate

fiction which applies only when such corporate fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime.[15] The rationale behind piercing a corporations
identity is to remove the barrier between the corporation from the persons comprising it to thwart
the fraudulent and illegal schemes of those who use the corporate personality as a shield for
undertaking certain proscribed activities.[16]

While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that
Aircons corporate legal existence can just be disregarded. In Velarde v. Lopez, Inc.,[17] the
Court categorically held that a subsidiary has an independent and separate juridical personality,
distinct from that of its parent company; hence, any claim or suit against the latter does not bind
the former, and vice versa. In applying the doctrine, the following requisites must be established:
(1) control, not merely majority or complete stock control; (2) such control must have been used
by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest acts in contravention of plaintiffs legal rights; and (3) the
aforesaid control and breach of duty must proximately cause the injury or unjust loss complained
of.[18]
The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired
Aircons majority of capital stock. It, however, does not exercise complete control over Aircon;
nowhere can it be gathered that the petitioner manages the business affairs of Aircon. Indeed, no
management agreement exists between the petitioner and Aircon, and the latter is an entirely
different entity from the petitioner.[19]

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

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

manufacturers, and agents;

(b) Upon complying with the requirements of law applicable thereto, to act as agents of
companies and underwriters doing and engaging in any and all kinds of insurance business.[21]
On the other hand, Aircon, incorporated on December 27, 1952,[22] is a manufacturing firm. Its
Articles of Incorporation states that its purpose is mainly -

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

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

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

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

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

First. The respondent merely relied on the newspaper advertisements showing the Fedders
window-type air conditioners, which are far different from the big capacity air conditioning units
installed at Blanco Center.
Second. After such print advertisements, the respondent informed Aircon that it was going to
install an electric meter to register its electric consumption so as to determine the electric costs
not saved by the presently installed units with semi-hermetic compressors. Contrary to the
allegations of the respondent that this was in pursuance to their Revised Agreement, no proof
was adduced that Aircon agreed to the respondents proposition. It was a unilateral act on the part
of the respondent, which Aircon did not oblige or commit itself to pay.

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

Likewise, there is no basis for the award of P185,951.67 representing maintenance cost. The
respondent merely submitted a schedule[31] prepared by the respondents accountant, listing the
alleged repair costs from March 1987 up to June 1994. Such evidence is self-serving and can not
also be given probative weight, considering that there are no proofs of receipts, vouchers, etc.,
which would substantiate the amounts paid for such services. Absent any more convincing proof,
the Court finds that the respondents claims are without basis, and cannot, therefore, be
awarded.We sustain the petitioners separateness from that of Aircon in this case. It bears
stressing that the petitioner was never a party to the contract. Privity of contracts take effect only
between parties, their successors-in-interest, heirs and assigns.[32] The petitioner, which has a

separate and distinct legal personality from that of Aircon, cannot, therefore, be held liable.

N VIEW OF THE FOREGOING, the petition is GRANTED. The assailed decision of the Court
of Appeals, affirming the decision of the Regional Trial Court is REVERSED and SET ASIDE.
The complaint of the respondent is DISMISSED. Costs against the respondent.
THIRD DIVISION

[G.R. No. 159121. February 3, 2005]

PAMPLONA PLANTATION COMPANY, INC. and/or JOSE LUIS BONDOC, petitioners, vs.
RODEL TINGHIL, MARYGLENN SABIHON, ESTANISLAO BOBON, CARLITO
TINGHIL, BONIFACIO TINGHIL, NOLI TINGHIL, EDGAR TINGHIL, ERNESTO
ESTOMANTE, SALLY TOROY, BENIGNO TINGHIL JR., ROSE ANN NAPAO,
DIOSDADO TINGHIL, ALBERTO TINGHIL, ANALIE TINGHIL, and ANTONIO
ESTOMANTE, respondents.

DECISION

PANGANIBAN, J.:

To protect the rights of labor, two corporations with identical directors, management, office and
payroll should be treated as one entity only. A suit by the employees against one corporation
should be deemed as a suit against the other. Also, the rights and claims of workers should not be
prejudiced by the acts of the employer that tend to confuse them about its corporate identity. The
corporate fiction must yield to truth and justice.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to annul the
January 31, 2003 Decision[2] and the June 17, 2003 Resolution[3] of the Court of Appeals (CA)
in CA-GR SP No. 62813. The assailed Decision disposed as follows:

WHEREFORE, in view of the foregoing, the petition is GRANTED. The assailed decision of
public respondent NLRC dated 19 July 2000 [is] REVERSED and SET ASIDE and a new one
entered DIRECTING private respondents to reinstate petitioners, except Rufino Bacubac, Felix
Torres and Antonio Canolas, to their former positions without loss of seniority rights plus
payment of full backwages. However, if reinstatement is no longer feasible, a one-month salary
for every year of service shall be paid the petitioners as ordered by the Labor Arbiter in his
decision dated 31 August 1998 plus payment of full backwages computed from date of illegal
dismissal to the finality of this decision.[4]

The Decision[5] of the National Labor Relations Commission (NLRC),[6] reversed by the CA,
disposed as follows:

WHEREFORE, premises considered, the decision appealed from is hereby REVERSED, and
another one entered DISMISSING the complaint.[7]

The June 17, 2003 Resolution denied petitioners Motion for Reconsideration.

The Facts

The CA summarized the antecedents as follows:

Sometime in 1993, [Petitioner] Pamplona Plantations Company, Inc. (company for brevity) was
organized for the purpose of taking over the operations of the coconut and sugar plantation of
Hacienda Pamplona located in Pamplona, Negros Oriental. It appears that Hacienda Pamplona
was formerly owned by a certain Mr. Bower who had in his employ several agricultural workers.

When the company took over the operation of Hacienda Pamplona in 1993, it did not absorb all
the workers of Hacienda Pamplona. Some, however, were hired by the company during harvest
season as coconut hookers or sakador, coconut filers, coconut haulers, coconut scoopers or
lugiteros, and charcoal makers.
Sometime in 1995, Pamplona Plantation Leisure Corporation was established for the purpose of
engaging in the business of operating tourist resorts, hotels, and inns, with complementary
facilities, such as restaurants, bars, boutiques, service shops, entertainment, golf courses, tennis
courts, and other land and aquatic sports and leisure facilities.

On 15 December 1996, the Pamplona Plantation Labor Independent Union (PAPLIU) conducted
an organizational meeting wherein several [respondents] who are either union members or
officers participated in said meeting.

Upon learning that some of the [respondents] attended the said meeting, [Petitioner] Jose Luis
Bondoc, manager of the company, did not allow [respondents] to work anymore in the
plantation.

Thereafter, on various dates, [respondents] filed their respective complaints with the NLRC,
Sub-Regional Arbitration Branch No. VII, Dumaguete City against [petitioners] for unfair labor
practice, illegal dismissal, underpayment, overtime pay, premium pay for rest day and holidays,
service incentive leave pay, damages, attorneys fees and 13th month pay.

On 09 October 1997, [respondent] Carlito Tinghil amended his complaint to implead Pamplona
Plantation Leisure Corporation x x x.

On 31 August 1998, Labor Arbiter Jose G. Gutierrez rendered a decision finding [respondents],
except Rufino Bacubac, Antonio Caolas and Felix Torres who were complainants in another
case, to be entitled to separation pay.

xxxxxxxxx

[Petitioners] appealed the Labor Arbiters decision to [the] NLRC. In the assailed decision dated
19 July 2000, the NLRCs Fourth Division reversed the Labor Arbiter, ruling that [respondents],
except Carlito Tinghil, failed to implead Pamplona Plantation Leisure Corporation, an
indispensable party and that there exist no employer-employee relation between the parties.
xxxxxxxxx

[Respondents] filed a motion for reconsideration which was denied by [the] NLRC in a
Resolution dated 06 December 2000.[8]

Respondents elevated the case to the CA via a Petition for Certiorari under Rule 65 of the Rules
of Court.

Ruling of the Court of Appeals

Guided by the fourfold test for determining the existence of an employer-employee relationship,
the CA held that respondents were employees of petitioner-company. Finding there was a power
to hire, the appellate court considered the admission of petitioners in their Comment that they
had hired respondents as coconut filers, coconut scoopers, charcoal makers, or as pieceworkers.
The fact that respondents were paid by piecework did not mean that they were not employees of
the company. Further, the CA ruled that petitioners necessarily exercised control over the work
they performed, since the latter were working within the premises of the plantation. According to
the CA, the mere existence -- not necessarily the actual exercise -- of the right to control the
manner of doing work sufficed to meet the fourth element of an employer-employee relation.

The appellate court also held that respondents were regular employees, because the tasks they
performed were necessary and indispensable to the operation of the company. Since there was no
compliance with the twin requirements of a valid and/or authorized cause and of procedural due
process, their dismissal was illegal.

Hence, this Petition.[9]

Issues
In their Memorandum, petitioners submit the following issues for our consideration:

1. Whether or not the finding of the Court of Appeals that herein respondents are employees of
Petitioner Pamplona Plantation Company, Inc. is contrary to the admissions of the respondents
themselves.

2. Whether or not the Court of Appeals has decided in a way not in accord with law and
jurisprudence, and with grave abuse of discretion, in not dismissing the respondents complaint
for failure to implead Pamplona Plantation Leisure Corp., which is an indispensable party to this
case.

3. Whether or not the Court of Appeals has decided in a way not in accord with law and
jurisprudence, and with grave abuse of discretion in ordering reinstatement or payment of
separation pay and backwages to the respondents, considering the lack of employer-employee
relationship between petitioner and respondents.[10]

The main issue raised is whether the case should be dismissed for the non-joinder of the
Pamplona Plantation Leisure Corporation. The other issues will be taken up in the discussion of
the main question.

The Courts Ruling

The Petition lacks merit.

Preliminary Issue:

Factual Matters
Section 1 of Rule 45 of the Rules of Court states that only questions of law are entertained in
appeals by certiorari to the Supreme Court. However, jurisprudence has recognized several
exceptions in which factual issues may be resolved by this Court:[11] (1) the legal conclusions
made by the lower tribunal are speculative;[12] (2) its inferences are manifestly mistaken,[13]
absurd, or impossible; (3) the lower court committed grave abuse of discretion; (4) the judgment
is based on a misapprehension of facts;[14] (5) the findings of fact of the lower tribunals are
conflicting;[15] (6) the CA went beyond the issues; (7) the CAs findings are contrary to the
admissions of the parties;[16] (8) the CA manifestly overlooked facts not disputed which, if
considered, would justify a different conclusion; (9) the findings of fact are conclusions without
citation of the specific evidence on which they are based; and (10) when the findings of fact of
the CA are premised on the absence of evidence but such findings are contradicted by the
evidence on record.[17]

The very same reason that constrained the appellate court to review the factual findings of the
NLRC impels this Court to take its own look at the facts. Normally, the Supreme Court is not a
trier of facts.[18] However, since the findings of the CA and the NLRC on this point were
conflicting, we waded through the records to find out if there was basis for the formers reversal
of the NLRCs Decision. We shall discuss our factual findings together with our review of the
main issue.

Main Issue:

Piercing the Corporate Veil

Petitioners contend that the CA should have dismissed the case for the failure of respondents
(except Carlito Tinghil) to implead the Pamplona Plantation Leisure Corporation, an
indispensable party, for being the true and real employer. Allegedly, respondents admitted in
their Affidavits dated February 3, 1998,[19] that they had been employed by the leisure
corporation and/or engaged to perform activities that pertained to its business.

Further, as the NLRC allegedly noted in their individual Complaints, respondents specifically
averred that they had worked in the golf course and performed related jobs in the recreational
facilities of the leisure corporation. Hence, petitioners claim that, as a sugar and coconut
plantation company separate and distinct from the Pamplona Plantation Leisure Corporation, the
petitioner-company is not the real party in interest.

We are not persuaded.

An examination of the facts reveals that, for both the coconut plantation and the golf course,
there is only one management which the laborers deal with regarding their work.[20] A portion
of the plantation (also called Hacienda Pamplona) had actually been converted into a golf course
and other recreational facilities. The weekly payrolls issued by petitioner-company bore the
name Pamplona Plantation Co., Inc.[21] It is also a fact that respondents all received their pay
from the same person, Petitioner Bondoc -- the managing director of the company. Since the
workers were working for a firm known as Pamplona Plantation Co., Inc., the reason they sued
their employer through that name was natural and understandable.

True, the Petitioner Pamplona Plantation Co., Inc., and the Pamplona Plantation Leisure
Corporation appear to be separate corporate entities. But it is settled that this fiction of law
cannot be invoked to further an end subversive of justice.[22]

The principle requiring the piercing of the corporate veil mandates courts to see through the
protective shroud that distinguishes one corporation from a seemingly separate one.[23] The
corporate mask may be removed and the corporate veil pierced when a corporation is the mere
alter ego of another.[24] Where badges of fraud exist, where public convenience is defeated,
where a wrong is sought to be justified thereby, or where a separate corporate identity is used to
evade financial obligations to employees or to third parties,[25] the notion of separate legal
entity should be set aside[26] and the factual truth upheld. When that happens, the corporate
character is not necessarily abrogated.[27] It continues for other legitimate objectives. However,
it may be pierced in any of the instances cited in order to promote substantial justice.

In the present case, the corporations have basically the same incorporators and directors and are
headed by the same official. Both use only one office and one payroll and are under one
management. In their individual Affidavits, respondents allege that they worked under the
supervision and control of Petitioner Bondoc -- the common managing director of both the
petitioner-company and the leisure corporation. Some of the laborers of the plantation also work
in the golf course.[28] Thus, the attempt to make the two corporations appear as two separate
entities, insofar as the workers are concerned, should be viewed as a devious but obvious means
to defeat the ends of the law. Such a ploy should not be permitted to cloud the truth and
perpetrate an injustice.

We note that this defense of separate corporate identity was not raised during the proceedings
before the labor arbiter. The main argument therein raised by petitioners was their alleged lack of
employer-employee relationship with, and power of control over, the means and methods of
work of respondents because of the seasonal nature of the latters work.[29]

Neither was the issue of non-joinder of indispensable parties raised in petitioners appeal before
the NLRC.[30] Nevertheless, in its Decision[31] dated July 19, 2000, the Commission concluded
that the plantation company and the leisure corporation were two separate and distinct
corporations, and that the latter was an indispensable party that should have been impleaded. We
quote below pertinent portions of that Decision:

Respondent posits that it is engaged in operating and maintaining sugar and coconut plantation.
The positions of complainants could only be determined through their individual complaints. Yet
all complainants alleged in their affidavits x x x that they were working at the golf course.
Worthy to note that only Carlito Tinghil amended his complaint to include Pamplona Leisure
Corporation, which respondents maintain is a separate corporation established in 1995. Thus,
xxx Pamplona Plantation Co., Inc. and Pamplona Leisure Corporation are two separate and
distinct corporations. Except for Carlito Tinghil the complainants have the wrong party
respondent. Pamplona Leisure Corporation is an indispensable party without which there could
be no final determination of the case.[32]

Indeed, it was only after this NLRC Decision was issued that the petitioners harped on the
separate personality of the Pamplona Plantation Co., Inc., vis--vis the Pamplona Plantation
Leisure Corporation.

As cited above, the NLRC dismissed the Complaints because of the alleged admission of
respondents in their Affidavits that they had been working at the golf course. However, it failed
to appreciate the rest of their averments. Just because they worked at the golf course did not
necessarily mean that they were not employed to do other tasks, especially since the golf course
was merely a portion of the coconut plantation. Even petitioners admitted that respondents had
been hired as coconut filers, coconut scoopers or charcoal makers.[33] Consequently, NLRCs
conclusion derived from the Affidavits of respondents stating that they were employees of the
Pamplona Plantation Leisure Corporation alone was the result of an improper selective
appreciation of the entire evidence.

Furthermore, we note that, contrary to the NLRCs findings, some respondents indicated that their
employer was the Pamplona Plantation Leisure Corporation, while others said that it was the
Pamplona Plantation Co., Inc. But in all these Affidavits, both the leisure corporation and
petitioner-company were identified or described as entities engaged in the development and
operation of sugar and coconut plantations, as well as recreational facilities such as a golf course.
These allegations reveal that petitioner successfully confused the workers as to who their true
and real employer was. All things considered, their faulty belief that the plantation company and
the leisure corporation were one and the same can be attributed solely to petitioners. It would
certainly be unjust to prejudice the claims of the workers because of the misleading actions of
their employer.

Non-Joinder of Parties

Granting for the sake of argument that the Pamplona Plantation Leisure Corporation is an
indispensable party that should be impleaded, NLRCs outright dismissal of the Complaints was
still erroneous.

The non-joinder of indispensable parties is not a ground for the dismissal of an action.[34] At
any stage of a judicial proceeding and/or at such times as are just, parties may be added on the
motion of a party or on the initiative of the tribunal concerned.[35] If the plaintiff refuses to
implead an indispensable party despite the order of the court, that court may dismiss the
complaint for the plaintiffs failure to comply with the order. The remedy is to implead the non-
party claimed to be indispensable.[36] In this case, the NLRC did not require respondents to
implead the Pamplona Plantation Leisure Corporation as respondent; instead, the Commission
summarily dismissed the Complaints.

In any event, there is no need to implead the leisure corporation because, insofar as respondents
are concerned, the leisure corporation and petitioner-company are one and the same entity.
Salvador v. Court of Appeals[37] has held that this Court has full powers, apart from that power
and authority which is inherent, to amend the processes, pleadings, proceedings and decisions by
substituting as party-plaintiff the real party-in-interest.

In Alonso v. Villamor,[38] we had the occasion to state thus:

There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose
is to facilitate the application of justice to the rival claims of contending parties. They were
created, not to hinder and delay, but to facilitate and promote, the administration of justice. They
do not constitute the thing itself, which courts are always striving to secure to litigants. They are
designed as the means best adapted to obtain that thing. In other words, they are a means to an
end. When they lose the character of the one and become the other, the administration of justice
is at fault and courts are correspondingly remiss in the performance of their obvious duty.

The controlling principle in the interpretation of procedural rules is liberality, so that they may
promote their object and assist the parties in obtaining just, speedy and inexpensive
determination of every action and proceeding.[39] When the rules are applied to labor cases, this
liberal interpretation must be upheld with even greater vigor.[40] Without in any way depriving
the employer of its legal rights, the thrust of statutes and rules governing labor cases has been to
benefit workers and avoid subjecting them to great delays and hardships. This intent holds
especially in this case, in which the plaintiffs are poor laborers.

Employer-Employee Relationship

Petitioners insist that respondents are not their employees, because the former exercised no
control over the latters work hours and method of performing tasks. Thus, petitioners contend
that under the control test, the workers were independent contractors.

We disagree. As shown by the evidence on record, petitioners hired respondents, who performed
tasks assigned by their respective officers-in-charge, who in turn were all under the direct
supervision and control of Petitioner Bondoc. These allegations are contained in the workers
Affidavits, which were never disputed by petitioners. Also uncontroverted are the payrolls
bearing the name of the plantation company and signed by Petitioner Bondoc. Some of these
payrolls include the time records of the employees. These documents prove that petitioner-
company exercised control and supervision over them.

To operate against the employer, the power of control need not have been actually exercised.
Proof of the existence of such power is enough.[41] Certainly, petitioners wielded that power to
hire or dismiss, as well as to check on the progress and the quality of work of the laborers.

Jurisprudence provides other equally important considerations[42] that support the conclusion
that respondents were not independent contractors. First, they cannot be said to have carried on
an independent business or occupation.[43] They are not engaged in the business of filing,
scooping and hauling coconuts and/or operating and maintaining a plantation and a golf course.
Second, they do not have substantial capital or investment in the form of tools, equipment,
machinery, work premises, and other implements needed to perform the job, work or service
under their own account or responsibility.[44] Third, they have been working exclusively for
petitioners for several years. Fourth, there is no dispute that petitioners are in the business of
growing coconut trees for commercial purposes. There is no question, either, that a portion of the
plantation was converted into a golf course and other recreational facilities. Clearly, respondents
performed usual, regular and necessary services for petitioners business.

WHEREFORE, the Petition is DENIED, and the assailed Decision AFFIRMED. Costs against
the petitioners.

SO ORDERED.

Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concur.

SECOND DIVISION

G.R. No. 127181 September 4, 2001

LAND BANK OF THE PHILIPPINES, petitioner,

vs.

THE COURT OF APPEALS, ECO MANAGEMENT CORPORATION and EMMANUEL C.

OÑATE, respondents.

QUISUMBING, J.:

This petition for review on certiorari seeks to reverse and set aside the decision1 promulgated on
June 17, 1996 in CA-GR No. CV-43239 of public respondent and its resolution2 dated
November 29, 1996 denying petitioner’s motion for reconsideration.3

The facts of this case as found by the Court of Appeals and which we find supported by the
records are as follows:

On various dates in September, October, and November, 1980, appellant Land Bank of the
Philippines (LBP) extended a series of credit accommodations to appellee ECO, using the trust
funds of the Philippine Virginia Tobacco Administration (PVTA) in the aggregate amount of
P26,109,000.00. The proceeds of the credit accommodations were received on behalf of ECO by
appellee Oñate.

On the respective maturity dates of the loans, ECO failed to pay the same. Oral and written
demands were made, but ECO was unable to pay. ECO claims that the company was in financial
difficulty for it was unable to collect its investments with companies which were affected by the
financial crisis brought about by the Dewey Dee scandal.
xxx

On October 20, 1981, ECO proposed and submitted to LBP a "Plan of Payment" whereby the
former would set up a financing company which would absorb the loan obligations. It was
proposed that LBP would participate in the scheme through the conversion of P9,000,000.00
which was part of the total loan, into equity.

On March 4, 1982, LBP informed ECO of the action taken by the former’s Trust Committee
concerning the "Plan of Payment" which reads in part, as follows:

xxx

Please be informed that the Bank’s Trust Committee has deliberated on the plan of payment
during its meetings on November 6, 1981 and February 23, 1982. The Committee arrived at a
decision that you may proceed with your Plan of Payment provided Land Bank shall not
participate in the undertaking in any manner whatsoever.

In view thereof, may we advise you to make necessary revision in the proposed Plan of Payment
and submit the same to us as soon as possible. (Records, p. 428)

On May 5, 1982, ECO submitted to LBP a "Revised Plan of Payment" deleting the latter’s
participation in the proposed financing company. The Trust Committee deliberated on the
"Revised Plan of Payment" and resolved to reject it. LBP then sent a letter to the PVTA for the
latter’s comments. The letter stated that if LBP did not hear from PVTA within five (5) days
from the latter’s receipt of the letter, such silence would be construed to be an approval of LBP’s
intention to file suit against ECO and its corporate officers. PVTA did not respond to the letter.

On June 28, 1982, Landbank filed a complaint for Collection of Sum of Money against ECO and
Emmanuel C. Oñate before the Regional Trial Court of Manila, Branch 50.
After trial on the merits, a judgment was rendered in favor of LBP; however, appellee Oñate was
absolved from personal liability for insufficiency of evidence.

Dissatisfied, both parties filed their respective Motions for Reconsideration. LBP claimed that
there was an error in computation in the amounts to be paid. LBP also questioned the dismissal
of the case with regard to Oñate.

On the other hand, ECO questioned its being held liable for the amount of the loan. Upon order
of the court, both parties submitted Supplemental Motions for Reconsideration and their
respective Oppositions to each other’s Motions.

On February 3, 1993, the trial court rendered an Amended Decision, the dispositive portion of
which reads as follows:

ACCORDINGLY, the Decision, dated December 3, 1990, is hereby modified to read as follows:

WHEREFORE, judgment is rendered ordering defendant Eco Management Corporation to pay

plaintiff Land Bank of the Philippines:

A. The sum of P26,109,000.00 representing the total amount of the ten (10) loan
accommodations plus 16% interest per annum computed from the dates of their respective
maturities until fully paid, broken down as follows:

1. the principal amount of P4,000,000.00 with interest at 16% computed from September 18,
1981;

2. the principal amount of P5,000,000.00 with interest at 16% computed from September 21,
1981;
3. the principal amount of P1,000,000.00 with interest rate at 16% computed from September 28,
1981;

4. the principal amount of P1,000,000.00 with interest at 15% computed from October 5, 1981;

5. the principal amount of P2,000,000.00 with interest rate at of 16% computed from October 8,
1981;

6. the principal amount of P2,000,000.00 with interest rate at of 16% from October 23, 1981;

7. the principal amount of P814,000.00 with interest rate at of 16% computed from November 1,
1981;

8. the principal amount of P2,295,000.00 with interest rate at of 16% computed from November
6, 1981;

9. the principal amount of P3,000,000.00 with interest rate at of 16% computed from November
7, 1981;

10. the principal amount of P5,000,000.00 with interest rate at 16% computed from November 9,
1981;

B. The sum of P260,000.00 as attorney’s fees; and

C. The costs of the suit.

The case as against defendant Emmanuel Oñate is dismissed for insufficiency of evidence.

SO ORDERED. (Records, p. 608)4

The Court of Appeals affirmed in toto the amended decision of the trial court.5

On June 9, 1996, petitioner filed a motion for reconsideration, which was denied in a resolution
dated November 29, 1996. Hence, this present petition, assigning the following errors allegedly
committed by the Court of Appeals:

THE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT BASED ON THE
FACTS AS ESTABLISHED BY EVIDENCE, THERE EXISTS A SUBSTANTIAL AND
JUSTIFIABLE GROUND UPON WHICH THE LEGAL NOTION OF THE CORPORATE
FICTION OF RESPONDENT ECO MANAGEMENT CORPORATION MAY BE PIERCED.

THE COURT OF APPEALS GRAVELY ERRED IN NOT A[T]TACHING LIABILITY TO

RESPONDENT EMMANUEL C. OÑATE JOINTLY AND SEVERALLY WITH
RESPONDENT ECO MANAGEMENT CORPORATION FOR THE PRINCIPAL SUM OF
P26 M PLUS INTEREST THEREON.

THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE RULING OF THE

LOWER COURT THE SAME NOT BEING SUPPORTED BY THE EVIDENCE AND
APPLICABLE LAWS AND JURISPRUDENCE.6
The primary issues for resolution here are (1) whether or not the corporate veil of ECO
Management Corporation should be pierced; and (2) whether or not Emmanuel C. Oñate should
be held jointly and severally liable with ECO Management Corporation for the loans incurred
from Land Bank.

Petitioner contends that the personalities of Emmanuel Oñate and of ECO Management
Corporation should be treated as one, for the particular purpose of holding respondent Oñate
liable for the loans incurred by corporate respondent ECO from Land Bank. According to
petitioner, the said corporation was formed ostensibly to allow Oñate to acquire loans from Land
Bank which he used for his personal advantage.

Petitioner submits the following arguments to support its stand: (1) Respondent Oñate owns the
majority of the interest holdings in respondent corporation, specifically during the crucial time
when appellees applied for and obtained the loan from LANDBANK, sometime in September to
November, 1980. (2) The acronym ECO stands for the initials of Emmanuel C. Oñate, which is
the logical, sensible and concrete explanation for the name ECO, in the absence of evidence to
the contrary. (3) Respondent Oñate has always referred to himself as the debtor, not merely as an
officer or a representative of respondent corporation. (4) Respondent Oñate personally paid P1
Million taken from trust accounts in his name. (5) Respondent Oñate made a personal offering to
pay his personal obligation. (6) Respondent Oñate controlled respondent corporation by
simultaneously holding two (2) corporate positions, viz., as Chairman and as treasurer, beginning
from the time of respondent corporation’s incorporation and continuously thereafter without
benefit of election. (7) Respondent corporation had not held any meeting of the stockholders or
of the Board of Directors, as shown by the fact that no proceeding of such corporate activities
was filed with or borne by the record of the Securities and Exchange Commission (SEC). The
only corporate records respondent corporation filed with the SEC were the following: Articles of
Incorporation, Treasurer’s Affidavit, Undertaking to Change Corporate Name, Statement of
Assets and Liabilities.7

Private respondents, in turn, contend that Oñate’s only participation in the transaction between
petitioner and respondent ECO was his execution of the loan agreements and promissory notes as
Chairman of the corporation’s Board of Directors. There was nothing in the loan agreement nor
in the promissory notes which would indicate that Oñate was binding himself jointly and
severally with ECO. Respondents likewise deny that ECO stands for Emmanuel C. Oñate.
Respondents also note that Oñate is no longer a majority stockholder of ECO and that the
payment by a third person of the debt of another is allowed under the Civil Code. They also
alleged that there was no fraud and/or bad faith in the transactions between them and Land Bank.
Hence, private respondents conclude, there is no legal ground to pierce the veil of respondent
corporation’s personality.8

At the outset, we find the matters raised by petitioner in his argumentation are mainly questions
of fact which are not proper in a petition of this nature.9 Petitioner is basically questioning the
evaluation made by the Court of Appeals of the evidence submitted at the trial. The Court of
Appeals had found that petitioner’s evidence was not sufficient to justify the piercing of ECO’s
corporate personality.10 Petitioner contended otherwise. It is basic that where what is being
questioned is the sufficiency of evidence, it is a question of fact.11 Nevertheless, even if we
regard these matters as tendering an issue of law, we still find no reason to reverse the findings
of the Court of Appeals.

A corporation, upon coming into existence, is invested by law with a personality separate and
distinct from those persons composing it as well as from any other legal entity to which it may be
related.12 By this attribute, a stockholder may not, generally, be made to answer for acts or
liabilities of the said corporation, and vice versa.13 This separate and distinct personality is,
however, merely a fiction created by law for convenience and to promote the ends of justice.14
For this reason, it may not be used or invoked for ends subversive to the policy and purpose
behind its creation15 or which could not have been intended by law to which it owes its being.16
This is particularly true when the fiction is used to defeat public convenience, justify wrong,
protect fraud, defend crime,17 confuse legitimate legal or judicial issues,18 perpetrate deception
or otherwise circumvent the law.19 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.20 In all these cases, the notion of corporate entity will be pierced or disregarded
with reference to the particular transaction involved.21

The burden is on petitioner to prove that the corporation and its stockholders are, in fact, using
the personality of the corporation as a means to perpetrate fraud and/or escape a liability and
responsibility demanded by law. In order to disregard the separate juridical personality of a
corporation, the wrongdoing must be clearly and convincingly established.22 In the absence of
any malice or bad faith, a stockholder or an officer of a corporation cannot be made personally
liable for corporate liabilities.23
The mere fact that Oñate owned the majority of the shares of ECO is not a ground to conclude
that Oñate and ECO is one and the same. Mere ownership by a single stockholder of all or nearly
all of the capital stock of a corporation is not by itself sufficient reason for disregarding the
fiction of separate corporate personalities.24 Neither is the fact that the name "ECO" represents
the first three letters of Oñate’s name sufficient reason to pierce the veil. Even if it did, it does
not mean that the said corporation is merely a dummy of Oñate. A corporation may assume any
name provided it is lawful. There is nothing illegal in a corporation acquiring the name or as in
this case, the initials of one of its shareholders.

That respondent corporation in this case was being used as a mere alter ego of Oñate to obtain
the loans had not been shown. Bad faith or fraud on the part of ECO and Oñate was not also
shown. As the Court of Appeals observed, if shareholders of ECO meant to defraud petitioner,
then they could have just easily absconded instead of going out of their way to propose "Plans of
Payment."25 Likewise, Oñate volunteered to pay a portion of the corporation’s debt.26 This
offer demonstrated good faith on his part to ease the debt of the corporation of which he was a
part. It is understandable that a shareholder would want to help his corporation and in the
process, assure that his stakes in the said corporation are secured. In this case, it was established
that the P1 Million did not come solely from Oñate. It was taken from a trust account which was
owned by Oñate and other investors.27 It was likewise proved that the P1 Million was a loan
granted by Oñate and his co-depositors to alleviate the plight of ECO.28 This circumstance
should not be construed as an admission that he was really the debtor and not ECO.

In sum, we agree with the Court of Appeals’ conclusion that the evidence presented by the
petitioner does not suffice to hold respondent Oñate personally liable for the debt of co-
respondent ECO. No reversible error could be attributed to respondent court’s decision and
resolution which petitioner assails.

WHEREFORE, the petition is DENIED for lack of merit. The decision and resolution of the
Court of Appeals in CA-G.R. CV No. 43239 are AFFIRMED. Costs against petitioner.

SO ORDERED.
FIRST DIVISION

[G.R. No. 126200. August 16, 2001]

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. HONORABLE COURT OF

APPEALS and REMINGTON INDUSTRIAL SALES CORPORATION, respondents.

DECISION

KAPUNAN, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,
seeking a review of the Decision of the Court of Appeals dated October 6, 1995 and the
Resolution of the same court dated August 29, 1996.

The facts are as follows:

Marinduque Mining Industrial Corporation (Marinduque Mining), a corporation engaged in the

manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides, copper
ore/concentrates, cement and pyrite conc., obtained from the Philippine National Bank (PNB)
various loan accommodations. To secure the loans, Marinduque Mining executed on October 9,
1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage
covered all of Marinduque Minings real properties, located at Surigao del Norte, Sipalay, Negros
Occidental, and at Antipolo, Rizal, including the improvements thereon. As of November 20,
1980, the loans extended by PNB amounted to P4 Billion, exclusive of interest and charges.[1]

On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of
the Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque
Mining mortgaged to PNB and DBP all its real properties located at Surigao del Norte, Sipalay,
Negros Occidental, and Antipolo, Rizal, including the improvements thereon. The mortgage also
covered all of Marinduque Minings chattels, as well as assets of whatever kind, nature and
description which Marinduque Mining may subsequently acquire in substitution or
replenishment or in addition to the properties covered by the previous Deed of Real and Chattel
Mortgage dated October 7, 1978. Apparently, Marinduque Mining had also obtained loans
totaling P2 Billion from DBP, exclusive of interest and charges.[2]

On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to
Mortgage Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB
and DBP all other real and personal properties and other real rights subsequently acquired by
Marinduque Mining.[3]

For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted
sometime on July and August 1984 extrajudicial foreclosure proceedings over the mortgaged
properties.

The events following the foreclosure are narrated by DBP in its petition, as follows:

In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP emerged and
were declared the highest bidders over the foreclosed real properties, buildings, mining claims,
leasehold rights together with the improvements thereon as well as machineries [sic] and
equipments [sic] of MMIC located at Nonoc Nickel Refinery Plant at Surigao del Norte for a bid
price of P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC located at Nonoc
Refinery Plant at Surigao del Norte, PNB and DBP as highest bidders, bidded for
P170,577,610.00 (Exhs. 5 to 5-A, 6, 7 to 7-AA- PNB/DBP). For the foreclosed real properties
together with all the buildings, major machineries & equipment and other improvements of
MMIC located at Antipolo, Rizal, likewise held on August 31, 1984, were sold to PNB and DBP
as highest bidders in the sum of P1,107,167,950.00 (Exhs. 10 to 10-X- PNB/ DBP).

At the auction sale conducted on September 7, 1984[,] over the foreclosed real properties,
buildings, & machineries/equipment of MMIC located at Sipalay, Negros Occidental were sold
to PNB and DBP, as highest bidders, in the amount of P2,383,534,000.00 and P543,040,000.00
respectively (Exhs. 8 to 8-BB, 9 to 90-GGGGGGPNB/DBP).
Finally, at the public auction sale conducted on September 18, 1984 on the foreclosed personal
properties of MMIC, the same were sold to PNB and DBP as the highest bidder in the sum of
P678,772,000.00 (Exhs. 11 and12-QQQQQPNB).

PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely, in order to
ensure the continued operation of the Nickel refinery plant and to prevent the deterioration of the
assets foreclosed, assigned and transferred to Nonoc Mining and Industrial Corporation all their
rights, interest and participation over the foreclosed properties of MMIC located at Nonoc Island,
Surigao del Norte for an initial consideration of P14,361,000,000.00 (Exh. 13-PNB).

Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned and
transferred in favor of Maricalum Mining Corp. all its rights, interest and participation over the
foreclosed properties of MMIC at Sipalay, Negros Occidental for an initial consideration of
P325,800,000.00 (Exh. 14PNB/DBP).

On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as amended, again
assigned, transferred and conveyed to the National Government thru [sic] the Asset Privatization
Trust (APT) all its existing rights and interest over the assets of MMIC, earlier assigned to
Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation and Island Cement
Corporation (Exh. 15 & 15-APNB/DBP).[4]

In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and
caused to be delivered construction materials and other merchandise from Remington Industrial
Sales Corporation (Remington) worth P921,755.95. The purchases remained unpaid as of August
1, 1984 when Remington filed a complaint for a sum of money and damages against Marinduque
Mining for the value of the unpaid construction materials and other merchandise purchased by
Marinduque Mining, as well as interest, attorneys fees and the costs of suit.

On September 7, 1984, Remingtons original complaint was amended to include PNB and DBP as
co-defendants in view of the foreclosure by the latter of the real and chattel mortgages on the real
and personal properties, chattels, mining claims, machinery, equipment and other assets of
Marinduque Mining.[5]
On September 13, 1984, Remington filed a second amended complaint to include as additional
defendant, the Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc Mining is the
assignee of all real and personal properties, chattels, machinery, equipment and all other assets of
Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte.[6]

On March 26, 1986, Remington filed a third amended complaint including the Maricalum
Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as co-
defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum
Mining and Island Cement must be treated in law as one and the same entity by disregarding the
veil of corporate fiction since:

1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities are
practically owned wholly by defendants PNB and DBP, and managed by their officers, aside
from the fact that the aforesaid co-defendants NMIC, Maricalum and Island Cement were
organized in such a hurry and in such suspicious circumstances by co-defendants PNB and DBP
after the supposed extra-judicial foreclosure of MMICs assets as to make their supposed projects
assets, machineries and equipment which were originally owned by co-defendant MMIC beyond
the reach of creditors of the latter.

2. The personnel, key officers and rank-and-file workers and employees of co-defendants NMIC,
Maricalum and Island Cement creations of co-defendants PNB and DBP were the personnel of
co-defendant MMIC such that x x x practically there has only been a change of name for all legal
purpose and intents.

3. The places of business not to mention the mining claims and project premises of co-defendants
NMIC, Maricalum and Island Cement likewise used to be the places of business, mining claims
and project premises of co-defendant MMIC as to make the aforesaid co-defendants NMIC,
Maricalum and Island Cement mere adjuncts and subsidiaries of co-defendants PNB and DBP,
and subject to their control and management.

On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement being all
corporations created by the government in the pursuit of business ventures should not be allowed
to ignore, x x x or obliterate with impunity nay illegally, the financial obligations of x x x MMIC
whose operations co-defendants PNB and DBP had highly financed before the alleged
extrajudicial foreclosure of defendant MMICs assets, machineries and equipment to the extent
that major policies of co-defendant MMIC were being decided upon by co-defendants PNB and
DBP as major financiers who were represented in its board of directors forming part of the
majority thereof which through the alleged extrajudicial foreclosure culminated in a complete
take-over by co-defendants PNB and DBP bringing about the organization of their co-defendants
NMIC, Maricalum and Island Cement to which were transferred all the assets, machineries and
pieces of equipment of co-defendant MMIC used in its nickel mining project in Surigao del
Norte, copper mining operation in Sipalay, Negros Occidental and cement factory in Antipolo,
Rizal to the prejudice of creditors of co-defendant MMIC such as plaintiff Remington Industrial
Sales Corporation whose stockholders, officers and rank-and-file workers in the legitimate
pursuit of its business activities, invested considerable time, sweat and private money to supply,
among others, co-defendant MMIC with some of its vital needs for its operation, which co-
defendant MMIC during the time of the transactions material to this case became x x x co-
defendants PNB and DBPs instrumentality, business conduit, alter ego, agency (sic), subsidiary
or auxiliary corporation, by virtue of which it becomes doubly necessary to disregard the
corporation fiction that co-defendants PNB, DBP, MMIC, NMIC, Maricalum and Island Cement,
six (6) distinct and separate entities, when in fact and in law, they should be treated as one and
the same at least as far as plaintiffs transactions with co-defendant MMIC are concerned, so as
not to defeat public convenience, justify wrong, subvert justice, protect fraud or confuse
legitimate issues involving creditors such as plaintiff, a fact which all defendants were as (sic)
still are aware of during all the time material to the transactions subject of this case.[7]

On April 3, 1989, Remington filed a motion for leave to file a fourth amended complaint
impleading the Asset Privatization Trust (APT) as co-defendant. Said fourth amended complaint
was admitted by the lower court in its Order dated April 29, 1989.

On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of Remington,
the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants
Marinduque Mining & Industrial Corporation, Philippine National Bank, Development Bank of
the Philippines, Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation,
Island Cement Corporation and Asset Privatization Trust to pay, jointly and severally, the sum of
P920,755.95, representing the principal obligation, including the stipulated interest as of June 22,
1984, plus ten percent (10%) surcharge per annum by way of penalty, until the amount is fully
paid; the sum equivalent to 10% of the amount due as and for attorneys fees; and to pay the
costs.[8]
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT, the
Court of Appeals, in its Decision dated October 6, 1995, affirmed the decision of the RTC.
Petitioner filed a Motion for Reconsideration, which was denied in the Resolution dated August
29, 1996.

Hence, this petition, DBP maintaining that Remington has no cause of action against it or PNB,
nor against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT.

On the other hand, private respondent Remington submits that the transfer of the properties was
made in fraud of creditors. The presence of fraud, according to Remington, warrants the piercing
of the corporate veil such that Marinduque Mining and its transferees could be considered as one
and the same corporation. The transferees, therefore, are also liable for the value of Marinduque
Minings purchases.

In Yutivo Sons Hardware vs. Court of Tax Appeals,[9] cited by the Court of Appeals in its
decision,[10] this Court declared:

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

separate and distinct from its stockholders and from other corporations to which it may be
connected. However, when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association of
persons or in case of two corporations, merge them into one. (Koppel [Phils.], Inc., vs. Yatco, 71
Phil. 496, citing 1 Fletcher Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S. vs.
Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) xxx

In accordance with the foregoing rule, this Court has disregarded the separate personality of the
corporation where the corporate entity was used to escape liability to third parties.[11] In this
case, however, we do not find any fraud on the part of Marinduque Mining and its transferees to
warrant the piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past
due account had incurred arrearages of more than 20% of the total outstanding obligation.
Section 1 of Presidential Decree No. 385 (The Law on Mandatory Foreclosure) provides:

It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from
the issuance of this decree, to foreclose the collateral and/or securities for any loan, credit
accommodation, and/or guarantees granted by them whenever the arrearages on such account,
including accrued interest and other charges, amount to at least twenty percent (20%) of the total
outstanding obligations, including interest and other charges, as appearing in the books of
account and/or related records of the financial institution concerned. This shall be without
prejudice to the exercise by the government financial institution of such rights and/or remedies
available to them under their respective contracts with their debtors, including the right to
foreclose on loans, credits, accomodations and/or guarantees on which the arrearages are less
than twenty (20%) percent.

Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose upon the
subject properties. The banks had no choice but to obey the statutory command.

The import of this mandate was lost on the Court of Appeals, which reasoned that under Article
19 of the Civil Code, Every person must, in the exercise of his rights and in the performance of
his duties, act with justice, give everyone his due, and observe honesty and good faith. The
appellate court, however, did not point to any fact evidencing bad faith on the part of the
Marinduque Mining and its transferees. Indeed, it skirted the issue entirely by holding that the
question of actual fraudulent intent on the part of the interlocking directors of DBP and
Marinduque Mining was irrelevant because:

As aptly stated by the appellee in its brief, x x x where the corporations have directors and
officers in common, there may be circumstances under which their interest as officers in one
company may disqualify them in equity from representing both corporations in transactions
between the two. Thus, where one corporation was insolvent and indebted to another, it has been
held that the directors of the creditor corporation were disqualified, by reason of self-interest,
from acting as directors of the debtor corporation in the authorization of a mortgage or deed of
trust to the former to secure such indebtedness x x x (page 105 of the Appellees Brief). In the
same manner that x x x when the corporation is insolvent, its directors who are its creditors can
not secure to themselves any advantage or preference over other creditors. They can not thus take
advantage of their fiduciary relation and deal directly with themselves, to the injury of others in
equal right. If they do, equity will set aside the transaction at the suit of creditors of the
corporation or their representatives, without reference to the question of any actual fraudulent
intent on the part of the directors, for the right of the creditors does not depend upon fraud in
fact, but upon the violation of the fiduciary relation to the directors. xxx. (page 106 of the
Appellees Brief.)

We also concede that x x x directors of insolvent corporation, who are creditors of the company,
can not secure to themselves any preference or advantage over other creditors in the payment of
their claims. It is not good morals or good law. The governing body of officers thereof are
charged with the duty of conducting its affairs strictly in the interest of its existing creditors, and
it would be a breach of such trust for them to undertake to give any one of its members any
advantage over any other creditors in securing the payment of his debts in preference to all
others. When validity of these mortgages, to secure debts upon which the directors were
indorsers, was questioned by other creditors of the corporation, they should have been classed as
instruments rendered void by the legal principle which prevents directors of an insolvent
corporation from giving themselves a preference over outside creditors. x x x (page 106-107 of
the Appellees Brief.)[12]

The Court of Appeals made reference to two principles in corporation law. The first pertains to
transactions between corporations with interlocking directors resulting in the prejudice to one of
the corporations. This rule does not apply in this case, however, since the corporation allegedly
prejudiced (Remington) is a third party, not one of the corporations with interlocking directors
(Marinduque Mining and DBP).

The second principle invoked by respondent court involves directors who are creditors which is
also inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the directors of
Marinduque Mining.

Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining,
Maricalum and Island Cement. As Remington itself concedes, DBP is not authorized by its
charter to engage in the mining business.[13] The creation of the three corporations was
necessary to manage and operate the assets acquired in the foreclosure sale lest they deteriorate
from non-use and lose their value. In the absence of any entity willing to purchase these assets
from the bank, what else would it do with these properties in the meantime? Sound business
practice required that they be utilized for the purposes for which they were intended.

Remington also asserted in its third amended complaint that the use of Nonoc Mining,
Maricalum and Island Cement of the premises of Marinduque Mining and the hiring of the latters
officers and personnel also constitute badges of bad faith.

Assuming that the premises of Marinduque Mining were not among those acquired by DBP in
the foreclosure sale, convenience and practicality dictated that the corporations so created
occupy the premises where these assets were found instead of relocating them. No doubt, many
of these assets are heavy equipment and it may have been impossible to move them. The same
reasons of convenience and practicality, not to mention efficiency, justified the hiring by Nonoc
Mining, Maricalum and Island Cement of Marinduque Minings personnel to manage and operate
the properties and to maintain the continuity of the mining operations.

To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such
corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend
crime.[14] To disregard the separate juridical personality of a corporation, the wrongdoing must
be clearly and convincingly established. It cannot be presumed.[15] In this case, the Court finds
that Remington failed to discharge its burden of proving bad faith on the part of Marinduque
Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the
piercing of the corporate veil.

The Court of Appeals also held that there exists in Remingtons favor a lien on the unpaid
purchases of Marinduque Mining, and as transferee of these purchases, DBP should be held
liable for the value thereof.

In the absence of liquidation proceedings, however, the claim of Remington cannot be enforced
against DBP. Article 2241 of the Civil Code provides:

Article 2241. With reference to specific movable property of the debtor, the following claims or
liens shall be preferred:
xxx

(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the
possession of the debtor, up to the value of the same; and if the movable has been resold by the
debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost by
the immobilization of the thing by destination, provided it has not lost its form, substance and
identity, neither is the right lost by the sale of the thing together with other property for a lump
sum, when the price thereof can be determined proportionally;

(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the
creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to
the value thereof;

xxx

In Barretto vs. Villanueva,[16] the Court had occasion to construe Article 2242, governing
claims or liens over specific immovable property. The facts that gave rise to the case were
summarized by this Court in its resolution as follows:

x x x Rosario Cruzado sold all her right, title, and interest and that of her children in the house
and lot herein involved to Pura L. Villanueva for P19,000.00. The purchaser paid P1,500 in
advance, and executed a promissory note for the balance of P17,500.00. However, the buyer
could only pay P5,500 on account of the note, for which reason the vendor obtained judgment for
the unpaid balance. In the meantime, the buyer Villanueva was able to secure a clean certificate
of title (No. 32626), and mortgaged the property to appellant Magdalena C. Barretto, married to
Jose C. Baretto, to secure a loan of P30,000.03, said mortgage having been duly recorded.

Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the
mortgage in her favor, obtained judgment, and upon its becoming final asked for execution on 31
July 1958. On 14 August 1958, Cruzado filed a motion for recognition for her "vendor's lien" in
the amount of P12,000.00, plus legal interest, invoking Articles 2242, 2243, and 2249 of the new
Civil Code. After hearing, the court below ordered the "lien" annotated on the back of Certificate
of Title No. 32526, with the proviso that in case of sale under the foreclousre decree the vendor's
lien and the mortgage credit of appellant Barretto should be paid pro rata from the proceeds. Our
original decision affirmed this order of the Court of First Instance of Manila.

In its decision upholding the order of the lower court, the Court ratiocinated thus:

Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that constitute an
encumbrance on specific immovable property, and among them are:

"(2) For the unpaid price of real property sold, upon the immovable sold"; and

"(5) Mortgage credits recorded in the Registry of Property."

Article 2249 of the same Code provides that "if there are two or more credits with respect to the
same specific real property or real rights, they shall be satisfied pro-rata, after the payment of the
taxes and assessments upon the immovable property or real rights."

Application of the above-quoted provisions to the case at bar would mean that the herein
appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to share
pro-rata with the appellants the proceeds of the foreclosure sale.

xxx

As to the point made that the articles of the Civil Code on concurrence and preference of credits
are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any
such limitation. If we are to interpret this portion of the Code as intended only for insolvency
cases, then other creditor-debtor relationships where there are concurrence of credits would be
left without any rules to govern them, and it would render purposeless the special laws on
insolvency.[17]
Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L. Reyes,
speaking for the Court, explained the reasons for the reversal:

A. The previous decision failed to take fully into account the radical changes introduced by the
Civil Code of the Philippines into the system of priorities among creditors ordained by the Civil
Code of 1889.

Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real
property under Article 1923 were to be resolved according to an order of priorities established by
Article 1927, whereby one class of creditors could exclude the creditors of lower order until the
claims of the former were fully satisfied out of the proceeds of the sale of the real property
subject of the preference, and could even exhaust proceeds if necessary.

Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar
absolute preference. All the remaining thirteen classes of preferred creditors under Article 2242
enjoy no priority among themselves, but must be paid pro rata, i.e., in proportion to the amount
of the respective credits. Thus, Article 2249 provides:

"If there are two or more credits with respect to the same specific real property or real rights,
they shall be satisfied pro rata, after the payment of the taxes and assessments upon the
immovable property or real rights."

But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to
14 of Article 2242 (or such of them as have credits outstanding) must necessarily be convened,
and the import of their claims ascertained. It is thus apparent that the full application of Articles
2249 and 2242 demands that there must be first some proceeding where the claims of all the
preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of
decedent's estate under Rule 87 of the Rules of Court, or other liquidation proceedings of similar
import.

This explains the rule of Article 2243 of the new Civil Code that -
"The claims or credits enumerated in the two preceding articles shall be considered as mortgages
or pledges of real or personal property, or liens within the purview of legal provisions governing
insolvency xxx (Italics supplied).

And the rule is further clarified in the Report of the Code Commission, as follows:

"The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled
by this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242)
are to be enforced in accordance with the Insolvency Law." (Italics supplied)

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a
foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the
enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for
taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two
creditors will not enable the Court to ascertain the pro rata dividend corresponding to each,
because the rights of the other creditors likewise enjoying preference under Article 2242 can not
be ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed from,
decreeing that the proceeds of the foreclosure sale be apportioned only between appellant and
appellee, is incorrect, and must be reversed. [Underscoring supplied]

The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et al.,[18]
and in two cases both entitled Development Bank of the Philippines vs. NLRC.[19]

Although Barretto involved specific immovable property, the ruling therein should apply equally
in this case where specific movable property is involved. As the extra-judicial foreclosure
instituted by PNB and DBP is not the liquidation proceeding contemplated by the Civil Code,
Remington cannot claim its pro rata share from DBP.WHEREFORE, the petition is GRANTED.
The decision of the Court of Appeals dated October 6, 1995 and its Resolution promulgated on
August 29, 1996 is REVERSED and SET ASIDE. The original complaint filed in the Regional
Trial Court in CV Case No. 84-25858 is hereby DISMISSED.
SECOND DIVISION

G.R. No. 76801 August 11, 1995

LOPEZ REALTY, INC., AND ASUNCION LOPEZ GONZALES, petitioners,

vs.

FLORENTINA FONTECHA, ET AL., AND THE NATIONAL LABOR RELATIONS

COMMISSION, respondents.

PUNO, J.:

The controversy at bench arose from a complaint filed by private respondents,1 namely,
Florentina Fontecha, Mila Refuerzo, Marcial Mamaril, Perfecto Bautista, Edward Mamaril,
Marissa Pascual and Allan Pimentel, against their employer Lopez Realty Incorporated
(petitioner) and its majority stockholder, Asuncion Lopez Gonzales, for alleged non-payment of
their gratuity pay and other benefits.2 The case was docketed as NLRC-NCR Case No. 2-2176-
82.

Lopez Realty, Inc., is a corporation engaged in real estate business, while petitioner Asuncion
Lopez Gonzales is one of its majority shareholders. Her interest in the company vis-a-vis the
other shareholders is as follows:

Asuncion Lopez Gonzales

7831

shares

Teresita Lopez Marquez

7830

shares

Arturo F. Lopez

7830

shares

Rosendo de Leon
4

shares

Benjamin Bernardino

share

Leo Rivera

share

Except for Arturo F. Lopez, the rest of the shareholders also sit as members of the Board of
Directors.

As found by the Labor arbiter.3 sometime in 1978, Arturo Lopez submitted a proposal relative to
the distribution of certain assets of petitioner corporation among its three (3) main shareholders.
The proposal had three (3) aspects, viz: (1) the sale of assets of the company to pay for its
obligations; (2) the transfer of certain assets of the company to its three (3) main shareholders,
while some other assets shall remain with the company; and (3) the reduction of employees with
provision for their gratuity pay. The proposal was deliberated upon and approved in a special
meeting of the board of directors held on April 17, 1978.

It appears that petitioner corporation approved two (2) resolutions providing for the gratuity pay
of its employees, viz: (a) Resolution No. 6, Series of 1980, passed by the stockholders in a
special meeting held on September 8, 1980, resolving to set aside, twice a year, a certain sum of
money for the gratuity pay of its retiring employees and to create a Gratuity Fund for the said
contingency; and (b) Resolution No. 10, Series of 1980, setting aside the amount of P157,750.00
as Gratuity Fund covering the period from 1950 up to 1980.

Meanwhile, on July 28, 1981, board member and majority stockholder Teresita Lopez Marquez
died.

On August 17, 1981, except for Asuncion Lopez Gonzales who was then abroad, the remaining
members of the Board of Directors, namely: Rosendo de Leon, Benjamin Bernardino, and Leo
Rivera, convened a special meeting and passed a resolution which reads:

Resolved, as it is hereby resolved that the gratuity (pay) of the employees be given as follows:

(a) Those who will be laid off be given the full amount of gratuity;

(b) Those who will be retained will receive 25% of their gratuity (pay) due on September 1,
1981, and another 25% on January 1, 1982, and 50% to be retained by the office in the
meantime. (emphasis supplied)

Private respondents were the retained employees of petitioner corporation. In a letter, dated
August 31, 1981, private respondents requested for the full payment of their gratuity pay. Their
request was granted in a special meeting held on September 1, 1981. The relevant, portion of the
minutes of the said board meeting reads:
In view of the request of the employees contained in the letter dated August 31, 1981, it was also
decided that, all those remaining employees will receive another 25% (of their gratuity) on or
before October 15, 1981 and another 25% on or before the end of November, 1981 of their
respective gratuity.

At that, time, however, petitioner Asuncion Lopez Gonzales was still abroad. Allegedly, while
she was still out of the country, she sent a cablegram to the corporation, objecting to certain
matters taken up by the board in her absence, such as the sale of some of the assets of the
corporation. Upon her return, she flied a derivative suit with the Securities and Exchange
Commission (SEC) against majority shareholder Arturo F. Lopez.

Notwithstanding the "corporate squabble" between petitioner Asuncion Lopez Gonzales and
Arturo Lopez, the first two (2) installments of the gratuity pay of private respondents Florentina
Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista were paid by petitioner
corporation.

Also, petitioner corporation had prepared the cash vouchers and checks for the third installments
of gratuity pay of said private respondents (Florentina Fontecha, Mila Refuerzo, Marcial
Mamaril and Perfecto Bautista). For some reason, said vouchers were cancelled by petitioner
Asuncion Lopez Gonzales.

Likewise, the first, second and third installments of gratuity pay of the rest of private
respondents, particularly, Edward Mamaril, Marissa Pascual and Allan Pimentel, were prepared
but cancelled by petitioner Asuncion Lopez Gonzales. Despite private respondents' repeated
demands for their gratuity pay, corporation refused to pay the same.4

On July 23, 1984, Labor Arbiter Raymundo R. Valenzuela rendered judgment in favor of private
respondents.5

Petitioners appealed the adverse ruling of the Labor arbiter to public respondent National Labor
Relations Commission. The appeal focused on the alleged non-ratification and non-approval of
the assailed August 17, 1981 and September 1, 1981 Board Resolutions during the Annual
Stockholders' Meeting held on March 1, 1982. Petitioners further insisted that the payment of the
gratuity to some of the private respondents was a mere "mistake" on the part of petitioner
corporation since, pursuant to Resolution No. 6, dated September 8, 1980, and Resolution No.
10, dated October 6, 1980, said gratuity pay should be given only upon the employees'
retirement.

On November 20, 1985, public respondent, through its Second Division, dismissed the appeal for
lack of merit, the pertinent portion of which states:6

We cannot agree with the contention of respondents (petitioners') that the Labor Arbiter a quo
committed abuse of discretion in his decision.

Respondents' (petitioners') contention that, the two (2) resolutions dated 17 August 1981 and 1
September 1981 . . . which were not approved in the annual stockholders meeting had no force
and effect, deserves scant consideration. The records show that the stockholders did not revoke
nor nullify these resolutions granting gratuities to complainants.

On record, it appears that the said resolutions arose from the legitimate creation of the Board of
Directors who steered the corporate affairs of the corporation. . . .

Respondents' (petitioners') allegation that the three (3) complainants, Mila E. Refuerzo, Marissa
S. Pascual and Edward Mamaril, who had resigned after filing the complaint on February 8,
1982, were precluded to (sic) receive gratuity because the said resolutions referred to only
retiring employee could not be given credence. A reading of Resolutions dated 17 August 1981
and 1 September 1981 disclosed that there were periods mentioned for the payment of
complainants' gratuities. This disproves respondents' argument allowing gratuities upon
retirement of employees. Additionally, the proposed distribution of assets (Exh. C-1) filed by
Mr. Arturo F. Lopez also made mention of gratuity pay, " . . . (wherein) an employee who
desires to resign from the LRI will be given the gratuity pay he or she earned." (Emphasis
supplied) Let us be reminded, too, that the complainants' resignation was not voluntary but it was
pressurized (sic) due to "power struggle" which was evident between Arturo Lopez and
Asuncion Gonzales.
The respondents' (petitioners') contention of a mistake to have been committed in granting the
first two (2) installments of gratuities to complainants Perfecto Bautista, Florentina Fontecha,
Marcial Mamaril and Mila Refuerzo, (has) no legal leg to stand on. The record is bereft of any
evidence that the Board of Directors had passed a resolution nor is there any minutes of whatever
nature proving mistakes in the award of damages (sic).

With regard to the award of service incentive leave and others, the Commission finds no cogent
reason to disturb the appealed decision.

We affirm.

WHEREFORE, let the appealed decision be, as it is hereby, AFFIRMED and let the instant
appeal (be) dismissed for lack of merit.

SO ORDERED.

Petitioners reconsidered.7 In their motion for reconsideration, petitioners assailed the validity of
the board resolutions passed on August 17, 1981 and September 1, 1981, respectively, and
claimed, for the first time, that petitioner Asuncion Lopez Gonzales was not notified of the
special board meetings held on said dates. The motion for reconsideration was denied by the
Second Division on July 24, 1986.

On September 4, 1986, petitioners filed another motion for reconsideration. Again, the motion
was denied by public respondent in a Minute Resolution dated November 19, 1986.8

Hence, the petition. As prayed for, we issued a Temporary Restraining Order,9 enjoining public
respondent from enforcing or executing the Resolution, dated November 20, 1986 (sic), in
NLRC-NCR-2-2176-82. 10
The sole issue is whether or not public respondent acted with grave abuse of discretion in
holding that private respondents are entitled to receive their gratuity pay under the assailed board
resolutions dated August 17, 1951 and September 1, 1981.

Petitioners contend that the board resolutions passed on August 17, 1981 and September 1, 1981,
granting gratuity pay to their retained employees, are ultra vires on the ground that petitioner
Asuncion Lopez Gonzales was not duly notified of the said special meetings. They aver, further,
that said board resolutions were not ratified by the stockholders of the corporation pursuant to
Section 28 1/2 of the Corporation Law (Section 40 of the Corporation Code). They also insist
that the gratuity pay must be given only to the retiring employees, to the exclusion of the retained
employees or those who voluntarily resigned from their posts.

At the outset, we note that petitioners allegation on lack of notice to petitioner Asuncion Lopez
Gonzales was raised for the first time in the in their motion for reconsideration filed before
public respondent National Labor Relations Commission, or after said public respondent had
affirmed the decision of the labor arbiter. To stress, in their appeal before the NLRC, petitioners
never raised the issue of lack of notice to Asuncion Lopez Gonzales. The appeal dealt with (a)
the failure of the stockholders to ratify the assailed resolutions and (b) the alleged "mistake"
committed by petitioner corporation in giving the gratuity pay to some of its employees who are
yet to retire from employment.

In their comment, 11 private respondents maintain that the new ground of lack of notice was not
raised before the labor arbiter, hence, petitioners are barred from raising the same on appeal.
Private respondents claim, further, that such failure on the part of petitioners, had deprived them
the opportunity to present evidence that, in a subsequent special board meeting held on
September 29, 1981, the subject resolution dated September 1, 1981, was unanimously approved
by the board of directors of petitioner corporation, including petitioner Asuncion Lopez
Gonzales. 12

Indeed, it would be offensive to the basic rules of fair play and justice to allow petitioners to
raise questions which have not been passed upon by the labor arbiter and the public respondent
NLRC. It is well settled that questions not raised in the lower courts cannot, be raised for the first
time on appeal.13 Hence, petitioners may not invoke any other ground, other than those it
specified at the labor arbiter level, to impugn the validity of the subject resolutions.
We now come to petitioners' argument that the resolutions passed by the board of directors
during the special meetings on August 1, 1981, and September 1, 1981, were ultra vires for lack
of notice.

The general rule is that a corporation, through its board of directors, should act in the manner and
within the formalities, if any, prescribed by its charter or by the general law. 14 Thus, directors
must act as a body in a meeting called pursuant to the law or the corporation's by-laws,
otherwise, any action taken therein may be questioned by any objecting director or shareholder.
15

Be that as it may, jurisprudence 16 tells us that an action of the board of directors during a
meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of
the directors in subsequent legal meeting, or impliedly, by the corporation's subsequent course of
conduct. Thus, in one case, 17 it was held:

. . . In 2 Fletcher, Cyclopedia of the Law of Private Corporations (Perm. Ed.) sec. 429, at page
290, it is stated:

Thus, acts of directors at a meeting which was illegal because of want of notice may be ratified
by the directors at a subsequent legal meeting, or by the corporations course of conduct

...

Fletcher, supra, further states in sec. 762, at page 1073-1074:

Ratification by directors may be by an express resolution or vote to that effect, or it may be

implied from adoption of the act, acceptance or acquiescence. Ratification may be effected by a
resolution or vote of the board of directors expressly ratifying previous acts either of corporate
officers or agents; but it is not necessary, ordinarily, to show a meeting and formal action by the
board of directors in order to establish a ratification.
In American Casualty Co., v. Dakota Tractor and Equipment Co., 234 F. Supp. 606, 611 (D.N.D.
1964), the court stated:

Moreover, the unauthorized acts of an officer of a corporation may be ratified by the corporation
by conduct implying approval and adoption of the act in question. Such ratification may be
express or may be inferred from silence and inaction.

In the case at bench, it was established that petitioner corporation did not issue any resolution
revoking nor nullifying the board resolutions granting gratuity pay to private respondents.
Instead, they paid the gratuity pay, particularly, the first two (2) installments thereof, of private
respondents Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista.

Despite the alleged lack of notice to petitioner Asuncion Lopez Gonzales at that time the assailed
resolutions were passed, we can glean from the records that she was aware of the corporation's
obligation under the said resolutions. More importantly, she acquiesced thereto. As pointed out
by private respondents, petitioner Asuncion Lopez Gonzales affixed her signature on Cash
Voucher Nos. 81-10-510 and 81-10-506, both dated October 15, 1981, evidencing the 2nd
installment of the gratuity pay of private respondents Mila Refuerzo and Florentina Fontecha. 18

We hold, therefore, that the conduct of petitioners after the passage of resolutions dated August,
17, 1951 and September 1, 1981, had estopped them from assailing the validity of said board
resolutions.

Assuming, arguendo, that there was no notice given to Asuncion Lopez Gonzalez during the
special meetings held on August 17, 1981 and September 1, 1981, it is erroneous to state that the
resolutions passed by the board during the said meetings were ultra vires. In legal parlance, "ultra
vires" act refers to one which is not within the corporate powers conferred by the Corporation
Code or articles of incorporation or not necessary or incidental in the exercise of the powers so
conferred. 19

The assailed resolutions before us cover a subject which concerns the benefit and welfare of the
company's employees. To stress, providing gratuity pay for its employees is one of the express
powers of the corporation under the Corporation Code, hence, petitioners cannot invoke the
doctrine of ultra vires to avoid any liability arising from the issuance the subject resolutions. 20

We reject petitioners' allegation that private respondents, namely, Mila Refuerzo, Marissa
Pascual and Edward Mamaril who resigned from petitioner corporation after the filing of the
case, are precluded from receiving their gratuity pay. Pursuant to board resolutions dated August
17, 1981 and September 1, 1981, respectively, petitioner corporation obliged itself to give the
gratuity pay of its retained employees in four (4) installments: on September 1, 1981; October
15, 1981; November, 1981; and January 1, 1982. Hence, at the time the aforenamed private
respondents tendered their resignation, the aforementioned private respondents were already
entitled to receive their gratuity pay.

Petitioners try to convince us that the subject resolutions had no force and effect in view of the
non-approval thereof during the Annual Stockholders' Meeting held on March 1, 1982. To
strengthen their position, petitioners cite section 28 1/2 of the Corporation Law (Section 40 of
the Corporation Code). We are not persuaded.

The cited provision is not applicable to the case at bench as it refers to the sale, lease, exchange
or disposition of all or substantially all of the corporation's assets, including its goodwill. In such
a case, the action taken by the board of directors requires the authorization of the stockholders on
record.

It will be observed that, except far Arturo Lopez, the stockholders of petitioner corporation also
sit as members of the board of directors. Under the circumstances in field, it will be illogical and
superfluous to require the stockholders' approval of the subject resolutions. Thus, even without
the stockholders' approval of the subject resolutions, petitioners are still liable to pay private
respondents' gratuity pay.

IN VIEW WHEREOF, the instant petition is DISMISSED for lack of merit and the temporary
restraining order we issued on February 9, 1987 is LIFTED. Accordingly, the assailed resolution
of the National Labor Relations Commission in NLRC-NCR-2176-82 is AFFIRMED. This
decision is immediately executory. Costs against petitioners.
SECOND DIVISION

VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA,

AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA,
FRANCISCO ORTIGAS III, ERIC ROXAS, in their capacities as members of the Board of
Directors of Valle Verde Country Club, Inc., and JOSE RAMIREZ,

Petitioners,

- versus -
VICTOR AFRICA,

Respondent.

G.R. No. 151969

Present:

QUISUMBING, J., Chairperson,

CARPIO-MORALES,

BRION,

DEL CASTILLO, and

ABAD, JJ.
 Promulgated:

September 4, 2009

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

DECISION
BRION, J.:

In this petition for review on certiorari,[1] the parties raise a legal question on corporate
governance: Can the members of a corporations board of directors elect another director to fill in
a vacancy caused by the resignation of a hold-over director?

THE FACTUAL ANTECEDENTS

On February 27, 1996, during the Annual Stockholders Meeting of petitioner Valle Verde
Country Club, Inc. (VVCC), the following were elected as members of the VVCC Board of
Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal),
Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and
Ray Gamboa.[2] In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum
for the holding of the stockholders meeting could not be obtained. Consequently, the above-
named directors continued to serve in the VVCC Board in a hold-over capacity.
On September 1, 1998, Dinglasan resigned from his position as member of the VVCC Board. In
a meeting held on October 6, 1998, the remaining directors, still constituting a quorum of
VVCCs nine-member board, elected Eric Roxas (Roxas) to fill in the vacancy created by the
resignation of Dinglasan.

A year later, or on November 10, 1998, Makalintal also resigned as member of the VVCC Board.
He was replaced by Jose Ramirez (Ramirez), who was elected by the remaining members of the
VVCC Board on March 6, 2001.

Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez
as members of the VVCC Board with the Securities and Exchange Commission (SEC) and the
Regional Trial Court (RTC), respectively. The SEC case questioning the validity of Roxas
appointment was docketed as SEC Case No. 01-99-6177. The RTC case questioning the validity
of Ramirez appointment was docketed as Civil Case No. 68726.

In his nullification complaint[3] before the RTC, Africa alleged that the election of Roxas was
contrary to Section 29, in relation to Section 23, of the Corporation Code of the Philippines
(Corporation Code). These provisions read:

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 until their successors are
elected and qualified.

xxxx

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of
term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular
or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall
be elected only for the unexpired term of his predecessor in office. xxx. [Emphasis supplied.]

Africa claimed that a year after Makalintals election as member of the VVCC Board in 1996, his
[Makalintals] term as well as those of the other members of the VVCC Board should be
considered to have already expired. Thus, according to Africa, the resulting vacancy should have
been filled by the stockholders in a regular or special meeting called for that purpose, and not by
the remaining members of the VVCC Board, as was done in this case.
Africa additionally contends that for the members to exercise the authority to fill in vacancies in
the board of directors, Section 29 requires, among others, that there should be an unexpired term
during which the successor-member shall serve. Since Makalintals term had already expired with
the lapse of the one-year term provided in Section 23, there is no more unexpired term during
which Ramirez could serve.

Through a partial decision[4] promulgated on January 23, 2002, the RTC ruled in favor of Africa
and declared the election of Ramirez, as Makalintals replacement, to the VVCC Board as null
and void.

Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of Roxas as
member of the VVCC Board, vice hold-over director Dinglasan. While VVCC manifested its
intent to appeal from the SECs ruling, no petition was actually filed with the Court of Appeals;
thus, the appellate court considered the case closed and terminated and the SECs ruling final and
executory.[5]

THE PETITION

VVCC now appeals to the Court to assail the RTCs January 23, 2002 partial decision for being
contrary to law and jurisprudence. VVCC made a direct resort to the Court via a petition for
review on certiorari, claiming that the sole issue in the present case involves a purely legal
question.
As framed by VVCC, the issue for resolution is whether the remaining directors of the
corporations Board, still constituting a quorum, can elect another director to fill in a vacancy
caused by the resignation of a hold-over director.

Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by the
resignation of a hold-over director is expressly granted to the remaining members of the
corporations board of directors.

Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the board of
directors caused by the expiration of a members term shall be filled by the corporations
stockholders. Correlating Section 29 with Section 23 of the same law, VVCC alleges that a
members term shall be for one year and until his successor is elected and qualified; otherwise
stated, a members term expires only when his successor to the Board is elected and qualified.
Thus, until such time as [a successor is] elected or qualified in an annual election where a
quorum is present, VVCC contends that the term of [a member] of the board of directors has yet
not expired.

As the vacancy in this case was caused by Makalintals resignation, not by the expiration of his
term, VVCC insists that the board rightfully appointed Ramirez to fill in the vacancy.
In support of its arguments, VVCC cites the Courts ruling in the 1927 El Hogar[6] case which
states:

Owing to the failure of a quorum at most of the general meetings since the respondent has been
in existence, it has been the practice of the directors to fill in vacancies in the directorate by
choosing suitable persons from among the stockholders. This custom finds its sanction in Article
71 of the By-Laws, which reads as follows:

Art. 71. The directors shall elect from among the shareholders members to fill the vacancies that
may occur in the board of directors until the election at the general meeting.

xxxx

Upon failure of a quorum at any annual meeting the directorate naturally holds over and
continues to function until another directorate is chosen and qualified. Unless the law or the
charter of a corporation expressly provides that an office shall become vacant at the expiration of
the term of office for which the officer was elected, the general rule is to allow the officer to hold
over until his successor is duly qualified. Mere failure of a corporation to elect officers does not
terminate the terms of existing officers nor dissolve the corporation. The doctrine above stated
finds expression in article 66 of the by-laws of the respondent which declares in so many words
that directors shall hold office "for the term of one year or until their successors shall have been
elected and taken possession of their offices." xxx.

It results that the practice of the directorate of filling vacancies by the action of the directors
themselves is valid. Nor can any exception be taken to the personality of the individuals chosen
by the directors to fill vacancies in the body. [Emphasis supplied.]

Africa, in opposing VVCCs contentions, raises the same arguments that he did before the trial
court.

THE COURTS RULING

We are not persuaded by VVCCs arguments and, thus, find its petition unmeritorious.
To repeat, the issue for the Court to resolve is whether the remaining directors of a corporations
Board, still constituting a quorum, can elect another director to fill in a vacancy caused by the
resignation of a hold-over director. The resolution of this legal issue is significantly hinged on
the determination of what constitutes a directors term of office.

The holdover period is not part of the term of office of a member of the board of directors

The word term has acquired a definite meaning in jurisprudence. In several cases, we have
defined term as the time during which the officer may claim to hold the office as of right, and
fixes the interval after which the several incumbents shall succeed one another.[7] The term of
office is not affected by the holdover.[8] The term is fixed by statute and it does not change
simply because the office may have become vacant, nor because the incumbent holds over in
office beyond the end of the term due to the fact that a successor has not been elected and has
failed to qualify.

Term is distinguished from tenure in that an officers tenure represents the term during which the
incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than
the term for reasons within or beyond the power of the incumbent.

Based on the above discussion, when Section 23[9] of the Corporation Code declares that the
board of directorsshall hold office for one (1) year until their successors are elected and
qualified, we construe the provision to mean that the term of the members of the board of
directors shall be only for one year; their term expires one year after election to the office. The
holdover period that time from the lapse of one year from a members election to the Board and
until his successors election and qualification is not part of the directors original term of office,
nor is it a new term; the holdover period, however, constitutes part of his tenure. Corollary, when
an incumbent member of the board of directors continues to serve in a holdover capacity, it
implies that the office has a fixed term, which has expired, and the incumbent is holding the
succeeding term.[10]

After the lapse of one year from his election as member of the VVCC Board in 1996,
Makalintals term of office is deemed to have already expired. That he continued to serve in the
VVCC Board in a holdover capacity cannot be considered as extending his term. To be precise,
Makalintals term of office began in 1996 and expired in 1997, but, by virtue of the holdover
doctrine in Section 23 of the Corporation Code, he continued to hold office until his resignation
on November 10, 1998. This holdover period, however, is not to be considered as part of his
term, which, as declared, had already expired.

With the expiration of Makalintals term of office, a vacancy resulted which, by the terms of
Section 29[11] of the Corporation Code, must be filled by the stockholders of VVCC in a regular
or special meeting called for the purpose. To assume as VVCC does that the vacancy is caused
by Makalintals resignation in 1998, not by the expiration of his term in 1997, is both illogical
and unreasonable. His resignation as a holdover director did not change the nature of the
vacancy; the vacancy due to the expiration of Makalintals term had been created long before his
resignation.

The powers of the corporations board of directors emanate from its stockholders
VVCCs construction of Section 29 of the Corporation Code on the authority to fill up vacancies
in the board of directors, in relation to Section 23 thereof, effectively weakens the stockholders
power to participate in the corporate governance by electing their representatives to the board of
directors. The board of directors is the directing and controlling body of the corporation. It is a
creation of the stockholders and derives its power to control and direct the affairs of the
corporation from them. The board of directors, in drawing to themselves the powers of the
corporation, occupies a position of trusteeship in relation to the stockholders, in the sense that the
board should exercise not only care and diligence, but utmost good faith in the management of
corporate affairs.[12]

The underlying policy of the Corporation Code is that the business and affairs of a corporation
must be governed by a board of directors whose members have stood for election, and who have
actually been elected by the stockholders, on an annual basis. Only in that way can the directors'
continued accountability to shareholders, and the legitimacy of their decisions that bind the
corporation's stockholders, be assured. The shareholder vote is critical to the theory that
legitimizes the exercise of power by the directors or officers over properties that they do not
own.[13]

This theory of delegated power of the board of directors similarly explains why, under Section
29 of the Corporation Code, in cases where the vacancy in the corporations board of directors is
caused not by the expiration of a members term, the successor so elected to fill in a vacancy shall
be elected only for the unexpired term of the his predecessor in office. The law has authorized
the remaining members of the board to fill in a vacancy only in specified instances, so as not to
retard or impair the corporations operations; yet, in recognition of the stockholders right to elect
the members of the board, it limited the period during which the successor shall serve only to the
unexpired term of his predecessor in office.
While the Court in El Hogar approved of the practice of the directors to fill vacancies in the
directorate, we point out that this ruling was made before the present Corporation Code was
enacted[14] and before its Section 29 limited the instances when the remaining directors can fill
in vacancies in the board, i.e., when the remaining directors still constitute a quorum and when
the vacancy is caused for reasons other than by removal by the stockholders or by expiration of
the term.

It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring
within the directors term of office. When a vacancy is created by the expiration of a term,
logically, there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be
the corporations stockholders who shall possess the authority to fill in a vacancy caused by the
expiration of a members term.

As correctly pointed out by the RTC, when remaining members of the VVCC Board elected
Ramirez to replace Makalintal, there was no more unexpired term to speak of, as Makalintals
one-year term had already expired. Pursuant to law, the authority to fill in the vacancy caused by
Makalintals leaving lies with the VVCCs stockholders, not the remaining members of its board
of directors.

WHEREFORE, we DENY the petitioners petition for review on certiorari, and AFFIRM the
partial decision of the Regional Trial Court, Branch 152, Manila, promulgated on January 23,
2002, in Civil Case No. 68726. Costs against the petitioners.
Republic of the Philippines

SUPREME COURT

Manila

EN BANC

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

MARIA CLARA PIROVANA ET AL., plaintiffs-appellees,

vs.

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

Del Rosario and Garcia for appellant.

Vicente J. Francisco for appellees.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Rizal declaring the donation
made by the defendant in favor of the minor children of the late Enrico Pirovano of the proceeds
of the insurance policies taken on his life valid and binding, and ordering said defendant to pay
to said minor children the sum of P583,813.59, with interest thereon at the rate of per cent from
the date of filing of the complaint, plus an additional amount equivalent to 20 per cent of said
sum of P538,813.59 as damages by way of attorney's fees and the costs of action.

Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their mother
and judicial guardian Estefania R. Pirovano. They seek to enforce certain resolutions adopted by
the Board of Directors and stockholders of the defendant company giving to said minor children
of the proceeds of the insurance policies taken on the life of their deceased father Enrico
Pirovano with the company as beneficiary. Defendant's main defense is: that said resolutions and
the contract executed pursuant thereto are ultra vires, and, if valid, the obligation to pay the
amount given is not yet due and demandable.

The trial court resolved all the issues raised by the parties in favor of the plaintiffs and, after
considering the evidence, both oral and documentary, arrived at the following conclusions:

First. — That the contract executed between the plaintiffs and the defendant is a renumerative
donation.

Second. — That said contract or donation is not ultra vires, but an act executed within the
powers of the defendant corporation in accordance with its articles of incorporation and by laws,
sanctioned and approved by its Board of Directors and stockholders; and subsequently ratified by
other subsequent acts of the defendant company.

Third. — That the said donation is in accordance with the trend of modern and more enlightened
legislation in its treatment of questions between labor and capital.

Fourth. — That the condition mentioned in the donation is null and void because it depends on
the provisions of Article 1115 of the old Civil Code.

Fifth. — That if the condition is valid, its non-fulfillment is due to the desistance of the
defendant company from obeying and doing the wishes and mandates of the majority of the
stockholders.

Sixth. — That the non-payment of the debt in favor of the National Development Company is
not due to the lack of funds, nor to lack of authority, but the desire of the President of the
corporation to preserve and continue the Government participation in the company.
Seventh. — That due demands were made by the plaintiffs and their attorneys and these demands
were rejected for no justifiable or legal grounds.

The important facts which need to be considered for purposes of this appeal may be briefly stated
as follows: Defendant is a corporation duly organized in accordance with law with an authorized
capital of P500,000, divided into 5,000 shares, with a par value of P100 each share. The
stockholders were: Esteban de la Rama, 1,800 shares, Leonor de la Rama, 100 shares, Estefania
de la Rama, 100 shares, and Eliseo Hervas, Tomas Concepcion, Antonio G. Juanco, and
Gaudencio Volasote with 5 shares each. Leonor and Estefania are daughters of Don Esteban,
while the rest his employees. Estefania de la Rama was married to the late Enrico Pirovano and
to them four children were born who are the plaintiffs in this case.

Enrico Pirovano became the president of the defendant company and under his management the
company grew and progressed until it became a multi-million corporation by the time Pirovano
was executed by the Japanese during the occupation. On May 13, 1941, the capital stock of the
corporation was increased to P2,000,000, after which a 100 per cent stock dividend was declared.
Subsequently, or before the outbreak of the war , new stock dividends of 200 per cent and 33 1/3
per cent were again declared. On December 4, 1941, the capital stock was once more increased
to P5,000,000. Under Pirovano's management, the assets of the company grew and increased
from an original paid up capital of around P240,000 to P15,538,024.37 by September 30, 1941
(Exhibit HH).

In the meantime, Don Esteban de la Rama, who practically owned and controlled the stock of the
defendant corporation, distributed his shareholding among his five daughters, namely, Leonor,
Estefania, Lourdes, Lolita and Conchita and his wife Natividad Aguilar so that, at that time, or
on July 10, 1946, the stockholding of the corporation stood as follows: Esteban de la Rama, 869
shares, Leonor de la Rama, 3,375 shares, Estefania de la Rama, 3,368 shares, Lourdes de la
Rama, 3,368 shares, Lolita de la Rama, 3,368 shares, Conchita de la Rama, 3,376 shares, and
Natividad Aguilar, 2,136 shares. The other stockholders , namely, Eliseo Hervas, Tomas
Concepcion, Antonio Juanco, and Jose Aguilar, who were merely employees of Don Esteban,
were given 40 shares each, while Pio Pedrosa, Marcial P. Lichauco and Rafael Roces, one share
each, because they merely represented the National Development Company. This Company was
given representation in the Board Of Directors of the corporation because at that time the latter
had an outstanding bonded indebtedness to the National Development Company.
This bonded indebtedness was incurred on February 26, 1940 and was in the amount of
P7,500.00. The bond held by the National Development Company was redeemable within a
period of 20 years from March 1, 1940,. bearing interest at the rate of 5 per cent per annum. To
secure said bonded indebtedness, all the assets of the De la Rama Steamship Co., Inc., and
properties of Don Esteban de la Rama, as well as those of the Hijos de I. de la Rama and Co.,
Inc., a sister corporation owned by Don Esteban and his family, were mortgaged to the National
Development Company (Annexes A, B, C, D of Exhibit 3, Deed of Trust). Payments made by
the corporation under the management of Pirovano reduced this bonded indebtedness to
P3,260,855.77.

Upon arrangement made with the National Development Company, the outstanding bonded
indebtedness was converted into non-voting preferred shares of stock of the De la Rama
company under the express condition that they would bear affixed cumulative dividend of 6 per
cent per annum and would be redeemable within 15 years (Exhibits 5 and 7). This conversion
was carried out on September 23, 1949, when the National Development Company executed a
"Deed of Termination of Trust and Release of Mortgage" in favor of the De la Rama company
(Exhibit 6.) The immediate effect of this conversion was the released from incumbrance of all
the properties Of Don Esteban and of the Hijos de I. de la Rama and Co., Inc., which was
apparently favorable to the interests of the De la Rama company, but, on the other hand, it
resulted in the inconvenience that, as holder of the preferred stock, the National Development
Company, was given to the right to 40 per cent of the membership of the Board of Directors of
the De la Rama company, which meant an increase in the representation of the National
Development Company from 2 to 4 of the 9 members of said Board of Directors.

The first resolution granting to the Pirovano children the proceeds of the insurance policies taken
on his life by the defendant company was adopted by the Board of Directors at a meeting held on
July 10, 1946, (Exhibit B). This grant was called in the resolution as "Special Payment to Minor
Heirs of the late Enrico Pirovano". Because of its direct hearing on the issues involved in this
case, said resolution is hereunder reproduced in toto:

SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO PIROVANO

The President stated that the principal purpose for which the meeting had been called was to
discuss the advisability of making some form of compensation to the minor heirs of the late
Enrico Pirovano, former President and General Manager of the Company. As every member of
the Board knows, said the President, the late Enrico Pirovano who was largely responsible for
the very successful development of the activities of the Company prior to war was killed by the
Japanese in Manila sometime in 1944 leaving as his only heirs four minor children, Maria Carla,
Esteban, Enrico and John Albert. Early in 1941, explained the President, the Company had
insured the life of Mr. Pirovano for a million pesos. Following the occupation of the Philippines
by Japanese forces the Company was unable to pay the premiums on those policies issued by
Filipino companies and these policies had lapsed. But with regards to the York Office of the De
la Rama Steamship Co., Inc. had kept up payment of the premiums from year to year. The
payments made on account of these premiums, however, are very small compared to the amount
which the Company will now receive as a result of Mr. Pirovano's death. The President proposed
therefore that out of the proceeds of these policies the sum of P400,000 be set aside for the minor
children of the deceased, said sum of money to be convertible into 4,000 shares of the stock of
the Company, at par, or 1,000 shares for each child. This proposal, explained the President as
being made by him upon suggestion of President Roxas, but, he added, that he himself was very
much in favor of it also. On motion of Miss Leonor de la Rama duly seconded by Mrs. Lourdes
de la Rama de Osmeña, the following resolution was, thereupon, unanimously approved:

Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama Steamship
Company, died in Manila sometime in November, 1944:

Whereas, the said Enrico Pirovano was largely responsible for the rapid and very successful
development of the activities of thus company;

Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various
Philippine and American Life Insurance companies for the total sum of P1,000,000;

Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and four minor
children, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed
Pirovano;lawphil.net

Whereas, said Enrico Pirovano left practically nothing to his heirs and it is but fit proper that this
company which owes so much to the deceased should make some provision for his children;
Whereas, this company paid premium on Mr. Pirovano's life insurance policies for a period of
only 4 years so that it will receive from the insurance companies sums of money greatly in
excess of the premiums paid by this company.

Be it resolved, That out of the proceeds to be collected from the life insurance policies on the life
of the late Enrico Pirovano, the sum of P400,000 be set aside for equal division among the 4
minor children of the deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano, which sum of money shall be convertible into shares of stock of the De la
Rama Steamship Company, at par and, for that purpose, that the present registered stockholders
of the corporation be requested to waive their preemptive right to 4,000 shares of the unissued
stock of the company in order to enable each of the 4 minor heirs of the deceased, to wit:
Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano, to obtain 1,000 shares at
par;

Resolved, further, that in view of the fact that under the provisions of the indenture with the
National Development Company, it is necessary that action herein proposed to be confirmed by
the Board of Directors of that company, the Secretary is hereby instructed to send a copy of this
resolution to the proper officers of the National Development Company for appropriate action.
(Exhibit B)

The above resolution, which was adopted on July 10, 1946, was submitted to the stockholders of
the De la Rama company at a meeting properly convened, and on that same date, July 10, 1946,
the same was duly approved.

It appears that, although Don Esteban and the Members of his family were agreeable to giving to
the Pirovano children the amount of P400,000 out of the proceeds of the insurance policies taken
on the life of Enrico Pirovano, they did not realize that when they provided in the above referred
two resolutions that said Amount should be paid in the form of shares of stock, they would be
actually giving to the Pirovano children more than what they intended to give. This came about
when Lourdes de la Rama, wife of Sergio Osmeña, Jr., showed to the latter copies of said
resolutions and asked him to explain their import and meaning, and it was value then that
Osmeña explained that because the value then of the shares of stock was actually 3.6 times their
par value, the donation their value, the donation, although purporting to be only P400,00, would
actually amount to a total of P1,440,000. He further explained that if the Pirovano children
would given shares of stock in lieu of the amount to be donated, the voting strength of the five
daughters of Don Esteban in the company would be adversely affected in the sense that Mrs.
Pirovano would be adversely affected in the sense that Mrs. Pirovano would have a voting power
twice as much as that of her sisters. This caused Lourdes de la Rama to write to the secretary of
the corporation, Atty. Marcial Lichauco, asking him to cancel the waiver she supposedly gave of
her pre-emptive rights. Osmeña elaborated on this matter at the annual meeting of the
stockholders held on December 12, 1946 but at said meeting it was decided to leave the matter in
abeyance pending further action on the part of the members of the De la Rama family.

Osmeña, in the meantime, took up the matter with Don Esteban and, as consequence, the latter,
on December 30, 1946, addressed to Marcial Lichauco a letter stating, among other things, that
"in view of the total lack of understanding by me and my daughters of the two Resolutions
abovementioned, namely, Directors' and Stockholders' dated July 10, 1946, as finally resolved by
the majority of the Stockholders and Directors present yesterday, that you consider the
abovementioned resolutions nullified." (Exhibit CC).

On January 6, 1947, the Board of Directors of the De la Rama company, as a consequence of the
change of attitude of Don Esteban, adopted a resolution changing the form of the donation to the
Pirovano children from a donation of 4,000 shares of stock as originally planned into a
renunciation in favor of the children of all the company's "right, title, and interest as beneficiary
in and to the proceeds of the abovementioned life insurance policies", subject to the express
condition that said proceeds should be retained by the company as a loan drawing interest at the
rate of 5 per cent per annum and payable to the Pirovano children after the company "shall have
first settled in full the balance of its present remaining bonded indebtedness in the sum of
approximately P5,000,000" (Exhibit C). This resolution was concurred in by the representatives
of the National Development Company. The pertinent portion of the resolution reads as follows:

Be resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as it hereby
renounces, all of his right, title, and interest as beneficiary in and to the proceeds of the
abovementioned life insurance policies in favor of Esteban, Maria Carla, Enrico and John Albert,
all surnamed Pirovano, subject to the terms and conditions herein after provided;

That the proceeds of said insurance policies shall be retained by the Company in the nature of a
loan drawing interest at the rate of 5 per cent annum from the date of receipt of payment by the
Company from the various insurance companies above-mentioned until the time the time the
same amounts are paid to the minor heirs of Enrico Pirovano previously mentioned;
That all amounts received from the above-mentioned policies shall be divided equally among the
minors heirs of said Enrico Pirovano;

That the company shall proceed to pay the proceeds of said insurance policies plus interests that
may have accrued to each of the heirs of the said Enrico Pirovano or their duly appointed
representatives after the Company shall have first settled in full the balance of its present
remaining bonded indebtedness in the sum of the approximately P5,000,000.

The above resolution was carried out by the company and Mrs. Estefania R. Pirovano, the latter
acting as guardian of her children, by executing a Memorandum Agreement on January 10, 1947
and June 17, 1947, respectively, stating therein that the De la Rama Steamship Co., Inc., shall
enter in its books as a loan the proceeds of the life insurance policies taken on the life of
Pirovano totalling S321,500, which loan would earn interest at the rate of 5 per cent per annum.
Mrs. Pirovano, in executing the agreement, acted with the express authority granted to her by the
court in an order dated March 26, 1947.

On June 24, 1947, the Board of Directors approved a resolution providing therein that instead of
the interest on the loan being payable, together with the principal, only after the company shall
have first settled in full its bonded indebtedness, said interest may be paid to the Pirovano
children "whenever the company is in a position to met said obligation" (Exhibit D), and on
February 26, 1948, Mrs. Pirovano executed a public document in which she formally accepted
the donation (Exhibit H). The Dela Rama company took "official notice" of this formal
acceptance at a meeting held by its Board of Directors on February 26, 1948.

In connection with the above negotiations, the Board of Directors took up at its meeting on July
25, 1949, the proposition of Mrs. Pirovano to buy the house at New Rochelle, New York, owned
by the Demwood Realty, a subsidiary of the De la Rama company at its original costs of
$75,000, which would be paid from the funds held in trust belonging to her minor children. After
a brief discussion relative to the matter, the proposition was approved in a resolution adopted on
the same date.

The formal transfer was made in an agreement signed on September 5, 1949 by Mrs. Pirovano,
as guardian of her children, and by the De la Rama company, represented by its new General
Manager, Sergio Osmeña, Jr. The transfer of this property was approved by the court in its order
of September 20, 1949.lawphil.net

On September 13, 1949, or two years and 3 months after the donation had been approved in the
various resolutions herein above mentioned, the stockholders of the De la Rama company
formally ratified the donation (Exhibit E), with certain clarifying modifications, including the
resolution approving the transfer of the Demwood property to the Pirovano children. The
clarifying modifications are quoted hereunder:

1. That the payment of the above-mentioned donation shall not be affected until such time
as the Company shall have first duly liquidated its present bonded indebtedness in the amount of
P3,260,855.77 with The National Development Company, or fully redeemed the preferred shares
of stock in the amount which shall be issued to the National Development Company in lieu
thereof;

2. That any and all taxes, legal fees, and expenses in any way connected with the above
transaction shall be chargeable and deducted from the proceeds of the life insurance policies
mentioned in the resolutions of the Board of Directors. (Exhibit E)

Sometime in March 1950, the President of the corporation, Sergio Osmeña, Jr., addressed an
inquiry to the Securities and Exchange Commission asking for opinion regarding the validity of
the donation of the proceeds of the insurance policies to the Pirovano children. On June 20, 1950
that office rendered its opinion that the donation was void because the corporation could not
dispose of its assets by gift and therefore the corporation acted beyond the scope of its corporate
powers. This opinion was submitted to the Board of Directors at its meting on July 12, 1950, on
which occasion the president recommend that other legal ways be studied whereby the donation
could be carried out. On September 14, 1950, another meeting was held to discuss the propriety
of the donation. At this meeting the president expressed the view that, since the corporation was
not authorized by its charter to make the donation to the Pirovano children and the majority of
the stockholders was in favor of making provision for said children, the manner he believed this
could be done would be to declare a cash dividend in favor of the stockholders in the exact
amount of the insurance proceeds and thereafter have the stockholders make the donation to the
children in their individual capacity. Notwithstanding this proposal of the president, the board
took no action on the matter, and on March 8, 1951, at a stockholders' meeting convened on that
date the majority of the stockholders' voted to revoke the resolution approving the donation to
the Pirovano children. The pertinent portion of the resolution reads as follows:

Be it resolved, as it is hereby resolved, that in view of the failure of compliance with the above
conditions to which the above donation was made subject, and in view of the opinion of the
Securities and Exchange Commissioner, the stockholders revoke, rescind and annul, as they do
thereby revoke, rescind and annul, its ratification and approval on September 13, 1949 of the
aforementioned resolution of the Board of Directors of January 6, 1947, as amended on June 24,
1947. (Exhibit T)

In view of the resolution declaring that the corporation failed to comply with the condition set for
the effectivity of the donation and revoking at the same time the approval given to it by the
corporation, and considering that the corporation can no longer set aside said donation because it
had no longer set aside said donation because it had long been perfected and consummated, the
minor children of the late Enrico Pirovano, represented by their mother and guardian, Estefania
R. de Pirovano, demanded the payment of the credit due them as of December 31, 1951,
amounting to P564,980.89, and this payment having been refused, they instituted the present
action in the Court of First Instance of Rizal wherein they prayed that the be granted an
alternative relief of the following tenor: (1) sentencing defendant to pay to the plaintiff the sum
of P564,980.89 as of December 31, 1951, with the corresponding interest thereon; (2) as an
alternative relief, sentencing defendant to pay to the plaintiffs the interests on said sum of
P564,980.89 at the rate of 5 per cent per annum, and the sum of P564,980.89 after the
redemption of the preferred shares of the corporation held by the National Development
Company; and (3) in any event, sentencing defendant to pay the plaintiffs damages in the amount
of not less than 20 per cent of the sum that may be adjudged to the plaintiffs, and the costs of
action.

The only issues which in the opinion of the court need to be determined in order to reach a
decision in this appeal are: (1) Is the grant of the proceeds of the insurance policies taken on the
life of the late Enrico Pirovano as embodied in the resolution of the Board of Directors of
defendant corporation adopted on January 6, 1947 and June 24, 1947 a remunerative donation as
found by the lower court?; (2) IN the affirmative case, has that donation been perfected before its
rescission or nullification by the stockholders of the corporation on March 8, 1951?; (3) Can
defendant corporation give by way of donation the proceeds of said insurance policies to the
minor children of the late Enrico Pirovano under the law or its articles of corporation, or is that
donation an ultra vires act?; and (4) has the defendant corporation, by the acts it performed
subsequent to the granting of the donation, deliberately prevented the fulfillment of the condition
precedent to the payment of said donation such that it can be said it has forfeited its right to
demand its fulfillment and has made the donation entirely due and demandable?

We will discuss these issues separately.

1. To determine the nature of the grant made by the defendant corporation to the minor
children of the late Enrico Pirovano, we do not need to go far nor dig into the voluminous record
that lies at the bottom of this case. We do not even need to inquire into the interest which has
allegedly been shown by President Roxas in the welfare of the children of his good friend Enrico
Pirovano. Whether President Roxas has taken the initiative in the move to give something to said
children which later culminated in the donation now in dispute, is of no moment for the fact is
that, from the mass of evidence on hand, such a donation has been given the full indorsement and
encouraging support by Don Esteban de la Rama who was practically the owner of the
corporation. We only need to fall back to accomplish this purpose on the several resolutions of
the Board of Directors of the corporations containing said grant for they clearly state the reasons
and purposes why the donation has been given.

Before we proceed further, it is convenient to state here in passing that, before the Board of
Directors had approved its resolution of January 6, 1947, as later amended by another resolution
adopted on June 24, 1947, the corporation had already decided to give to the minor children of
the late Enrico Pirovano the sum of P400,000 out of the proceeds of the insurance policies taken
on his life in the form of shares, and that when this form was considered objectionable because
its result and effect would be to give to said children a much greater amount considering the
value then of the stock of the corporation, the Board of Directors decided to amend the donation
in the form and under the terms stated in the aforesaid resolutions. Thus, in the original
resolution approved by the Board of Directors on July 10, 1946, wherein the reasons for granting
the donation to the minor children of the late Enrico Pirovano were clearly, we find out the
following revealing statements:

Whereas, the late Enrico Pirovano President and General Manager of the De la Rama Steamship
Company, died in Manila sometime in November, 1944;

Whereas, the said Enrico Pirovano was largely responsible for the rapid and very successful
development of the activities of this company;
Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various
Philippine and American Life Insurance companies for the total sum of P1,000,000;

Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and 4 minor
children, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano;

Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit and proper
that this company which owes so much to the deceased should make some provisions for his
children;

Whereas, this company paid premiums on Mr. Pirovano's life insurance policies for a period of
only 4 years so that it will receive from the insurance companies sums of money greatly in
excess of the premiums paid by the company,

Again, in the resolution approved by the Board of Directors on January 6, 1947, we also find the
following expressive statements which are but a reiteration of those already expressed in the
original resolution:

Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama Steamship
Co., Inc., died in Manila sometime during the latter part of the year 1944;

Whereas, the said Enrico Pirovano was to a large extent responsible for the rapid and very
successful development and expansion of the activities of this company;

Whereas, early in 1941, the life of the said Enrico Pirovano was insured in various life
companies, to wit:

Whereas, the said Enrico Pirovano is survived by 4 minor children, to wit: Esteban, Maria Carla,
Enrico and John Albert, all surnamed Pirovano; and
Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit and proper
that this Company which owes so much to the deceased should make some provision for his
children;

Be it resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as it
hereby renounces, . . . .

From the above it clearly appears that the corporation thought of giving the donation to the
children of the late Enrico Pirovano because he "was to a large extent responsible for the rapid
and very successful development and expansion of the activities of this company"; and also
because he "left practically nothing to his heirs and it is but fit and proper that this company
which owes so much to the deceased should make some provision to his children", and so, the
donation was given "out of gratitude to the late Enrico Pirovano." We do not need to stretch our
imagination to see that a grant or donation given under these circumstances is remunerative in
nature in contemplation of law.

That which is made to a person in consideration of his merits or for services rendered to the
donor, provided they do not constitute recoverable debts, or that in which a burden less than the
value of the thing given is imposed upon the donee, is also a donation." (Art. 619, old Civil
Code.)

In donations made to a person for services rendered to the donor, the donor's will is moved by
acts which directly benefit him. The motivating cause is gratitude, acknowledgment of a favor, a
desire to compensate. A donation made to one who saved the donor's life, or a lawyer who
renounced his fees for services rendered to the donor, would fall under this class of donations.
These donations are called remunerative donations . (Sinco and Capistrano, The Civil Code, Vol.
1, p. 676; Manresa, 5th ed., pp. 72-73.)

2. The next question to be determined is whether the donation has been perfected such that
the corporation can no longer rescind it even if it wanted to. The answer to this question cannot
but be in the affirmative considering that the same has not only been granted in several
resolutions duly adopted by the Board of Directors of the defendant corporation, and in all these
corporate acts the concurrence of the representatives of the National Development Company, the
only creditor whose interest may be affected by the donation, has been expressly given. The
corporation has even gone further. It actually transferred the ownership of the credit subject of
donation to the Pirovano children with the express understanding that the money would be
retained by the corporation subject to the condition that the latter would pay interest thereon at
the rate of 5 per cent per annum payable whenever said corporation may be in a financial
position to do so. Thus, the following acts of the corporation as reflected from the evidence bear
this out:

(a) The donation was embodied in a resolution duly approved by the Board of Directors on
January 6, 19437. In this resolution, the representatives of the National Development Company,
have given their concurrence. This is the only creditor which can be considered as being
adversely affected by the donation. The resolution of June 24, 1947 did not modify the substance
of the former resolution for it merely provided that instead of the interest on the loan being
payable, together with the principal, only after the corporation had first settled in full its bonded
indebtedness, said interest would be paid "whenever the company is in a position to meet said
obligation."

(b) The resolution of January 6, 1947 was actually carried out when the company and Mrs.
Estefania R. Pirovano, executed a memorandum agreement stating therein hat the proceeds of the
insurance policies would be entered in the books of the corporation as a loan which would bear
an interest at the rate of 5 per cent per annum, and said agreement was signed by Mrs. Pirovano
as judicial guardian of her children after she had been expressly authorized by the court to accept
the donation in behalf of her children.

(c) While the donation can be considered as duly executed by the execution of the document
stated in the preceding paragraph, and by the entry in the books of the corporation of the
donation as a loan, a further record of said execution was made when Mrs. Pirovano executed a
public document on February 26, 1948 making similar acceptance of the donation. And this
acceptance was officially recorded by the corporation when on the same date its Board of
Directors approved a resolution taking "official notice" of said acceptance.

(d) On July 25, 1949, the Board of Directors approved the proposal of Mrs. Pirovano to buy
the house at New Rochelle, New York, owned by a subsidiary of the corporation at the costs of
S75,000 which would be paid from the sum held in trust belonging to her minor children. And
this agreement was actually carried out in a document signed by the general manager of the
corporation and by Mrs. Pirovano, who acted on the matter with the express authority of the
court.

(e) And on September 30, 1949, or two years and 3 months after the donation had been
executed, the stockholders of the defendant corporation formally ratified and gave approval to
the donation as embodied in the resolutions above referred to, subject to certain modifications
which did not materially affect the nature of the donation.

There can be no doubt from the foregoing relation of facts the donation was a corporate act
carried out by the corporation not only with the sanction of its Board of Directors but also of its
stockholders. It is evident that the donation has reached the stage of perfection which is valid and
binding upon the corporation and as such cannot be rescinded unless there is exists legal grounds
for doing so. In this case, we see none. The two reasons given for the rescission of said donation
in the resolution of the corporation adopted on March 8, 1951, to wit: that the corporation failed
to comply with the conditions to which the above donation was made subject, and that in the
opinion of the Securities and Exchange Commission said donation is ultra vires, are not, in our
opinion, valid and legal as to justify the rescission of a perfected donation. These reasons, as we
will discuss in the latter part of this decision, cannot be invoked by the corporation to rescind or
set at naught the donation, and the only way by which this can be done is to show that the donee
has been in default, or that the donation has not been validly executed, or is illegal or ultra vires,
and such is not the case as we will see hereafter. We therefore declare that the resolution
approved by the stockholders of the defendant corporation on March 8, 1951 did not and cannot
have the effect of nullifying the donation in question.

3. The third question to be determined is: Can defendant corporation give by way of
donation the proceeds of said insurance policies to the minor children of the late Enrico Pirovano
under the law or its articles of corporation, or is that donation an ultra vires act? To answer this
question it is important for us to examine the articles of incorporation of the De la Rama
company to see this question it is important for us to examine the articles of incorporation of the
De la Rama company to see if the act or donation is outside of their scope. Paragraph second of
said articles provides:

Second.— The purposes for which said corporation is formed are:

(a) To purchase, charter, hire, build, or otherwise acquire steam or other ships or vessels,
together with equipments and furniture therefor, and to employ the same in conveyance and
carriage of goods, wares and merchandise of every description, and of passengers upon the high
seas.

(b) To sell, let, charter, or otherwise dispose of the said vessels or other property of the
company.

(c) To carry on the business of carriers by water.

(d) To carry on the business of shipowners in all of its branches.

(e) To purchase or take on lease, lands, wharves, stores, lighters, barges and other things
which the company may deem necessary or advisable to be purchased or leased for the necessary
and proper purposes of the business of the company, and from time to time to sell the dispose of
the same.

(f) To promote any company or companies for the purposes of acquiring all or any of the
property or liabilities of this company, or both, or for any other purpose which may seem directly
or indirectly calculated to benefit the company.

(g) To invest and deal with the moneys of the company and immediately required, in such
manner as from time to time may be determined.

(h) To borrow, or raise, or secure the payment of money in such manner as the company
shall think fit.

(i) Generally, to do all such other thing and to transact all business as may be directly or
indirectly incidental or conducive to the attainment of the above object, or any of them
respectively.
(j) Without in any particular limiting or restricting any of the objects and powers of the
corporation, it is hereby expressly declared and provided that the corporation shall have power to
issue bonds and provided that the corporation shall have power to issue bonds and other
obligations, to mortgage or pledge any stocks, bonds or other obligations or any property which
may be required by said corporations; to secure any bonds, guarantees or other obligations by it
issued or incurred; to lend money or credit to and to aid in any other manner any person,
association, or corporation of which any obligation or in which any interest is held by this
corporation or in the affairs or prosperity of which this corporation or in the affairs or prosperity
of which this corporation has a lawful interest, and to do such acts and things as may be
necessary to protect, preserve, improve, or enhance the value of any such obligation or interest;
and, in general, to do such other acts in connection with the purposes for which this corporation
has been formed which is calculated to promote the interest of the corporation or to enhance the
value of its property and to exercise all the rights, powers and privileges which are now or may
hereafter be conferred by the laws of the Philippines upon corporations formed under the
Philippine Corporation Act; to execute from time to time general or special powers of attorney to
persons, firms, associations or corporations either in the Philippines, in the United States, or in
any other country and to revoke the same as and when the Directors may determine and to do
any and or all of the things hereinafter set forth and to the same extent as natural persons might
or could do.

After a careful perusal of the provisions above quoted we find that the corporation was given
broad and almost unlimited powers to carry out the purposes for which it was organized among
them, (1) "To invest and deal with the moneys of the company not immediately required, in such
manner as from time to time may be determined" and, (2) "to aid in any other manner any
person, association, or corporation of which any obligation or in which any interest is held by
this corporation or in the affairs or prosperity of which this corporation has a lawful interest."
The world deal is broad enough to include any manner of disposition, and refers to moneys not
immediately required by the corporation, and such disposition may be made in such manner as
from time to time may be determined by the corporations. The donation in question undoubtedly
comes within the scope of this broad power for it is a fact appearing in the evidence that the
insurance proceeds were not immediately required when they were given away. In fact, the
evidence shows that the corporation declared a 100 per cent cash dividend, or P2,000,000, and
later on another 30 per cent cash dividend. This is clear proof of the solvency of the corporation.
It may be that, as insinuated, Don Esteban wanted to make use of the insurance money to
rehabilitate the central owned by a sister corporation, known as Hijos de I. de la Rama and Co.,
Inc., situated in Bago, Negros Occidental, but this, far from reflecting against the solvency of the
De la Rama company, only shows that the funds were not needed by the corporation.
Under the second broad power we have the above stated, that is, to aid in any other manner any
person in the affairs and prosperity of whom the corporation has a lawful interest, the record of
this case is replete with instances which clearly show that the corporation knew well its scope
and meaning so much so that, with the exception of the instant case, no one has lifted a finger to
dispute their validity. Thus, under this broad grant of power, this corporation paid to the heirs of
one Florentino Nonato, an engineer of one of the ships of the company who died in Japan, a
gratuity of P7,000, equivalent to one month salary for each year of service. It also gave to Ramon
Pons, a captain of one of its ships , a retirement gratuity equivalent to one month salary for every
year of service, the same to be based upon his highest salary. And it contributed P2,000 to the
fund raised by the Associated Steamship Lines for the widow of the late Francis Gispert,
secretary of said Association, of which the De la Rama Steamship Co., Inc., was a member along
with about 30 other steamship companies. In this instance, Gispert was not even an employee of
the corporation. And invoking this vast power, the corporation even went to the extent of
contributing P100,000 to the Liberal Party campaign funds, apparently in the hope that by
conserving its cordial relations with that party it might continue to retain the patronage of the
administration. All these acts executed before and after the donation in question have never been
questioned and were willingly and actually carried out.

We don't see much distinction between these acts of generosity or benevolence extended to some
employees of the corporation, and even to some in whom the corporation was merely interested
because of certain moral or political considerations, and the donation which the corporation has
seen fit to give to the children of the late Enrico Pirovano from the point of view of the power of
the corporation as expressed in its articles of incorporation. And if the former had been
sanctioned and had been considered valid and intra vires, we see no plausible reasons why the
latter should now be deemed ultra vires. It may perhaps be argued that the donation given to the
children of the late Enrico Pirovano is so large and disproportionate that it can hardly be
considered a pension of gratuity that can be placed on a par with the instances above mentioned,
but this argument overlooks one consideration: the gratuity here given was not merely motivated
by pure liberality or act of generosity, but by a deep sense of recognition of the valuable services
rendered by the late Enrico Pirovano which had immensely contributed to the growth of the
corporation to the extent that from its humble capitalization it blossomed into a multi-million
corporation that it is today. In other words of the very resolutions granting the donation or
gratuity, said donation was given not only because the company was so indebted to him that it
saw fit and proper to make provisions for his children, but it did so out of a sense of gratitude.
Another factor that we should bear in mind is that Enrico Pirovano was not only a high official of
the company but was at the same time a member of the De la Rama family, and the recipient of
the donation are the grandchildren of Don Esteban de la Rama. This we, may say, is the
motivating root cause behind the grant of this bounty.
It may be contended that a donation is different from a gratuity. While technically this may be so
in substance they are the same. They are even similar to a pension. Thus, it was granted for
services previously rendered, and which at the time they were rendered gave rise to no legal
obligation. " (Words and Phrases, Permanent Edition, p. 675; O'Dea vs. Cook,, 169 Pac., 306,
176 Cal., 659.) Or stated in another way, a "Gratuity is mere bounty given by the Government in
consideration or recognition or meritorious services and springs from the appreciation an d
graciousness of the Government", (Ilagan vs. Ilaya, G.R. No. 33507, Dec. 20 1930) or "A
gratuity is something given freely, or without recompense, a gift, something voluntarily given in
return for a favor or services; a bounty; a tip." Wood Mercantile Co. vs. Cole, 209 S.W. 2d. 290;
Mendoza vs. Dizon, 77 Phil., 533, 43 Off. Gaz. p. 4633. We do not see much difference between
this definition of gratuity and a remunerative donation contemplated in the Civil Code. In
essence they are the same. Such being the case, it may be said that this donation is gratuity in a
large sense for it was given for valuable services rendered an ultra vires act in the light of the
following authorities:

Indeed, some cases seem to hold that the giving of a pure gratuity to directors is ultra vires of
corporation, so that it could not be legalized even if the approval of the shareholders; but this
position has no sound reason to support it, and is opposed to the weight of authority (Suffaker vs.
Kierger's Assignee, 53 S.W. Rep. 288; !07 Ky. 200; 46 L.R.A. 384).

But although business corporations cannot contribute to charity or benevolence, yet they are not
required always to insist on the full extent of their legal rights. They are not forbidden for the
recognizing moral obligation of which strict law takes no cognizance. They are not prohibited
from establishing a reputation for board, liberal, equitable dealing which may stand them in good
stead in competition with less fair rivals. Thus, an incorporated fire insurance company which
policies except losses from explosions may nevertheless pay a loss from that cause when other
companies are accustomed to do so, such liberal dealing being deemed conducive to the
prosperity of the corporation." (Modern Law of Corporations, Machen, Vol. 1, p. 81).

So, a bank may grant a five years pension to the family at one of its officers. In all cases in this
sorts, the amount of the gratuity rests entirely within the discretion of the company, unless
indeed it be all together out of the reason and fitness. But where the company has ceased to be
going concerned, this power to make gifts or present it at the end. (Modern Law of Corporations,
Machen, Vol. 1, p. 82.).
Payment of Gratitude out of Capital.— There seems on principle no reason to doubt that gifts or
gratuities wherever they are lawful may be paid out of capital as well as out of profits. (Modern
Law of corporations, Machen, Vol. 1 p. 83.).

Whether desirable to supplement implied powers of this kind by express provisions.— Enough
has been said to show that the implied powers of a corporation to give gratuities to its servants
and officers, as well as to strangers, are ample, so that there is therefore no need to supplement
them by express provisions." (modern Law of Corporations, Machen, Vol. 1, p. 83.) 1

Granting arguendo that the donation given by Pirovano children is outside the scope of the
powers of the defendant corporation, or the scope of the powers that it may exercise under the
law, or it is an ultra vires act, still it may said that the same can not be invalidated, or declared
legally ineffective for the reason alone, it appearing that the donation represents not only the act
of the Board of Directors but of the stockholders themselves as shown by the fact that the same
has been expressly ratified in a resolution duly approved by the latter. By this ratification, the
infirmity of the corporate act, it may has been obliterated thereby making the cat perfectly valid
and enforceable. This is specially so if the donation is not merely executory but executed and
consummated and no creditors are prejudice, or if there are creditors affected, the latter has
expressly given their confirmity.

In making this pronouncement, advertence should made of the nature of the ultra vires act that is
in question. A little digression needs be made on this matter to show the different legal effect that
may result consequent upon the performance of a particular ultra vires act on the part of the
corporation. may authorities may be cited interpreting or defining, extent, and scope of an ultra
vires act, but all of them are uniform and unanimous that the same may be either an act
performed merely outside the scope of the powers granted to it by it articles of incorporation, or
one which is contrary to law or violative of any principle which will void any contract whether
done individually or collectively. In other words, a distinction should be made between corporate
acts or contracts which are illegal and those which are merely ultra vires. The former
contemplates the doing of an act which is contrary to law, morals, or public policy or public
duty, and are, like similar transactions between the individuals void. They cannot serve as basis
of a court action, nor require validity ultra vires acts on the other hand, or those which are not
illegal and void ab initio, but are merely within are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are merely voidable and may become
binding and enforceable when ratified by the stockholders.
Strictly speaking, an ultra vires act is one outside the scope of the power conferred by the
legislature, and although the term has been used indiscriminately, it is properly distinguishable
from acts which are illegal, in excess or abuse of power, or executed in an unauthorized manner,
or acts within corporate powers but outside the authority of particular officers or agents (19 C. J.
S. 419).

Corporate transactions which are illegal because prohibited by statute or against public policy are
ordinarily void and unenforceable regardless of the part performance, ratification, or estoppel;
but general prohibitions against exceeding corporate powers and prohibitions intended to protect
a particular class or specifying the consequences of violation may not preclude enforcement of
the transaction and an action may be had for the part unaffected by the illegality or for equitable
restitution. (19 C.J.S. 421.)

Generally, a transaction within corporate powers but executed in an irregular or unauthorized

manner is voidable only, and may become enforceable by reason of ratification or express or
implied assent by the stockholders or by reason of estoppel of the corporation or the other party
to the transaction to raise the objection, particularly where the benefits are retained

As appears in paragraphs 960-964 supra, the general rule is that a corporation must act in the
manner and with the formalities, if any, prescribed by its character or by the general law.
However, a corporation transaction or contract which is within the corporation powers, which is
neither wrong in itself nor against public policy, but which is defective from a failure to observe
in its execution a requirement of law enacted for the benefit or protection of a certain class, is
voidable and is valid until avoided, not void until validated; the parties for whose benefit the
requirement was enacted may ratify it or be estoppel to assert its invalidity, and third persons
acting in good faith are not usually affected by an irregularity on the part of the corporation in
the exercise of its granted powers. (19 C.J.S., 423-24.)

It is true that there are authorities which told that ultra vires acts, or those performed beyond the
powers conferred upon the corporation either by law or by its articles of incorporation, are not
only voidable, but wholly void and of no legal effect, and that such acts cannot be validated by
ratification or be the basis of any action in court; but such ruling does not constitute the weight of
authority, the reason being that they fail to make the important distinction we have above
adverted to. Because rule has been rejected by most of the state courts and even by the modern
treaties or corporations (7 Flethcer, Cyc. Corps., 563-564). And now it can be said that the
majority of the cases hold that acts which are merely ultra vires, or acts which are not illegal,
may be ratified by the stockholders of a corporation (Brooklyn Heights R. Co. vs. Brooklyn City
R. Co., 135 N.Y. Supp. 1001).

Strictly speaking, an act of a corporation outside of its character powers is just as such ultra vires
where all the stockholders consent thereto as in a case where none of the stockholders expressly
or cannot be ratified so as to make it valid, even though all the stockholders consent thereto; but
inasmuch as the stockholders in reality constitute the corporation, it should , it would seem, be
estopped to allege ultra vires, and it is generally so held where there are no creditors, or the
creditors are not injured thereby, and where the rights of the state or the public are not involved,
unless the act is not only ultra vires but in addition illegal and void. of course, such consent of all
the stockholders cannot adversely affect creditors of the corporation nor preclude a proper attack
by the state because of such ultra vires act. (7 Fletcher Corp., Sec. 3432, p. 585)

Since it is not contended that the donation under consideration is illegal, or contrary to any of the
express provision of the articles of incorporation, nor prejudicial to the creditors of the defendant
corporation, we cannot but logically conclude, on the strength of the authorities we have quoted
above, that said donation, even if ultra vires in the supposition we have adverted to, is not void,
and if voidable its infirmity has been cured by ratification and subsequent acts of the defendant
corporation. The defendant corporation, therefore, is now prevented or estopped from contesting
the validity of the donation. This is specially so in this case when the very directors who
conceived the idea of granting said donation are practically the stockholders themselves, with
few nominal exception. This applies to the new stockholder Jose Cojuangco who acquired his
interest after the donation has been made because of the rule that a "purchaser of shares of stock
cannot avoid ultra vires acts of the corporation authorized by its vendor, except those done after
the purchase" (7 Fletcher, Cyc. Corps. section 3456, p. 603; Pascual vs. Del Saz Orozco, 19
Phil., 82.) Indeed, how can the stockholders now pretend to revoke the donation which has been
partly consummated? How can the corporation now set at naught the transfer made to Mrs.
Pirovano of the property in New York, U.S.A., the price of which was paid by her but of the
proceeds of the insurance policies given as donation. To allow the corporation to undo what it
has done would only be most unfair but would contravene the well-settled doctrine that the
defense of ultra vires cannot be set up or availed of in completed transactions (7 Fletcher, Cyc.
Corps. Section 3497, p. 652; 19 C.J.S., 431).

4. We now come to the fourth and last question that the defendant corporation, by the acts it
has performed subsequent to the granting of the donation, deliberately prevented the fulfillment
of the condition precedent to the payment of said donation such that it can be said it has forfeited
entirely due and demandable.

It should be recalled that the original resolution of the Board of Directors adopted on July 10,
1946 which provided for the donation of P400,000 out of the proceeds which the De la Rama
company would collect on the insurance policies taken on the life of the late Enrico Pirovano
was, as already stated above, amended on January 6, 1947 to include, among the conditions
therein provided, that the corporation shall proceed to pay said amount, as well as the interest
due thereon, after it shall have settled in full balance of its bonded indebtedness in the sum of
P5,000,000. It should be recalled that on September 13, 1949, or more than 2 years after the last
amendment referred too above, the stockholders adopted another resolution whereby they
formally ratified said donation but subject to the following clarifications: (1) that the amount of
the donation shall not be effected until such time as the company shall have first duly liquidated
its present bonded indebtedness in the amount of P3,260,855.77 to the National Development
Company, or shall have first fully redeemed the preferred shares of stock in the amount to be
issued to said company in lieu thereof, and (2) that any and all taxes, legal fees, and expenses
connected with the transaction shall be chargeable from the proceeds of said insurance policies.

The trial court, in considering these conditions in the light of the acts subsequently performed by
the corporation in connection with the proceeds of the insurance policies, considered said
conditions null and void, or at most not written because in its pinion their non-fulfillment was
due to a deliberate desistance of the corporation and not to lack of funds to redeem the preferred
shares of the National Development Company. The conclusions arrived at by the trial court on
this point are as follows:

Fourth. — that the condition mentioned in the donation is null and void because it depends on
the exclusive will of the donor, in accordance with the provisions of Article 1115 of the Old
Civil Code.

Fifth. — That if the condition is valid, its non-fulfillment is due to the desistance of the
defendant company from obeying and doing the wishes and mandate of the majority of the
stockholders.
Sixth. — That the non-payment of the debt in favor of the National Development Company is
due to the lack of funds, nor to lack of authority, but to the desire of the President of the
corporation to preserve and continue the Government participation in the company.

To this views of the trial court, we fail to agree. There are many factors we can consider why the
failure to immediately redeem the preferred shares issued to the National Development Company
as desired by the minor children of the late Enrico Pirovano cannot or should not be attributed to
a mere desire on the part of the corporation to delay the redemption, or to prejudice the interest
of the minors, but rather to protect the interest of the corporation itself. One of them is the text of
the very resolution approved by the National Development Company on February 18, 1949
which prescribed the terms and conditions under which it expressed its conformity to the
conversion of the bonded indebtedness into preferred shares of stock. The text of the resolution
above mentioned reads:

Resolved: That the outstanding bonded indebtedness of the Dela Rama Steamship Co., Inc., in
the approximate amount of P3,260,855.77 be converted into non-voting preferred shares of stock
of said company, said shares to bear a fixed dividend of 6 percent per annum which shall be
cumulative and redeemable within 15 years. Said shares shall be preferred as to assets in the
event of liquidation or dissolution of said company but shall be non-participating.

It is plain from the text of the above resolution that the defendant corporation had 15 years from
February 18, 1949, or until 1964, within which to effect the redemption of the preferred shares
issued to the National Development Company. This condition cannot but be binding and
obligatory upon the donees, if they desire to maintain the validity of the donation, for it is not
only the basis upon which the stockholders of the defendant corporation expressed their
willingness to ratify the donation, but it is also by way which its creditor, the National
Development Company, would want it to be. If the defendant corporation is given 15 years
within which to redeem the preferred shares, and that period would expire in 1964, one cannot
blame the corporation for availing itself of this period if in its opinion it would redound to its
best interest. It cannot therefore be said that the fulfillment of the condition for the payment of
the donation is one that wholly depends on the exclusive will of the donor, as the lower court has
concluded, simply because it failed to meet the redemption of said shares in her manner desired
by the donees. While it may be admitted that because of the disposition of the assets of the
corporation upon the suggestion of its general manager more than enough funds had been raised
to effect the immediate redemption of the above shares, it is not correct to say that the
management has completely failed in its duty to pay its obligations for, according to the
evidence, a substantial portion of the indebtedness has been paid and only a balance of about
P1,805,169.98 was outstanding when the stockholders of the corporation decided to revoke or
cancel the donation. (Exhibit P.)

But there are other good reasons why all the available funds have not been actually applied to the
redemption of the preferred shares, one of them being the "desire of the president of the
corporation to preserve and continue the government participation in the company" which even
the lower court found it to be meritorious, which is one way by which it could continue receiving
the patronage and protection of the government. Another reason is that the redemption of the
shares does not depend on the will of the corporation alone but to a great extent on the will of a
third party, the National Development Company. In fact, as the evidence shows, this Company
had pledged these shares to the Philippine National Bank and the Rehabilitation Finance
Corporation as a security to obtain certain loans to finance the purchase of certain ships to be
built for the use of the company under management contract entered into between the
corporation and the National Development Company, and this was what prevented the
corporation from carrying out its offer to pay the sum P1,956,513.07 on April 5, 1951. Had this
offer been accepted, or favorably acted upon by the National Development Company, the
indebtedness would have been practically liquidated, leaving outstanding only one certificate
worth P217,390.45. Of course, the corporation could have insisted in redeeming the shares if it
wanted to even to the extent of taking a court action if necessary to force its creditor to relinquish
the shares that may be necessary to accomplish the redemption, but such would be a drastic step
which would have not been advisable considering the policy right along maintained by the
corporation to preserve its cordial and smooth relation with the government. At any rate, whether
such attitude be considered as a mere excuse to justify the delay in effecting the redemption of
the shares, or a mere desire on the part of the corporation to retain in its possession more funds
available to attend to other pressing need as demanded by the interest of the corporation, we fail
to see in such an attitude an improper motive to circumvent the early realization of the desire of
the minors to obtain the immediate payment of the donation which was made dependent upon the
redemption of said shares there being no clear evidence that may justify such design. Anyway, a
great portion of the funds went to the stockholders themselves by way of dividends to offset, so it
appears, the huge advances that the corporation had made to them which were entered in the
books of the corporation as loans and, therefore, they were invested for their own benefit. As
General Manager Osmeña said, "we were first confronted with the problem of the withdrawals of
the family which had to be repaid back to the National Development Company and one of the
most practical solutions to that was to declare dividends and reduce the amounts of their
withdrawals", which then totalled about P3,000,000.

All things considered, we are of the opinion that the finding of the lower court that the failure of
the defendant corporation to comply with the condition of the donation is merely due to its
desistance from obeying the mandate of the majority of the stockholders and not to lack of funds,
or to lack of authority, has no foundation in law or in fact, and, therefore, its conclusion that
because of such desistance that condition should be deemed as fulfilled and the payment of the
donation due and demandable, is not justified. In this respect, the decision of the lower court
should be reversed.

Having reached the foregoing conclusion, we deem it unnecessary to discuss the other issues
raised by the parties in their briefs.

The lower court adjudicated to plaintiff an additional amount equivalent to 20 per cent of the
amount claimed as damages by way of attorney's fees, and in our opinion, this award can be
justified under Article 2208, paragraph 2, of the new Civil Code, which provides: "When the
defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest", attorney's fees nay be awarded as damages. However, the
majority believes that this award should be reduced to 10 per cent.

Wherefore, the decision appealed from should be modified as follows: (a) that the donation made
in favor of the children of the late Enrico Pirovano of the proceeds of the insurance policies
taken on his life is valid and binding on the defendant corporation, (b) that said donation, which
amounts to a total of P583,813.59, including interest, as it appears in the books of the corporation
as of August 31, 1951, plus interest thereon at the rate of 5 per cent per annum from the filing of
the complaint, should be paid to the plaintiffs after the defendant corporation shall have fully
redeemed the preferred shares issued to the National Development Company under the terms and
conditions stated in the resolutions of the Board of Directors of January 6, 1947 and June 24,
1947, as amended by the resolution of the stockholders adopted on September 13,1949; and (c)
defendant shall pay to plaintiffs an additional amount equivalent to 10 per cent of said amount of
P583,813.59 as damages by way of attorney's fees, and to pay the costs of action.

Paras, C. J., Pablo Bengzon, Padilla, Montemayor, Jugo, Concepcion, and Reyes, J. B. L.,
concur.

Reyes, A., concurs in the result.